Rethinking Retirement Planning

When it comes to preparing for retirement, there is a natural tendency – enhanced no doubt by online retirement calculators and “magic number” marketing campaigns – to view it as strictly  an exercise in asset accumulation. As a result, most people narrowly focus their efforts on building a nest egg large enough to fund the retirement they have imagined for themselves.

For those prescient enough to begin planning early in life and persistent and fortunate enough to be able to stay on track over time, accumulating the necessary funds for what they perceive as the ideal retirement may be entirely realistic. But for the many people who enter the retirement stretch drive well behind where they need to be, there’s little comfort to be found in some unreachable asset-accumulation target.

For a fiftysomething couple who have accumulated a couple of hundred thousand dollars in their retirement accounts, learning that they will need $3 million to reach their retirement goals is about as helpful as being told they need to jump over the moon. Because even if they dramatically ramp up the percentage of their income they are saving each month or are fortunate enough to experience above-average investment returns, they still aren’t going to be able to come close to hitting that target.

Rethinking Your Retirement

So, what can you do at this stage of the game? You may be pleasantly surprised that there are a number of productive actions to consider. The first, of course, is to acknowledge the obvious – that your original asset-accumulation target – if, in fact, you ever had one – is out of reach. The second is to explain that, in the real world, a financially successful retirement isn’t about some magic number nearly so much as it’s about the relationship of your income to your expenses. 

Once people understand and accept this basic concept, their perspective changes. They begin to focus less on assets and more on income and expenses. This is a productive development because there is much more that can be done late in the retirement planning process to maximize income and control expenses than there is that can be done to accelerate asset accumulation.

Maximizing Retirement Income

One way you may be able to increase your net income in retirement is by moving money from your traditional IRAs to Roth IRAs. It’s important to understand that this is likely to be a taxable transaction. But by paying the taxes now, while you’re working and can better afford it, you can ensure that you will be able to withdraw the money tax-free in retirement.

Another attractive way to increase your retirement income is by waiting longer to claim your Social Security benefits. Lots of folks claim their benefits at age 62 with the rationale that they don’t know how long they’re going to live. But if long life spans run in your family, it may be worth waiting. Though it won’t change the amount of your lifetime benefit, deferring your benefits until your full retirement age (currently 66) will boost your monthly check by 33 percent and waiting until age 70 will add an additional 32 percent to your check. That’s a 76 percent increase in exchange for an 8-year wait. 

It goes without saying that if you can’t afford to retire without Social Security, waiting to claim it will mean working longer than you may have originally planned. But that may not be such a bad thing, either, as it will give you more time to sock away money in your tax-advantaged TSP, 401(k) or IRA.

Reducing Expenses

One of the best and most obvious ways to reduce retirement expenses is by paying off your mortgage before you retire. This used to be a standard practice for most people, but these days it’s not uncommon for people to plan and build the most expensive house they’ve ever owned just before or after they retire! There’s nothing wrong with that if you can comfortably afford it, but if you’re playing catch-up, it might make more sense to eliminate a mortgage payment that likely eats up 25 or 30 percent of your monthly income.

Another common-sense method for those not concerned about estate taxes to consider for reducing expenses is spending the money in your taxable investment accounts first. You don’t have to pay income tax on the funds in tax-qualified accounts like IRAs and 401(k)s until the money is withdrawn. But dividends and capital gains on non-retirement accounts are distributed as taxable income every year. By spending the money in your non-retirement accounts first, you can minimize your total tax bill while allowing the money in your retirement accounts to continue to compound on a tax-deferred basis.

Your Advisor Can Help

Starting to get the idea? There are a wealth of viable strategies for rethinking retirement planning. So, if you’re nearing retirement and don’t feel entirely confident that you’re on track, don’t spend a lot of time fretting over the verdict of some online calculator. Sit down with your Financial Advisor and discuss what steps you can take to stretch your resources and get the most out of your retirement.