Retirement War Zone: Know Thine Enemy

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Retirement planning has often been referred to as a “puzzle”, a “maze” and even a “gauntlet”.

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Being the seasoned professional I am, however, I look at it more like a war zone, complete with explosive land mines, calculating snipers, and hidden pits with those pointy bamboo spikes, like in the black and white, old war films. A retirement soldier is going to need to bring the right equipment to survive that sort of altercation, and it definitely pays to know your enemy!

There are so many mistakes a person can make during retirement planning. With the right maneuvers and weaponry, however, there’s still time to win this thing.  If you are 50-70 years of age, perhaps you should double-time it over to the war room.

Here are the top 5 tactical errors I’ve seen people make too often on the path toward their retirement planning:

5.  Accepting a reduced pension to provide for your spouse.

Think of that reduction in your paycheck as the most expensive insurance you can buy. Most settlement options don’t allow you to EVER stop paying premiums, even if your spouse pre-deceases, and you probably won’t be able to assign the benefit to anyone else once your spouse is gone.

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A potential solution: Consider taking your maximum pension amount, and enough personal life insurance to provide for your spouse if you pass-on first.

Here is a “snapshot” of some of the differences between a opting for a reduced pension versus taking your maximum pension (while owning personal life insurance):

  Personal Insurance Reduced Pension
Policy Builds Cash Value Yes No
Policy Allows Beneficiary Options Yes No
Death Benefit is Paid Lump Sum/Tax Fee Monthly/Spouse-only/Taxable
"Unconsumed" Proceeds Flow to Estate Upon 2nd Spouse's Death Yes No. The Benefit Ceases
Policy is Cancellable by Insured (at any time, including if spouse pre-deceases) Yes No

As you can see by the chart above, the company plan is advisable only if you have a health history that precludes you from getting your own insurance. It is important to do this early, while you are still insurable. Also, be sure to factor in your existing (surplus) assets and existing life insurance when calculating how much coverage to buy.

4. Ignoring Inflation.

This may be the most common error made by advisors and retirees alike. Inflation looms.

Remember the gas lines of the 70’s? We experienced over 7% inflation that decade. When you apply that percentage to a $50,000 annual income need every year, by year 5 you’ll need $70,127.

By year 10, the number will jump to an eye-popping $98,357.  Pretty scary, so it is imperative to plan and prepare accordingly.

3. Taking your social security income prior to Full Retirement Age (FRA).

There are plenty of debates circulating on the topic of when to retire, but in my opinion it is rarely a good idea to start tapping into your social security benefits before your FRA. There are three ways you may be hurt if you choose to do this:

(1) A reduced benefit, for life, just for being too young. For example, if you start your benefit at age 62, the smallest reduction is 20%. This reduction is larger for each year you were born after 1937. If you were born in 1940, you can expect a 22.5% reduction.

(2) Further reduction for making too much money (50% of your social security is included in that calculation). It is possible to give up plus or minus a dollar in benefits for every $2 you earn above $14,160.

(3) Taxation on your social security for the same reason (a separate calculation determines that one). For example, if you are married and filing jointly, expect a tax on 50% of your benefits if your provisional income is above $32,000.

And you thought all the breaks went to folks who make some money, right? Take your time. Do the math carefully.

2. Utilizing Rule 72t if you could have avoided it.

If a person wants to access some money prior to their retirement, the IRS allows early retirees to use the Rule 72t. This rule allows a person to take a stream of income from their IRA prior to age 59 ½ without a penalty as long as they take distributions though equally periodic payments.

Though this program sounds great, there is a catch. Once you start streaming the income, you are required to continue with your plan for 5 years with no option for alterations.

The solution, however: if you retire “post-55”, you may take sporadic OR stream your income without penalty from your 401(k), but not your IRA.

This means, should you retire “post-55,” it is important to make sure you’re leaving enough in your 401(k) to make it to age 59 ½. It is possible to roll the rest of that money to the IRA of your choosing.

1. The Enemy in your Own Camp

We all have reasons for selecting our own financial professionals. Think back on how you selected yours. Does this sound familiar?

“Mr. Jones, what sort of rate did you earn last year? Hmm. That’s pathetic. We did better. Why don’t you come over to our camp?”

I hate to say it, but the industry I work for loves to prey on your greed impulse. Its too easy. Sometimes, though, less is more. This was a game-changing and valuable lesson I learned 25 years ago when retirees would smile as they politely showed me the door. They would say,

“Son, we don’t need your fancy investments. We’ve done the math and we won’t put our life’s savings at risk going after a rate we don’t need”.

In other words, if you’ve already won the battle, you can put down your weapons and seek some R&R—as in Rest and Relaxation, not Risk and Return!

If you are nearing, or in retirement, PLEASE do the math, THEN allocate accordingly. Do a comprehensive calculation (include your fixed income streams, COLAs, inflation, assumed rates of return, etc.). If you can make it on 4%, don’t invest like you need 12% and put the whole thing at risk.  And, by the way, if you need 12%, you’re probably not ready. Call my office and let’s do the math.

You can leave your fatigues at home for now.

The content presented is for informational purposes only and is not an offer or solicitation to sell or buy securities or intended to substitute the advice of a qualified professional.

You can read more from Darrell Bryant at www.dbryantandassociates.com

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