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Your Life After Work

Distribution is About Income

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Attitude and circumstances jointly impact your optimal distribution strategies. Distribution is difficult, emotionally, and logistically. Moving parts need to function in harmony that can become disjointed, leaving your dedicated efforts toward saving and accumulating assets with less than desired retirement outcomes.

There are three common attitudes toward distribution for most families. There are individuals fearful of running out of money before they pass away. Many “good savers” find they don’t need to take additional income at retirement and are opposed to removing funds from their accounts. The final generality is families who cannot imagine taking funds out after dedicating 30 or more years to building the balance. The IRS is the last straw as distributions are forced at age 72 from retirement accounts.

Circumstances vary for each family. Academic research is essential, but you need to be aware that the investigation is done on the average – the extremes on both ends of the financial spectrum – rather than you specifically. Reading about the weather in Scottsdale while vacationing in Alaska may provide interest but far from useful data regarding what to wear outside. Distribution planning must be about you, your family, your needs and wants, and what your previous financial efforts allow.

There are three base strategies we utilize in our office. The classic distribution method allows people to take a fixed percentage out of their account every year – without running out of money – and adjusts for inflation. The “bridge strategy” allows people to increase their distributions until another source of funds temporarily – Social Security is the best example – begins to flow. The spend-down is for families who want to eliminate their estate near their last days of life. The latter is very difficult almost impossible to perfect, but the objective is vital in making financial decisions.

Examining your unique situation, your task is to address how much income you need to maintain your standard of living after leaving the workforce. We recommend a retirement budget that includes both fixed expenses as well as social expenses. The key is starting with what you need rather than what you have to use.

The second step is to determine the asset base you have along with current and future retirement income sources. Optimal planning may have you taking out of one fund first and your neighbor using a different strategy. Situations are all unique, and your retirement happiness is dependent upon your recognition that one-size does not fit all.

Once you know what you need, examine what you have to utilize, then you can begin to move the chess pieces around to maximize your best strategy. Investments need to be examined for risk and volatility, fees and expenses, taxation today and tomorrow and understand the impact arising from inflation. You will need to have a reasonable handle on taxation to maximize your situation. This is not just about assets. Distribution is about income, and that is a significant shift in mindset from your years as a saver.

Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This Program” found on WIBC Saturday mornings from 6-7a.m. as well as a podcast of the same name. Joe served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning. 

Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor.  Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group.  FEG is not owned or controlled by World Equity Group.

Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.

 

Charitable Giving During Retirement

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Your life after work begins with maintaining your standard of living. Fulfillment and financial happiness are not about the replacement of income but rather matching the standard of living you were accustomed to having before leaving the workforce.

Standard of living can be thought of as the things you do regularly that bring joy to your life, like travel, sporting events, golfing, or volunteering at your favorite charity. This article will focus on the challenges of charitable gifting after you begin your life after work. Charitable givers have been conditioned to give generously of their resources. Resources being time, energy, and money. The challenge for many organizations and the givers themselves is that “money” has been thought to be income. Many churches strongly encourage a giving of 10% of your income to be used toward charitable endeavors.

The obvious elephant in the room would be that our income tends to drop substantially at retirement time by design. You are no longer saving for retirement, no longer paying into Social Security, and you likely didn’t spend everything you made, or retirement really wouldn’t be a viable option. Now your income has contracted, and 10% is less than it was in the past – significantly less.

This change in the ability to contribute is not an issue for some families but a serious emotional strain for others. If contributing to charitable causes was a significant focus of your life during work then your life after work can feel less than purposeful with that part of your life reduced or gone altogether. Giving was, in fact, a part of your standard of living.

The best way to address the issue is to prepare before you leave the workforce for both household spending and your giving practices. Remember, a successful “your life after work” is not about replacing your income but your standard of living.

You can use Donor Advised Funds to make gifts that are deductible today at a higher tax rate in theory than when you retire and then use those gifts to fund future donations. Should you consider charitable giving as part of your standard of living or at least something you wish to continue during retirement, this is a great strategy to consider.

If you are over the age of 70.5 and have tax-deferred IRA money, then you can consider the use of QCD’s or Qualified Charitable Contributions. We have written articles on the past, and you can get more information at www.thebettergiver.com. QCD’s are an excellent strategy that can help reduce taxation on Social Security, Medicare part B premiums as well as allow you to maximize the benefits of the standard tax deduction.

