Welcome, readers! We’re excited to announce that we recently launched our TFS Office Hours virtual Q&A, where we tackle your most pressing financial planning questions. We wanted to create a safe, open, and welcoming environment for people to anonymously submit questions and hear us talk more in-depth about the topics that impact your financial plan.
At TFS, we focus on helping clients structure their financial resources in ways that encourage and promote living their ideal life. With collaboration, trust, and open communication, we work with you to align your money with your goals and values.
Our first episode dove into the basics of retirement planning! Today, we’ll recap some of the top questions and work through answers to help you find more confidence in your retirement planning journey.
Let’s fire up the engine and start driving down Retirement Road.
Retirement income planning basics
Your retirement road comes with many twists and turns from income planning to taxes to insurance to lifestyle wants to estate planning—it’s easy to get lost along the way. While your retirement plan can be complex, taking it one step at a time will help you stay in the driver’s seat.
Below are some fundamental retirement planning questions we discussed during office hours.
What are some important items to have in place before retirement?
Retirement represents an enormous shift—everything changes from how you structure your day to how you receive a “paycheck.” How can you begin to navigate this transition?
To best answer, this question, think about it in terms of a cross-country road trip. There are several items you’d need to prepare for a smooth venture—charting an appropriate route, ensuring the vehicle is safe and sturdy, planning maintenance stops (gas, oil, rotating tires, etc.), booking lodging along the route, packing supplies (food, clothes, entertainment, music), choosing the best road-trip company, as well as planning activities, stops, and excursions along the way.
This is a rather detailed list, but without even one element, your plans could swiftly fall apart. No place to sleep? Your car likely won’t be super comfortable (or safe!). Forget the map (or GPS)? You may end up several miles off course. Car not functioning? You might have costly maintenance and added time.
Your retirement plan operates similarly. Every element of your retirement plan is connected, making it critical to have a unifying agent that harmonizes each piece—a financial plan. Your financial plan acts as a roadmap to retirement, charting the course to your ideal life. Below are some critical components of your financial plan.
- Ideal retirement lifestyle
- Knowing your ideal lifestyle sets the tone for the rest of your financial plan. No two financial plans are the same—that’s what makes planning such a personal and tailored experience. Once you know your goals, we can help you put more realistic numbers to those goals, which better informs your saving strategy.
- Spending projections and expectations
- We often recommend that people test out their retirement spending plan for an extended period (preferably a year) before transitioning to retirement. This test-drive provides key insight into the efficacy of your current spending plan and gives us breathing room to make adjustments before you ditch your steady paycheck.
- Income sources and strategies
- Structuring and managing your assets like 401k, IRA, brokerage accounts, pension, Social Security, and more.
- Tax planning opportunities
- Creating a comprehensive tax plan to address your tax situation. We work closely with your CPA to infuse tax efficiency in your plan year-round.
- Estate and legacy planning elements
- Properly titling assets and naming beneficiaries, safeguarding your estate, financial and lifestyle planning for a surviving spouse, etc.
- Asset protection
- Seniors can be a target for financial scams. It’s critical to protect yourself and your assets. We are passionate about this topic and will discuss it further in upcoming blogs.
We can help you build a financial plan that aligns all of these financial items with your goals, values, and priorities.
How do you come up with the income you need for retirement?
The shift from a steady paycheck to drawing off your assets is a significant one. Building a plan that works for you should take your lifestyle goals, income channels, tax responsibilities, and more into consideration. Let’s look at an example.
Brett Branning makes $100,000 per year and saves 20% for retirement. Conventional wisdom (and several Google searches) tell Brett that to be comfortable in retirement, he needs to replace nearly 100% of his income, so $100,000 per year. Does that logic hold up?
Let’s start at the beginning. Brett’s saving 20% or $20,000 annually for retirement, reducing his base pay to $80,000. Before funneling into his account, that $80,000 wades through payroll taxes (Social Security and Medicare), as well as federal and state income tax, reducing his net pay to about $70,000. In this example, Brett wouldn’t likely notice a huge lifestyle change if he were living off of $70,000 per year in retirement.
Here’s a basic formula to help gauge your income needs in retirement.
- Know your needs, wants, and wishes, then prioritize.
- What goals should come first? Perhaps your dream vacation takes precedence or maybe starting a college fund for your grandchild is top of mind. How much do your goals cost? A vacation will have a different sticker price than college. Knowing the cost of your goals helps establish the right baseline.
- Outline income sources.
- This looks at ongoing retirement income outside of your portfolio like pension funds, Social Security, real estate funds, annuities, ongoing passive income, etc.
Take these two numbers and do some quick addition and subtraction to come up with your spending goal, and the income required to get there.
