We provide extensive retirement planning services including work v. retire “gap analysis”; 401(k), 4013(b) and 457 retirement plan rollover analysis; retirement cash flow reviews; inflation adjusted withdrawal strategies; and required minimum distribution calculations.
The primary financial goal of most people is to have enough financial security to be able to retire with a safe, increasing flow of money to make them healthy and happy for their lifetimes (sometimes their kids’ lifetimes as well.) The initial step of retirement analysis is to determine ‘critical capital’; or the amount need in dollars to provide a flow for life. The amount needed should include inflation (and we think a provision for retirement health care), as well as future taxes. The calculation takes into account taxes in retirement, like the taxes on eventual IRA distributions. Flows like Social Security and pensions are factored in, and the critical capital is calculated using a conservative rate of return. This step help us determine what amount of money you need to have to live a good life, with inflation, after taxes, for as long as you may live. (Actually, we make the calculated based on an infinite time frame, rather than try to predict your life expectancy: it’s easier and although unrealistic, has a nice ring to it)
Once we have a goal of Critical Capital, we can find the right vehicles for achieving success in obtaining it. In our opinion, the major enemy in retirement is inflation, and the major enemy in pre-retirement is taxes. We think qualified tax-deferred saving vehicles like 401(k), 403(b) and 457 plans are powerful wealth accumulation tools. The use of tax-deferred vehicles allows a high level of saving efficiency due to the tax savings. With the prospect of high future income tax rates, we also include Roth IRAs into our calculation, including the prospect of a Roth Conversion (where you turn an existing IRA into a Roth). Roth’s have an advantage of being tax-free, and allowing tax-free investment compounding. For those at Critical capital (you have enough to retire), we help facilitate a rollover to an IRA when advisable, and model a mix of assets to make an income stream (or build capital, as the case may be). For those with a ‘gap’ in critical capital, we provide options on reaching the goal, including increasing savings, modifying assets, or changing retirement dates. This step is intended to get you to and through retirement with lower taxes and lower risk.
Another key notion of retirement planning is the aspect of risk. Risk, in investment terms is defined as the volatility of a portfolio’s return. Volatility is the level that a portfolio’s return moves, both up and down. In the early phases of your financial life, when you are accumulating, risk is beneficial. Dips present buying opportunities, and rises present rebalancing opportunities. As you get to the point where the amount you’ve invested generates more income and reinvestment than you contribute (a point we call ‘critical mass’), then risk starts to diminish the benefit of the buying opportunities and you should change the allocation to lower the risk. When you are withdrawing from the investment pool (like from an IRA when you reach 70 ½), downside risk can be fatal to the portfolio’s health. An essential function of retirement planning that we provide is to look carefully at the withdrawal rate and the risk level of investment to achieve that withdrawal rate.
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