During the years where you have left the workforce but have yet to turn 70.5, make certain you are strategic in your charitable giving. Pay attention to the itemized and standard deduction tax limits and consider multiple contributions every other year to increase the potential for tax deductibility.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

One Small Step

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In the early morning of July 16, 1969, three men, Neil Armstrong, Michael Collins, and Edwin “Buzz” Aldrin sat in a tiny space capsule on top of the most powerful disposable rocket ever constructed, the mighty Saturn V.

These men were taking the ultimate leap of faith; they put their very lives in the hands of the designers who were able to envision every possible aspect of the mission, to accomplish a feat that had never ever been attempted. Engineers took those theories and designed rockets, capsules, lunar landing craft and everything imaginable. Mathematicians, (the ones that use symbols other than plus, minus, and equals) plotted the course to the moon and back that had to be perfect for if off by the width of a human hair would have sent them flying past their lunar orbit never to return.  Last, but certainly not the least were the women and men who labored tirelessly to create the very craft that would send them on their journey.

Yes, it was a journey, an idea born out of a need just a few years earlier, not unlike your own financial future.

You may not put retirement on the scale of the first manned mission to the moon but, is it any less important to you?

Neil, Buzz, and Michael could never have accomplished this feat on their own; they relied on the Designers, Engineers, Mathematicians and Construction Specialists to ensure that they landed on the moon and returned safely to the earth.  Are you designing the retirement you dreamed of?  Do you have what it takes to bring your golden years in for a safe landing?  Is it time to place your faith and trust in the hands of skilled professionals who will work with you and construct a specific plan to fit your individual needs?

Growing up in the sixties I dreamed of being an astronaut.  I read about every rocket test success and failure.  On the day of the moon landing I was lying on the floor in the living room of my aunt’s house near Romney, IN with my cousin’s beside me. We all watched that grainy black and white picture and listened to Armstrong speak the words our generation knows so well.  That’s one small step…………..

I have never sat on top of a rocket three hundred and sixty-three feet in the air with nine hundred forty-seven thousand gallons of highly explosive fuel below me, but I have helped families accomplish their financial mission.

With the right team, proper planning and one small step Your Life After Work dreams can come true.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

Generational Diversity in Financial Planning

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Have you ever noticed when you buy a car that it seems many other drivers suddenly made the same choice? It is often known as the Badder-Meinhof phenomenon otherwise known as frequency illusion or recency illusion. When you buy a new car, it might be frustrating, but when you are studying it is rather helpful.

Last week we talked about the Enneagram. A personality test that I swear I had never heard of that is now on multiple podcasts and articles. This week the buzz word is generational diversity. Angi, who is in charge of questions for my radio show, even brought the topic to the table this week.

The concept is critical, and we have applied it to the families we serve. People of different ages, in general, have different needs and are in various phases of their financial journey.

Typically young people are in the accumulation mode and have expectations that are different than those retiring entering the distribution phase where income is needed. Apparently, there is even more to this story that I have missed.

Andy Stanley did a Leadership podcast with guest Dr. Tim Elmore. They discussed the fact that conflict arises when there is a difference between your expectation and the reality of what occurs. That makes sense and passes the smell test of accuracy. The shocking part came next.

What if the millennial generation had an entirely different set of expectations than the Baby Boom generation? From the start of the relationship, conflict would naturally exist as expectations are dramatically different. Their reality of whether this is a good or bad situation will be entirely dependent upon the original expectations.

Dr. Elmore discussed this in terms of the work environment. Almost immediately, this became obvious to me in the world of financial planning. The fears of my older families are dramatically different than that of the younger generation. Once that is said, it seems so obvious but is missed more often than realized.

The Baby Boom generation is considered to be born between 1946-64. The X generation (was called the Baby Busters originally as we started with the introduction of birth control) is argued though not held as rigid as the Baby Boom to be between 1965 and 1982. By age, I am 52, I am an X generation, but my behavior and expectations match that of a baby boomer.

The Baby Boomer generation, the first to believe they could do better than their parents. Parents cheered us on! It was the first generation that had moms going to work and having professional careers. This changed the dynamic of the family environment. Expectations shifted from that of the Bob Hope generation.

