By Jonathan Harner, CFP®
Maintaining health in retirement comes with significant costs, and it’s crucial to plan for them in advance. Many people underestimate the expenses and level of care they’ll need, including supplemental Medicare plans and long-term care. However, with wise investment decisions and proper planning, you can reduce the uncertainty and better prepare for your retirement. Here are four factors to consider.
Identify Your Income Sources and Manage Fragmentation
Before assessing what type of lifestyle you can lead in retirement, you must first identify where your retirement funds will be coming from. Common sources include:
- Qualified retirement accounts such as 401(k)s, 403(b)s, and 457(b)s
- Traditional or Roth IRAs
- Health savings accounts (HSAs)
- Social Security benefits
- Investment portfolios
- Life insurance policies
- Annuities
If you’re like most professionals, you’ve probably worked for a few different employers throughout your career, and you may have multiple retirement accounts that are not consolidated. This is called fragmentation, and it can eat into your income stream by causing larger tax liabilities.
For instance, all qualified retirement accounts (e.g. 401ks, 403bs, etc.), with the exception of the Roth portionshave required minimum distributions (RMDs) once you reach age 73 (the RMD age just changes at the end of last year, so depending on your age it may be a bit later). This means you are obligated to withdraw and pay taxes on a certain amount each year. If you have three accounts with RMDs, it can be easy to withdraw extra funds from one account that could have been spread out over multiple accounts to satisfy each account’s RMD. But not doing so, you effectively took extra distributions which means you paid more in taxes than you had to.
Fragmentation can easily be alleviated by merging your accounts through consolidation. This will allow you to take one RMD instead of three, thereby saving you money on taxes and keeping your funds invested longer. It’s important to note that there are very particular rules surrounding consolidation and the process should be reviewed with a professional whenever possible.
Where Is Your Money Going?
Our clients often come to us with concerns about how soon they will be able to retire, whether they can maintain their desired lifestyle, and how to make sure they won’t run out of money. A crucial part of answering those questions comes from budgeting and tracking expenses.
Without understanding your retirement needs, there is simply no way to assess where you stand. It’s important to record every expense you can realistically estimate, including basic living expenses, mortgage and debt payments, life insurance, health insurance, and long-term care.
It’s often said that retirees should plan to spend about 80% of their pre-retirement income on their post-retirement lifestyle, but in practice, that number is very subjective. The amount of income required largely depends on the type of lifestyle you want to lead, which is even more of a reason to plan ahead.
Assess Your Level of Risk
Once you have a complete picture of your finances, you will be able to determine whether you’re on track for retirement. At this point, you can evaluate the level of risk in your portfolio and make any necessary adjustments.
If you find that you are not on track for the lifestyle you want to lead, you can consider investing in riskier assets with the hope they will earn a bigger return or you can extend your retirement timeline.
Conversely, if you find you are on track for retirement, you can consider reducing your overall level of risk and invest in more conservative assets. Either way, your risk tolerance is just one aspect of your full financial situation, and, as such, it must be analyzed as one piece of a much larger puzzle.
Take the Time to Review Your Plan
It’s imperative to review your retirement plan every year and make any necessary adjustments. Even with careful planning, unexpected events can occur, so you may wish to consider partnering with a trusted advisor for guidance. At Wichita Wealth Management, we can assist you in preparing for retirement. Schedule an introductory phone call by contacting me at 316-722-1010 or jonathan@wichitawealth.com.
About Jonathan
Jonathan Harner is a CERTIFIED FINANCIAL PLANNER™ practitioner at Wichita Wealth Management, a fee-only, fiduciary financial advisory firm dedicated to helping their clients thoroughly prepare for retirement. Jonathan’s goal is to simplify the complex so his clients can experience confidence and peace of mind as they work toward and live out their retirement dreams. He specializes in developing and implementing tax strategies that maximize his clients’ money and builds a tax-efficient withdrawal plan for retirement. Jonathan loves finding opportunities for his clients to save money and is dedicated to continual learning and growing in his profession so he can provide solutions for his clients’ financial needs. When he’s not working, you can find Jonathan spending time with his wife, Annie, and their daughter, staying active in his church community, and participating in his two favorite (but vastly different) hobbies: CrossFit and Dungeons & Dragons. To learn more about Jonathan and how he can help you, connect with him on LinkedIn.