Income Planning
Retirement requires a shift from saving money to efficiently using it to cover monthly expenses. This shift involves creating a comprehensive income plan. As Stephen Kates, a certified financial planner, highlights, "Building a large nest egg is different from creating a well-balanced income plan to replace your current paycheck(s)."
When planning your retirement income, you'll have two main types:
Regular Sources: These include Social Security, pensions, and income annuities. They offer predictable monthly income, ideal for covering fixed expenses like housing and utilities.
Variable Sources: These consist of IRAs, employer-sponsored retirement plans, and savings accounts. You manage these, deciding annual withdrawal amounts.
To build a solid income plan, discuss these questions with your advisor:
- How much should I have in an emergency fund by retirement?
- How can I adjust my portfolio for predictable, inflation-resistant income?
- How can I ensure my income covers essential expenses?
Legacy or Estate Planning
Having a plan for asset transfer upon passing is crucial, given the complexities of tax laws. A financial advisor can help ensure your assets are transferred according to your wishes while minimizing tax implications.
"Many retirees know their wishes for their heirs," explains Kates, "but without a plan, these may be derailed by unexpected expenses or mismanagement."
Consider asking:
- Is the amount I wish to leave my heirs realistic?
- How can I ensure I can leave $X to my heirs?
- How can I simplify the process for my heirs and avoid probate?
Risk Tolerance
Understanding your risk tolerance is vital, especially as you near retirement. The stock market's volatility can significantly impact your savings if you're overly invested in risky assets. "Recent market turbulence is a wakeup call," warns Kates. "Retirees can't afford to take risky steps with their future income."
However, being overly cautious can also hinder growth, leaving your income vulnerable to inflation. Balancing risk is essential.
Discuss these questions with your advisor:
- How can I protect my portfolio from sequence of returns risk?
- How exposed is my portfolio to specific companies or sectors?
- How can I adopt a rules-based approach to avoid distractions from market trends?
Financial advisors are not just for building retirement portfolios; they're crucial in managing your finances before and after retirement. They help ensure you maintain a comfortable lifestyle and secure your legacy for your heirs.
