31 December 2007
If you are within five years of retiring or in your first five years of retirement, 2008 is the year to start addressing your red zone issues. Much like a football team trying to score in the red zone, you have many plays that need to be run now since these decisions will affect you for the next 30 years of your life.
If you are within five years of retiring, there are several key issues that you need to address. First, where will you get your income? Many do not focus on this question until the day they retire and find they have most of their assets in Individual Retirement Accounts (IRA) and/or a 401(k), but not a lot of money outside of that. There is very little tax control with an IRA and/or 401(k) since all distributions are taxable which could push you into a higher tax bracket. If you still have time to assess this, we will often look at how we can begin putting more money into lower taxable situations (even bank accounts) in order to have access to some monies that will be taxed in a lower bracket.
A second key issue is your asset allocation. This is important because more and more studies are showing that if a portfolio experiences negative returns on top of retirement income withdrawals, the longevity of the portfolio is put at risk. Said another way, the order of returns – most often referencing negative returns early in retirement – can mean you need to spend less later in life. Addressing this concern now with some assets that are more liquid and still allowing the portfolio to grow for the long-term should be done in 2008 after the several positive years we have had in the stock market.
A third key issue is health care. A recent study by Fidelity estimates that a couple retiring at 65 will spend approximately $215,000 on health care costs in retirement, not including nursing home care. This is up 7.5% from the $200,000 estimate in 2006. Discussing a long-term care plan (not just nursing home insurance) that includes your entire family is critical to understanding how much it might cost, as well as what type of care you might receive.
Finally, start thinking about what you want to do in retirement. Better yet, let’s rephrase the whole concept of retirement to a point in time when you hav&ü#252;e the financial freedom to do what you want. At that point, what do you want to do? Many people leave behind instead of heading towards something at that point. When you are within the red zone, it is time to start focusing on what you are headed towards so that you do not find yourself 30 days into golfing only to find that golf is boring when it is your only focus.
And if you have already decided to hang up the cleats and head into retirement/financial freedom, doing all of the above each year for the first five years of retirement is needed since many of these issues are moving targets that need to be continually addressed until you are comfortable in your decisions. Remember, financial planning is not a one-time event, but an ever evolving mosaic of changing viewpoints.