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Preserving Wealth Post-Retirement: 5 Steps You Should Be Taking

The transition to retirement can be a challenging one.  After working for decades, and focusing on saving for the future, you now have to depend on those savings to provide income to supplement your Social Security benefit and, in some cases, a pension.

Preservation of wealth is a top concern for millions of retirees.  One study showed that 70% of Americans fear outliving their money in retirement more than death itself. They’re worried that they’ll have to change their standard of living, reduce their level of care, and, possibly, go back to work.

Fortunately, there are things you can do today to ensure a secure retirement. We’ve outlined five of the best steps you can take below.



1: What Sort of Life Do You Want in Retirement?

Visualizing an ideal retirement is an important part of financial planning for seniors. A good financial plan will help you define and prioritize what’s important to you. Naturally, income in retirement is a top priority. But there are also things you’ll need to spend money on, like health care (which tends to increase in price more than other goods and services), periodic home maintenance and upgrades, replacement cars, and, potentially, care at home or in a facility later in life. And you’ll definitely have things that you may want to spend money on, too – like travel, education and support for your kids or grandkids, and charitable giving and philanthropy.

Once you’ve defined and prioritized your goals, you and your financial planner can start to figure out how to pay for them.

2: Be Risk-Smart with Your Portfolio

You might think of your portfolio as the engine for your plan. Its performance fuels the growth of your investments over time.

Many people mistakenly think that the key to investing success is buying “hot” stocks – like finding the next Microsoft or Google, or “timing” the market – knowing when to buy and sell ahead of a market rise or fall. If this sounds a lot like looking into a very cloudy crystal ball, it is – and the dismal track record of investors who try to beat the market with these strategies should be all the proof you need that it’s the wrong approach.

At Springwater, we know from decades of academic research the factors that will largely determine the performance of your portfolio – and they’re things that a disciplined, professional advisor can help you control, like asset allocation (your “mix” of investments), diversification (owning a variety of investments that perform differently over time), taxes and fees, and, perhaps most importantly, your emotions.

It’s important to keep in mind that in investing, risk and return are related; if you want to earn more return on your portfolio, you have to accept more investment risk (with risk defined as the variability of your portfolio’s returns). And unfortunately, this risk-return relationship isn’t linear – in fact, you have to take on ever-larger amounts of investment risk if you want to generate more return.

So, at Springwater, we believe your investment strategy should be designed to take as little risk as possible, while still helping you achieve your goals. Your financial plan will help you determine that level of investment risk.

After all, when we look back on a life well-lived, we don’t celebrate the average return we earned on our investments, but we do remember the experiences we shared with those most important to us.

3: Diversify Your Investments

Diversification involves owning investments which will respond differently to the same market or economic event. For instance, when the economy is growing, stocks tend to out-perform bonds. But when things slow down, bonds often perform better than stocks. By holding both stocks and bonds, you reduce the impact on your portfolio when markets swing one way or the other. The same holds true for other types of investments you could include in your portfolio, like real estate, cash and more.

One of the biggest investment challenges is managing portfolio withdrawals when stock prices are declining. For retirees, this is a very real risk. You’ve retired, and so are no longer contributing to your investment and retirement accounts – you’ve shifted from accumulation mode to distribution mode. At the same time, your investments in stocks are declining in value. Mathematically, this is the worst possible scenario – taking distributions from a portfolio that’s declining in value.

Since we know that the stock market typically experiences a significant correction on average once every seven to ten years, how can you minimize this very real risk? By ensuring that your portfolio has a mix of investments that are expected to perform differently over time, including high-quality bonds and cash.

Why? If you have high-quality bonds and cash in your portfolio, they’ll maintain their value even as the stocks you own fall in price. You can then sell some of your bonds and use the proceeds, together with your existing portfolio cash, to cover your distributions, allowing the stocks time to recover their value.

At Springwater, we typically have one to two years’ worth of your anticipated distributions in investments that shouldn’t decline in value even when the stock market gyrates. A well-diversified portfolio, that includes bonds and cash in the investment mix, will help you preserve wealth when the stock market is volatile.

4: Understand Your RMDs

A Required Minimum Distribution, or “RMD”, is a withdrawal you’re required to make from most retirement plan accounts by the time you reach age 72.

You probably recall that your contributions to your 401(k) or 403(b) plan at work, or to your IRA, were made with pre-tax dollars. That’s to say, you didn’t pay any tax on the income you contributed to the account.

The earnings in your account also were never taxed, they just continued to compound year after year.

But, your 401(k), 403(b), or IRA aren’t tax-free accounts, they’re tax-deferred accounts.

So, when you reach age 72 or retire, the IRS requires you to begin taking withdrawals from your account, and those withdrawals will be taxed at ordinary income rates.

There is an exception to the age 72 rule, and it is: if you’re either a 5% (or greater) owner of the business sponsoring the retirement plan, or if your RMD is for an IRA, you have to start your withdrawals in the year you turn 72 even if you’re not retired yet.

Also, Congress changed the age at which you must start your RMDs. If you were born on or before June 30, 1949, you were required to start your withdrawals in the year you turned 70 ½. If you were born on or after July 1, 1949, your withdrawals must begin in the year you turn 72.

