Most of us will spend our lives paying bills from predictable monthly or bi-weekly paychecks, whether those checks come from an employer, self-pay, or investments. We budget and plan our financial lives around these regular paychecks and direct deposits.
Once we retire, we know the paychecks we have been receiving over the past 40+ years will stop. Naturally, one of the major challenges’ pre-retirees face is ensuring their assets and resources will cover their expenses for the next 30+ years in retirement.
Suddenly, we are forced to create our own paycheck from our assets. This may be one of the most challenging financial decisions you will ever have to make. And the chances of getting it wrong are high! No one wants to have to go back to work and start over, especially at an older age. This is your time for financial freedom.
The goal is to live off your investments and retirement accounts in such a way that you can:
- Maintain your current lifestyle
- Protect a financial legacy for your heirs
- Enjoy retirement free from financial concern
We believe that generating a Retirement Paycheck for our clients that automatically transfers into their personal checking account provides for the easiest transition from the workforce into retirement years.
(1) Determine How Much You Will Need
Everyone approaches retirement with different resources, goals, and risk tolerance levels. The first step is to determine what you have and what you will need based on your individual situation.
Ideally, with the help of a financial advisor, you’ll take a detailed inventory of all your debts, assets, and expenses to estimate the amount you will need monthly and annually to fund the retirement you desire.
For many retirees, investments will not be their only source of income. Some will have supplemental income streams from:
- Social Security Benefits
- Pension Plans
- Part Time Income
- Life Insurance Policies
- Real Estate Income
- Business Investment Income
One of the biggest mistakes pre-retirees make is neglecting to account for inflation. Inflation diminishes purchasing power and reduces returns on investments. The average inflation rate is about 3% per year and we do not forecast this going lower. Expenses today will cost significantly more 10, 20, 30 years from now. Failing to account for inflation could derail your financial goals years down the road.
(2) Prepare Your Portfolio
This can be the most complex, and oftentimes most essential part of creating a Retirement Paycheck. Different investors may favor different approaches. But ultimately, the financial ideology employed to generate investment income should be based upon your individual goals and risk tolerance level.
For example, will you need your investment income immediately to cover living expenses? Or is your goal to accumulate wealth for posterity? Or perhaps a combination of both.
Your goals and risk tolerance level will establish your time horizon. And it is your time horizon that will determine (1) the types of investments that will suit your needs and (2) when or where to withdraw funds to mitigate taxes.
For most, the investment portfolio will need to fulfill many goals at once and should be designed to serve each of your separate needs appropriately.
(3) Mitigate Taxes and Plan for Required Minimum Distributions
The strategy on How you withdraw money in retirement is just as important as How much money you have in total. This is because of Taxes and Required Minimum Distribution (RMD) requirements.
Paying Taxes is inevitable but can be alleviated with a designed strategy and proper timing. Accounts fall into one of three categories:
- Taxable (Individual/Joint)
- Tax-deferred (401K or Traditional IRA)
- Tax-free (Roth IRA)
In order to maximize the life of your portfolio, it is important that you design a withdrawal strategy for each account. This Vanguard Study demonstrates just how nuanced timing these withdrawals can be and the importance of developing a withdrawal plan.
Your Required Minimum Distribution (RMD) is a pre-determined minimum amount you must withdraw from certain types of retirement accounts each year to avoid penalty. For IRAs, SEP IRAs, and Simple IRAs, 70 ½ is when you’ll have to begin fitting these distributions into your overall retirement plan. Roth IRAs, however, are exempt from the RMD requirement.
If you don’t take your RMD, or take less than is mandated, you’ll owe 50% federal penalty tax on the difference and still be mandated to withdraw the required amount and pay income tax on the taxable amount.
Incorporating an RMD strategy into your overall retirement plan will not only prevent penalties but offer opportunity to reduce your tax bill. Understanding your income tax brackets aligned with Medicare surcharges can be a lucrative plan analysis.
(4) Put it All on “Advisor-Pilot”
The best part of having a financial advisor prepare My Retirement Paycheck is that you will not have to worry about when, from where, and in what amount, you will need to withdraw money each month.
It is time to enjoy your retirement years and live in financial freedom! With a trusted advisor to do the heavy lifting, you can receive the direct deposit you’re accustomed to without spending your time navigating the financial nuances.
If you would like more information or are unsure how you will generate your own Retirement Paycheck, our Certified Financial Planners are here to help. Contact Us today to schedule a complimentary consultation call. We look forward to helping you plan for a prosperous, worry-free retirement.
Frank J. Fiumecaldo, CFP
Founder & Partner