As an investor saving for retirement, you need to know your expectations and make those known to your advisor. Our planning team is focused on asking those questions. This is more than risk tolerance. It is how we communicate, how often, and what is discussed. Generational diversity is a significant issue. Who would have thought!

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

Coordination is Key on the Retirement Journey

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One of the most important messages we strive to convey to families is that retirement planning is an ongoing journey and not a one-time event. Successful retirement journeys demand a roadmap, complete with milestone markers for predictable occurrences along life’s road, as well as flexibility to accommodate unexpected events.

You’re probably not a long distance backpacker, but I expect you can brainstorm a list of the items needed to carry out a backpacking trek. Necessary items include shelter, a sleeping bag, drinking water and food. These “essentials” comprise about 70% of the weight of the backpack. What makes up the rest of the pack’s weight? Generally, these are the items hikers hope they will never need but must bring along as a precaution. Such items include rain gear, replacement batteries, and a medical kit. And finally, there are things for safety, comfort and enjoyment like a compass and a deck of cards.

Of course, this column is not about imparting backpacking fundamentals, but rather to help you understand that there are items vital to success on the retirement journey. Overlooking even one can thwart the course of your retirement. Just as more than one hike has been spoiled due to poor planning, a lack of planning has also compromised many retirement plans. Retirement is a journey and like any scout worthy of his or her merit badges, investors must be prepared.

Several key areas require special attention as you map out the journey we call “life after work.” Too often, families approach estate planning, saving, giving and other issues as isolated topics. Many affluent individuals work with specialized experts including CPA's, attorneys, insurance agents and financial advisors.  But if the various experts don’t approach the journey with an awareness of what the other players on the “team” are doing, dangers can arise along the retirement path. Missing even one small consideration can lead to unnecessary costs.

Many people believe estate planning has nothing to do with retirement planning. Tell that to the spouse they just left behind. The implications of estate planning decisions are enormous and often overlooked. For example, gifts left to charities may seem straightforward, but the process can be inefficient. A family recently came to us with a million dollars saved for retirement. They worked with a competent CPA and engaged a large law firm to develop their estate plan. The family also included its church in the will.

The couple’s college educated children are doing well and half of the assets are in a 401k plan which will be taxed either by distributions during retirement, or when the kids inherit the funds as beneficiaries. The church should also be a beneficiary for part of the 401k as churches pay no taxes and the after-tax money in the will should go to the kids.

Even when advisors are involved, it’s important to look at the retirement journey from a coordinated perspective, to avoid unnecessary money paid to the IRS. Happy trails.

Written by Joe Clark, CFP 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

Retirement Realities

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As a child and young adult, you begin to save and accumulate assets for a better future.  This future, called retirement was usually an open-ended and vague thought. After all, who wants to start their career by figuring out when they could quit?

To save for retirement, you make some sacrifices, and you do the “heavy lifting.”   When retirement is within reach, congratulations, your discipline should pay off and you move to the next phase of your financial journey.

For years you save in defined contribution plans and tax-deferred savings plans.  What does this mean for you in retirement? There are three shocking situations we encounter advising people about retirement.

The first reality is that many people don’t need the money in their retirement accounts. They either worked longer than they planned or more often, lived within their means and require less than expected to live a happy life.

The second reality is that some people are so attached to the value on their statements that they cannot fathom the emotional shift from saving to spending. For more than 40 years they have deliberately saved and accumulated, watched the values go up and down and found themselves emotionally invested in the value. The struggle to change that emotion is delayed 70% of the time. That 70% is the percentage of tax-deferred accounts that are never accessed until people are required to make distributions according to the IRS, at 70.5 years of age.

The third reality is the fear of the unknown. “What if I run out of money?“ “What if I have to go to a nursing home?” The fear of the future debilitates more families than you might imagine. This is perhaps the hardest of the realities to overcome.

The truth is simple: what goes in must come out. We will all exit this planet, and we will all have to exit our retirement savings. Retirement is indeed an optional event, but distribution is not.

At 70.5 years of age, Required Minimum Distributions are mandatory, or you will leave the money to your heirs. Your heirs will then enter into Required Minimum Distributions regardless of their ages – even grandchildren! The only logical choice is to look at your unique circumstances and design a distribution strategy that best uses your assets for your benefit.

Most of you reading this article started with retirement dreams and are now facing or getting ready to face retirement realities. Will you wait for the IRS or will you take charge?

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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