A long and happy retirement begins with a solid financial plan. That plan needs to include the amount of money needed to live comfortably as well as options to spread the wealth to family members or charitable organizations.
It also will help with a trend identified by Vanguard that more seniors are saving rather than spending.
According to a recent study published by the money manager, more than 30 percent of income is saved in retirement.
One reason for this ongoing frugality is retirees' concern about health-related costs later in life, according to the Vanguard study. This is especially true among recent retirees, who are experiencing a new way of life without steady income. New retirees attempt to save one-third of their monthly income, while those who have been retired several years only save about one-fifth.
“Saving for retirement is a concept that most can grasp,” said Stacey Fargo, wealth adviser at Oak Partners Inc. “Spending in retirement is another story. This is a completely different mindset that a lot of retirees have a hard time executing, with the underlying reason being fear.”
Fargo emphasized that many retirees fear they will outlive their savings and will have to try to go back to work or rely on others to live day to day.
“This is where having an adviser and a good plan set in place can be extremely beneficial,” Fargo said. “The key to this process is not only in the planning stages, but in the execution phase.”
Fargo said that when planning for retirement, homework is crucial, along with a deep dive into your financials and spending habits. This builds the framework to project how long your assets may last in retirement.
“It is extremely powerful to be able to visualize how your retirement may play out in different scenarios,” she said. “We utilize projection software that takes into account 10,000 different historical scenarios that can affect your individual portfolio to help you see how different market conditions can impact your retirement.
“We have found that these analyses have helped those in or near retirement feel more comfortable in spending their retirement assets to ensure they can live the retirement they want,” she continued.
Fargo emphasized that preparation for the execution phase is just as crucial to help the retiree navigate rules and regulations.
“At 70 ½, a percentage of your IRA is required to be distributed,” she explained. “It’s known as a Required Minimum Distribution. It’s the government's way of ensuring taxes are paid on those assets.”
Tax implications or estate strategies are just two of the areas that affect retirement spending.
As a financial adviser that specializes in working with people nearing retirement and retired, John Amatulli, certified financial counselor with Amatulli and Associates, often assists with recommendations on withdrawing assets.
“One of the first areas I examine is how to withdraw money in the most tax efficient way,” he explained. “For example, if a retiree withdraws a substantial amount of money from their retirement accounts such as IRAs, they will have to pay tax on 100 percent of this money. In the event the retiree has other after-tax money or Roth IRA money, I may suggest withdrawing some after tax money to live on and potentially reduce taxable income.”
Amatulli also suggested withdrawing money from accounts earning the least amount of interest. This will increase growth potential in higher yield accounts.
There are some financial vehicles that provide an income stream for retirees. For example, certain annuities can provide lifetime income.
“I call this a paycheck for life,” Amatulli explained. “The right type of annuity can protect against longevity risk. This is one of the more certain ways a retiree can be more comfortable with creating income.”
Estate planning also is part of the equation, said Amy Nowaczyk, an attorney and junior partner at O’Drobinak & Nowaczyk PC. Among her estate recommendations for retirees is making gifts to family members and to charity.
“Whether it’s giving to a worthy cause or helping a loved one in their time of need, gifting is an important element of life to many of us,” Nowaczyk said. “For most people, especially those with considerable assets, gifting is a great way to reduce their taxable estate while providing even greater benefits for their loved ones.”
Anyone can make a gift up to $14,000 (for 2017) to as many people as they want. No particular reason or purpose is needed; it’s part of “annual exclusion.” If a person gives more than this annual exclusion, he will have fill out a gift tax return when he files his taxes the following year.
“A person can pay tuition directly to an educational institution on behalf of their loved one,” she said. IS THERE A BENEFIT TO THE DIRECT PAYMENT? “They can also pay medical expenses for their loved ones, including payment directly to the doctor, hospital, or other medical entity.”
If education is a priority, retirees can establish a 529 college savings plan for a loved one.
“A 529 college savings plan allows for saving for higher education and the earning can be federally and state tax exempt,” Nowaczyk said. “In some states, even the contributions can be state tax deductible. When the funds are distributed to pay for higher education, they will be distributed tax free.”