If Brett’s spending goal is $70,000 and he has $30,000 in ongoing retirement income, that means we need to help Brett create a plan to supplement $40,000 from his portfolio annually. 1
Risk management and long-term care
It’s estimated that nearly 70% of people over 65 will require long-term care at some point. There are several ways to cover the costs of such care, and long-term care insurance is one of those options.
Long-term care insurance has had a relatively short claims-history but it has grown in popularity since its inception. The webinar brought up some rich conversations about the place this type of policy could have in your financial life.
Should you purchase a long-term care insurance policy or self-fund those costs?
We love this question because it inspires a deeper conversation concerning the role of long-term care on your retirement assets. Your long-term care need may be significant or minimal, but paying for it usually results in three groups.
- Group 1: The group has limited funds and likely can’t make the long-term care payments (even for the elimination period, which can be up to 90 days out of pocket). In this case, Medicaid kicks in and helps cover the costs. We say, if the premium is more than 7% of your income, it’s likely too expensive.
- Group 2: The group with vast resources and several options for footing the long-term care bill. This group might not mind reallocating some retirement assets to pay for care.
- Group 3: The group that falls in between. While they could use earnings off of their assets, an insurance policy to pick up the slack could come in handy.
Long-term care insurance gives you and your loved ones more options and flexibility when it comes to the care you receive. We like to think of it as a supplemental tool to your other retirement resources. While it might not cover the full cost of care, it could keep you and your spouse from depleting your nest egg or dipping into what was reserved for your kid’s inheritance.
In 2019, Washington was the first state to enact a state-run, public long-term care insurance benefit. It offers a $36,500-lifetime benefit (indexed annually for inflation) and residents can access the funds after paying into the program for 10 years. Half of 1% will be deducted from wages to pay for the program, and benefits are available starting in 2025.
While this program is far from a comprehensive solution, it could assist many Washington families.
We don’t DIY your financial plan
While we are experienced professionals in the financial planning industry, we certainly aren’t a jack of all trades. When it comes to elements like insurance (long-term care, Medicare, etc.) we bring in practiced counsel. We have established and trusted relationships with several professionals and work together with them to set you up with the right policies and coverage for your needs.
New family financial CFOs
Taking control of your finances is a demanding role, especially when grief and loss are in the mix. Assuming the responsibility of your personal CFO isn’t easy, but rest assured that you have support and guidance along the way.
I anticipate outliving my spouse; how do I plan for longevity and solo-living in late retirement?
Several factors permeate this space, which is why we build longevity planning into your retirement roadmap. It’s critical to protect the surviving spouse with the right financial and lifestyle considerations. A few ideas to think about:
- Remain conscious of spending habits early in retirement.
- It’s important to retain enough money for the surviving spouse to live comfortably and cover end-of-life expenses.
- Create a Social Security strategy to plan for benefits for the surviving spouse.
- Survivor benefits can be complex, but they often present important planning opportunities. It’s essential to stay on top of your options to help increase your monthly benefit.
- Work together on your financial plan.
- Both spouses should be actively involved in their financial plan to avoid surprises and misalignment in the future.
- Build a streamlined estate plan
- All beneficiaries and titling information should be reviewed periodically, so everything remains consistent and up to date.
How should my spouse and I structure our financial accounts so that we both have access if one of us passes away?
This question dives deeper into the estate planning realm, ensuring that beneficiaries and titles are correct. Your estate planning attorney can ensure that all of the legal documents are aligned with your wishes. Think through the following.
- Do you have joint or separate accounts?
- Have you named beneficiaries for insurance, retirement accounts, banking, brokerage, etc.?
- Have you named a durable power of attorney?
- What title designations are in place and does that impact your planning? A title like transfer on death, payable on death, joint tenants in common, etc. can have a big impact on the assets transferability.
No matter how deftly you plan, there will likely be some delay in gaining access to your late spouse’s accounts. We often find that an emergency fund helps allay immediate cash needs until those accounts can be accessed.
Build a strong and trusted professional team
As you can see, your financial plan has several layers. It’s crucial to assemble a team that can help you plan for your financial goals.
Who do you need in your corner along with yourself to help implement your financial plan?
While everyone’s financial plan requires a different treatment, most people build a team that consists of the following pros,
- Attorney (estate planning, business, personal, etc.)
- CPA or other tax professional
- Insurance broker
- Realtor/Mortgage broker
- Financial planner
Several different people help bring your financial plan to life. How do all of these pros work together? At TFS, we like to be your financial quarterback, building a coordinated and deliberate financial plan alongside your other professionals. We can be in your corner translating the technical components of your plan to give recommendations aligned with your goals and values.
It’s common for us to talk with our client’s CPAs and attorneys, even join our clients for meetings with their professionals to ensure that any implementation is aligned with the financial roadmap we created together.
If you want to talk about your specific financial situation like your investments or unique retirement plan, set up a time to talk with us.
For answers to more retirement-focused questions, check out our full webinar.
1. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.