The minimum amount you’re required to withdraw is calculated each year, using a simple formula and table that the IRS provides. You just divide the value of your account at the end of the prior year by a divisor from the appropriate IRS table, which you can find on their website or in Publication 590. Here’s a simple example:

Fred is unmarried, and turned 80 this year. The value of his account at the end of last year was $400,000. He looks up the divisor for his current age in the IRS’s Uniform Life Table, and sees that it’s 18.7. So, he divides $400,000 by 18.7 to arrive at his RMD, which for this year is $21,390. That’s the minimum amount he must withdraw before the end of the year.

If you have more than one IRA or 403(b) account that’s subject to RMDs, the IRS will ask you to calculate the figure for each account separately, but allow you to take the total amount from any one (or more) of your accounts.

That’s not true, though, for retirement accounts like 401(k) or 457(b) plans. You’ll have to take your RMDs separately from each one for those.

It’s important to make sure that you take your RMD before the deadline, because the penalties for taking out too little, or missing it completely, are pretty severe. The amount you should have taken out but didn’t is taxed at 50%. This is on top of the income tax you already owe on the distribution. Fortunately, most financial services companies now send you a form to remind you of the amount you’re required to withdraw.

Finally, just to make matters even more confusing, RMDs for inherited IRAs and retirement plans are treated differently than those that must be taken by the original account owner.

5: Be Tax-Smart with Creating Your Retirement Income

For years, financial advisors and accountants recommended that their clients use the “conventional wisdom” strategy for spending down a portfolio to generate income in retirement. The approach used this withdrawal order:

First, spend down taxable accounts, like checking and savings accounts, and brokerage accounts. Next, spend down tax-deferred accounts, like traditional IRAs, SEP and Simple IRAs, 401(k) and 403(b) accounts, etc. Then, spend down tax-exempt accounts, like Roth IRAs. Finally, spend down non-deductible IRAs, non-qualified annuities, and the cash value from permanent life insurance policies.

For retirees who needed to start taking Required Minimum Distributions, this sequence would change only slightly, with the RMDs necessarily being withdrawn first, followed by the taxable accounts.

But, you may have opportunities to take withdrawals from your tax-deferred accounts when those dollars will be taxed at unusually low rates. That would likely include years before your RMDs begin, and years when you have large tax deductions, such as high medical expenses. Reducing the portion of distributions lost to taxes will extend the life of your portfolio, and is key to the preservation of wealth.

When you’re retired and taking distributions from your portfolio to generate income, one objective should be to minimize the average marginal tax rate on withdrawals from your tax-deferred accounts like IRAs and 401(k) plans.

Once you have a marginal tax bracket in mind, you can start by withdrawing funds from your tax-deferred accounts (part of which may be your RMDs) so long as they are taxed at a rate below your target marginal rate. Then, you can make additional withdrawals from your taxable account, as necessary. If you’ve depleted your taxable account, and you have tax-exempt Roth assets, the withdrawals from your tax-deferred accounts can be supplemented with distributions from your Roth account.

6: Consider Hiring a Fee-Only Financial Advisor

Planning for a secure retirement can be challenging, so having the right resources to guide you along the way is crucial. One of the best resources you can have is a financial advisor who specializes in financial planning for seniors.

You should approach finding a financial advisor as you would selecting a doctor or other trusted professional. You shouldn’t take it lightly. Unfortunately, many people end up with an advisor who approached them socially or who was referred by a relative, friend, or coworker. Too often that doesn’t work out very well.

There are two steps to selecting an advisor. First, identify several candidates who meet a set of objective criteria. Then, interview those advisors and select the one you trust and with whom you have the best rapport.

What are the objective criteria?

  • Your advisor should always put your best interests first.
  • Work with an advisor who’s not employed by some large financial institution that produces and sells financial products. Find an independent Registered Investment Advisor.
  • Look for a Certified Financial Planner (CFP®) or Chartered Financial Analyst (CFA). These are the gold standard credentials in the financial planning and investment management fields.
  • Find an advisor who has been through a few market cycles. While there are plenty of young, credentialed advisors, there’s no substitute for life experience.
  • Look for an advisor who has skills in your areas of need and interest. Advisors tend to specialize, just as doctors do. Find one who offers the services you want.

Once you find 2-3 advisors who meet these objective criteria, interview them. Select the advisor who feels like a trusted friend who cares about you.

An easy way to find local fee-only financial advisors is through websites like the CFP Board, the National Association of Personal Financial Advisors, and the Garrett Planning Network. These sites let you search by location to find advisors in your area.

When you meet with a financial advisor, be sure to verify their credentials, areas of expertise, fiduciary status and method of compensation. Don’t be afraid to be direct in your first meeting. Ask any questions that are important to you. If you don’t like the answer an advisor gives you, find another advisor.

Keep interviewing advisors until you find someone with whom you feel comfortable and trust. A good financial advisor will be a lifelong partner and guide. Someone you can turn to with any financial concerns, and who will be dedicated to helping you achieve all of your financial goals.

OUR LOCATIONS

Our Portland office is conveniently located off the SW Denney Road exit from Highway 217.

6600 SW 105th Avenue, Suite 155
Beaverton, OR 97008

Our Bay Area office is located in downtown Santa Cruz.

133 Mission Street
Santa Cruz, CA 95060

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