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7 Tips to Get You Through a New Age of Retirement Planning

Forget what you've been taught about investing for retirement.

The income taxes you pay to Uncle Sam have followed an interesting trend over the past half century, and now it's changing the way I advise clients.

Here's some historical perspective: In 1964, the top income tax rate dropped from 91% to 77%. Tax rates continued to fall for the next 25 years, and by 1990, the top rate was 28%. Over the next 25 years, income taxes trended upward. Today, the top rate stands at 39.6%.

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Don't expect that rising trend to stop, much less reverse. What we heard 25 years ago—that your taxes would be lower in retirement—is no longer true.

The national debt is $19 trillion. Social Security is expected to run out of cash sometime after 2030 unless it is reformed. In fact, with a footnote on today's Social Security statements, the federal government is warning you now, many years in advance, that when it comes time to collect your Social Security checks in 2033, you can expect only 77% of what you were promised.

This reality leads me to believe—and this is straight talk not intended to scare—that as Social Security starts to run out of money, politicians will stare (or glare) at the huge Baby Boomer generation (75 million strong) and say, "Look at these greedy seniors taking all this money out of Social Security. Ya' know, it's time to tax Derek's million-dollar retirement fund at 50%—just split it 50-50 with Uncle Sam—for the good of the country."

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And I, along with every other incredulous senior, will scream, "Are you kidding me?"

In the meantime, here are seven tips to get you through this new age of retirement planning:

1. Spend Down Pre-tax Retirement Cash

The prospect of higher taxes in the future is prompting me to teach clients a new lesson, and it's a big one: Before you start collecting your pension or Social Security, spend down your tax-deferred money—the pre-tax dollars in your 401k or IRA (but remember, you pay a 10% penalty tax for any withdrawals before the age of 59½). Live on those pre-tax dollars first because that's where your future liability is greatest as politicians search for ways to save Social Security.

That investment strategy is the polar opposite of what I was taught, and what I have taught in the past, but now is time to adjust our mindset and actions. Spending retirement money that you still owe taxes on will help minimize the impact of potentially higher taxes on your retirement savings.

2. Reconsider Diversification

I know this also bucks conventional wisdom—portfolio diversification is taught as a basic tenet of investment strategy. But the investment environment is evolving, and so should your plan.

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Many investors think they're well diversified because they own a lot of mutual funds. One of my clients owns 23 different mutual funds. We analyzed all 23 and found duplicating positions in every single one. That's not true diversification. It's better to become an expert on a company or industry, or hire an expert, and buy stock in good companies that sell things that everyone needs.

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Billionaire Warren Buffett famously said, "Diversification is protection against ignorance. It makes little sense if you know what you are doing." That's the point. Do your homework—or trust your adviser to do the homework—on a core group of stocks or industries, and use that knowledge to profit.

3. Buy In-Demand Stocks

I'm a big proponent of owning individual stocks. I know a lot of people are still squeamish about stocks due to the market meltdown in 2008. They vowed then they'd never get back into the market.

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Rethink that attitude. Make a list of about 10 stocks that pay a dividend. Dividends are like interest in your bank account.

You don't even have to call it stock if you don't want to—let's just say there are some "companies you want to own." Your list should include companies that most everyone patronizes: big phone companies such as Verizon, utilities, Coca Cola, Budweiser. They all pay good dividends.

And if the economy drops, don't worry if the stock's value falls. People will still pay their cell phone and utility bills, drink their favorite beverages—and you sill still collect solid dividends.

4. Set Aside "Safe Money"

Maybe you've had a gut feeling in the past that the stock market was going to tank, but you didn't do anything about it. Then just as you feared, it crashed. Sometimes clients ask me, "Can I just go to cash?" Absolutely.

Every 401(k) has a safe harbor provision—that's a government money market. You can move your money, or a percentage of it, to that option. If the market keeps rising, maybe you lose 3% to 4% of upside. But if there's a big downturn of 20% to 30%, how much did you save? You'd be thrilled to be in cash.

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Focus on these goals: set aside safe money; make sure you have reasonable access to cash; and the main one—don't lose money!

5. Evaluate Whether Your Adviser Is Worth It

A wealthy client of mine, a retired doctor who used to work with another adviser, showed me his portfolio. It included nine variable annuities. Nine. I don't like variable annuities because they often have hidden fees. They're great for sellers but not buyers.

The doctor and I are friends so I can razz him a bit. I asked, "On the sixth or seventh annuity, did you ever think to ask the guy, 'Do you have anything else besides annuities?" The doctor said he was busy operating his practice and he assumed his best interests were being served by a smart money guy. Not so much. The adviser was working just as hard on his retirement as the doctor was.

If you are not talking with your investment adviser two or three times a year, why not? I know you're busy, but if your adviser has not reached out to you, at least with a quick call, maybe you should find an adviser who does have time for you.

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Here's something you should do right now: Have another adviser perform a fee analysis on your portfolio. Find out exactly how much you're paying in fees. If you discover you're paying $5,000 a year, that's $416 a month. Are you getting your money's worth? What are you getting for that monthly payment?

6. Think About What Retirement Means to You

This is the most important question you can ask yourself as your investment strategy evolves. Some folks say, "I'll golf every day." Then you realize your friends can't do that, and it's not fun anymore. I've heard too many retirees admit, "I wish I would've thought this through a little better."

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So practice retirement first. Do a dry run. You want to move to Palm Springs? Okay, spend a week there in summer, fall and winter. See what it's like. Educate yourself on what retirement means to you, and then we'll talk about the best financial products to accomplish that vision.

7. Understand That There's More to Life Than Money

Your retirement plan is about more than money. It should be built to protect your family and give you the confidence to enjoy your life. If we outperform the market in a year, and your account generates an extra $20,000 you weren't expecting, why not use it to make a memory your family will never forget? Tell me what cool family trip you want to take, what goal is on your bucket list, and do it now when you're young rather than when you're 85.

That may be unconventional advice from an investment adviser, but remember: Forget what you've been taught. It's an exciting new age, and new investment ideas can help you enjoy your life even more!

Derek Overstreet is an Investment Adviser who owns New Millennium Group in Utah. He believes a retirement plan should be built around safety and offer greater security for you and your loved ones.

Dave Heller contributed to this article.

About the Author

Derek Overstreet, Investment Adviser

Owner, New Millennium Group

Derek Overstreet is an Investment Adviser who owns New Millennium Group in Utah. He believes a retirement plan should be built around safety and offer greater security for you and your loved ones. His team of financial planners provides comprehensive wealth management services designed to help you meet your investment goals.

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