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Retirement Planning

Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations.  For one, people are living longer.  A person who turns 65 today could be expected to live as many as 20- 35 years or more in retirement, as compared to a retiree in 1950 who lived, on average, an additional 15 years.  Indeed, some today may live more years in retirement than the number of years in their career!  Whatever that span, it is clear that longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.

Lifetime Income Need

There actually is a lifetime after retirement, and the need to be able to develop a steady stream of income that cannot be outlived is more important than ever.  With the prospect of paying for retirement needs for as many as 20 to 30 years or longer, retirees need to be concerned with maintaining their cost-of-living, even as inflation and taxes never give up.

To that end, it is important to pursue some solid investment planning with the savings one sets aside for retirement.

Asset Allocation

Asset allocation is the process of selecting a mix of asset classes that closely matches an investor’s financial profile in terms of their investment preferences and tolerance for risk.  It is based on the premise that the different asset classes have varying cycles of performance, and that by investing in multiple classes, the overall investment returns will be more stable and less susceptible to adverse movements in any one class.

All investments involve some sort of risk, whether it’s market risk, interest risk, inflation risk liquidity risk, or tax risk.  An individualized asset allocation strategy seeks to mitigate the risks of any one asset class though diversification and balance. 

Individual Strategy

When done properly, an investor’s allocation of assets will reflect his or her desired goals, priorities, investment preferences and his tolerance for risk.  Asset allocation is an individualized strategy, so there really is no perfect mix of assets.  Each individual’s strategy is built on the careful consideration of the key elements of their financial profile:

Investment Objectives: What it is the investor hopes to achieve using his investment dollars – improve current lifestyle; achieve capital growth; fund a specific goal, such as a college education.

Risk Tolerance: This reflects the investor’s comfort level with market fluctuations that can result in losses.  Inflation risk and interest risk need to be considered as well.

Investment Preferences: An investor may prefer one asset class over another based on a certain bias or interest towards the characteristics of that class.

Time Horizon: The length of time an investor is willing to commit to achieving his objectives.

Taxation: Investing in a mix of asset classes will have varying tax consequences.

An Evolving Strategy

A sound asset allocation strategy includes periodic reviews.

About the only certainty when it comes to the financial markets is that they will change, and so will your financial situation.  Through market gains and losses, a portfolio can become unbalanced and it may be important to make adjustments to your allocation.  As people move through life’s stages their needs, preferences, priorities and risk tolerance change and so too must their asset allocation strategy.   

Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification.  Neither can eliminate the risk of loss, but both are valuable tools to help manage your risks.

Health Care Needs

Longer life spans can also translate into more health issues that arise in the process of aging.  The federal government provides a safety net in the form of Medicare; however, it may not provide the coverage needed especially in chronic illness situations.  Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today, and simply cannot be overlooked.  What is your plan? And what are the consequences if that plan proves inadequate? Who is affected most? Contact us at Allgood Financial today to explore your options and how to build the appropriate one(s) into your financial plan.

Estate Protection

Planning for the transfer of assets at death is a critical element of retirement planning, especially if there are survivors who are dependent upon the assets for their financial security.  Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent.  And arguably for younger families, guardianship provisions are even more critical. Larger estates may be confronted with settlement costs and sizable death taxes, which could force liquidation if the proper planning is not done.

LPL and Allgood Financial does not offer tax advise or legal services. Please consult a tax or legal professional to discuss these matters.

Paying for Retirement

Retirees who have prepared for their retirement usually rely upon three main sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments.  A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with Social Security as a safety net for steady income.

Social Security

Social Security was established in the 1930’s as a safety net for people who, after paying into the system from their earnings, could rely upon a steady stream of income for the rest of their lives.  The age of retirement, when the income benefit starts was, originally, age 65 which was referred to as the “normal retirement age”.  Now, for a person born after 1937, the normal retirement age is being increased gradually until it reaches age 67 for all people born in 1960 and beyond.  The amount paid in benefits is based upon the earnings of an individual while working.  If a person wanted to continue to work and delay receiving benefits, they could do so build up a larger benefit.  Conversely, early retirement benefits are available, at a reduced level, as early as age 62.  The decision about when to commence taking Social Security benefits is important, and should be made only after considering the rest of your resources, your health and potential longevity, and who else may be dependent upon your future stream of Social Security income benefits.

Employer-Sponsored Qualified Plans

Most employer-sponsored plans today are established as “defined contribution” plans, where an employee contributes a percentage of his earnings into an account that will accumulate until retirement.  As a qualified plan, the contributions are deductible from the employee’s current income.  The amount of income available to be taken at retirement is based on the total amount of contributions, the returns earned, and the employee’s retirement time horizon.  As in all qualified plans, withdrawals made prior to age 59 ½ may be subject to a penalty of 10% on top of ordinary taxes that are due. 

Depending on the size and type of the organization, they may offer a 401(k) Plan, a Simplified Employee Pension Plan, in the case of a non-profit organization, a 403(b) plan, or with some government employers, a 457 Plan.

Traditional and Roth IRAs

Individual Retirement Accounts (IRA) are tax-qualified retirement plans that were established as way for individuals to save for retirement with the benefit of tax favored treatment.  The traditional IRA allows for contributions to be made on a tax-deductible basis (depending on income and whether or not the contributor is “covered” by another retirement plan at work), and to accumulate without current taxation of earnings inside the account.  Distributions from a traditional IRA are taxable.  A Roth IRA is different in that the contributions are not tax deductible; however, the earnings growth is not currently taxable, nor are withdrawals done correctly.  To qualify for tax-free and penalty-free withdrawals of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, a first-time home purchase (up to a $10,000 lifetime maximum), or for a family member’s college education. Otherwise, taxes, and penalties may apply.

Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching 59-½, may be subject to an additional 10% federal tax penalty.

For more information on retirement income needs and income sources, please contact us today.