Saving for Retirement Isn’t Enough: You Need a Wealth Plan
To ensure you have a wealth plan in place that will work for you, five key steps can help get you safely to your retirement destination and beyond.
Imagine boarding a plane for a long-awaited retirement vacation in Hawaii. Before takeoff, the captain announces the crew is fairly certain they have enough fuel to make it to Hawaii safely, but if not, the plane will land in a desert instead. Not only that, but the navigation system is down. The plan is to simply fly west and hope for the best! And for a hat trick of misfortune, the weather radar is malfunctioning, so no one knows what kind of turbulence is ahead. But don’t worry, the crew is sort of optimistic that good weather is ahead, so they’ve taken the liberty of removing the emergency life jackets and air masks. Are you staying on that flight?
Unfortunately, this is how many people approach retirement. Saving money year after year is a great start, but it isn’t a plan to help you reach the ultimate end goal of retirement. A comprehensive wealth plan acts as your flight plan to retirement. It determines if you have enough fuel (assets) to get you to retirement and last a lifetime. It ensures you can withstand any upcoming turbulence (market volatility) that may hit before and during retirement.
In order to reach retirement safely and efficiently, it is paramount to have a wealth plan that is stress-tested and offers proactive strategies unique to your needs.
How did we get here?
The responsibility of creating a comprehensive wealth plan wasn't always on the shoulders of everyday working people. Your parents may like to gripe about walking uphill to school both ways, but they had it easier when it comes to retirement planning.
Decades ago, the average person lived only 10 to 12 years after retirement and could rely on a pension and Social Security benefits to largely meet their needs. Pensions, or defined benefit plans, put the risk of creating retirement income on the employer. They were responsible for growing their pension fund investments, but after life expectancies began to rise along with market volatility, companies wanted to ditch the risk of providing lifetime income to their former employees. After lobbying with Congress to create a new investment vehicle for employees known as a defined contribution plan, the 401(k) plan was born.
Now, the risk of creating lifetime income is on the employee. It’s up to you to create a retirement income plan that provides for your needs, which is especially challenging as people live longer. A 65-year-old man of average health today has a 55% chance of living to age 85, while a woman of that age has a 65% chance of reaching age 85. But some will live even longer: A man in the top 1% in net worth has a life expectancy of about 87 years old, while a woman in the top 1% has a life expectancy of nearly 89 years old.
Do you have a retirement income plan that can provide income for two to three decades of retirement?
Longevity makes retirees more susceptible to all other key retirement risks, such as sequence of returns, inflation, interest rates, healthcare and taxes. Withstanding those six major risks requires proactive planning and careful strategy, which can be accomplished only through a comprehensive and customized wealth plan.
What is a wealth plan?
An investment portfolio, 401(k) or IRA is not a wealth plan. Investing money is certainly a key component for retirement planning, but a wealth plan is much more comprehensive. It provides an in-depth, personalized look at your financial future using dozens of advanced planning concepts that can account for potential risks, no matter how long your retirement lasts. It asks, “What if?” over and over again so that you are never left asking, “What now?”
You may think you have a solid plan in place, but unless your plan has gone through five key steps, you may be boarding a plane to retirement that lacks any clear guidance or safety nets. Those five key steps are:
1. Take inventory.
A wealth plan starts by looking at your complete financial situation by assessing all your current assets, pre- and post-retirement inflows (income sources) and pre- and post-retirement outflows (expenses) while also taking inflation into account.
Ultimately, an asset inventory allows you to see your current trajectory to retirement. It can determine if you are putting away enough money each year and reveal any potential gaps based on your goals.
2. Set goals.
Many financial planners use a simple form to deem someone as a conservative, moderate or aggressive investor and pick cookie-cutter investment strategies that will hopefully get enough returns. A true wealth plan works backward by setting goals before investment strategies.
Accurate goals are set by calculating your estimated retirement income as well as expenses like healthcare, taxes, vacations, hobbies and your legacy. Your income needs should be projected until age 95, at the minimum, to reduce the risk of running out of money.
Without a clear understanding of what you need to earn, how are you investing for retirement? Your required yield should determine your asset allocation and make sure you are not taking on unnecessary risk. Setting and measuring accurate goals year in and year out will help you invest for success, without being too aggressive or conservative.
3. Implement growth strategies.
After calculating your future needs and potential risks, a wealth plan creates growth and protection strategies specific to your goals. Of course, these targeted strategies include a diverse investment portfolio that comprises a wide variety of asset classes, from fixed income sources to stocks, ETFs and mutual funds.
However, a wealth plan doesn't stop with the stock market. It utilizes out-of-the-box tools to meet your unique needs and protect your assets. If your spouse were to pass away unexpectedly before you retire, would you have enough insurance to cover your needs? Would your retirement be able to survive on just one Social Security income?
A wealth plan might recommend using an annuity to create a stream of guaranteed lifetime income and a long-term care policy to protect your assets from healthcare costs — the second-highest expense in retirement!
A wealth plan may also utilize a Roth IRA and health savings account, in addition to your employer-sponsored 401(k), to save more aggressively for retirement and lower your tax liability. In short, a proper wealth plan provides strategies for both growth and protection to address every area of your financial picture and increase your probability of success.
4. Run stress tests.
A wealth plan doesn’t just allocate your assets and hope for the best. It analyzes the probability of your success and brings more certainty to your future using stress tests, like Monte Carlo simulations. This method runs your wealth plan through thousands of tests to find the best, worst and most likely outcomes for your investments during all kinds of market conditions.
Will your wealth plan still provide for your needs if interest rates rise? How will rising inflation affect your savings? Can your portfolio survive a bear market? Monte Carlo simulations use mathematical certainty to help you understand how your plan would withstand these kinds of situations, providing you with peace of mind knowing that your retirement assets are secure.
If your plan fails any of these tests, adjustments should be made to protect you from being caught off-guard when uncertainty strikes.
5. Leverage withdrawal strategies.
As you enter retirement, a wealth plan will help you move from accumulation into a retirement income distribution plan by providing guidance to withdraw your funds in the most tax-efficient way.
One common distribution strategy is a Roth conversion, which lowers your tax liability in retirement. There’s often a window of opportunity before required minimum distributions (RMDs) and Social Security benefits start. At that point, your taxable income is low, which will lower your upfront tax bill when you do a Roth conversion. No matter your current situation, a wealth plan unique to you will pinpoint exactly how much you should convert and when.
A wealth plan also helps you optimize your Social Security benefits and determine how to strategically satisfy your RMDs while still allowing your accounts to grow for as long as possible. At the end of the day, it’s not about how much money you have saved, but how much you actually get to use.
If your current retirement plan is simply to save money, you have no idea how your retirement will play out. For something this important, don’t you want to create a real plan? Without one, you’re hopping on a dangerous plane hoping to arrive at retirement safely, rather than boarding a plane knowing all systems are go and the proper safety measures are in place.
A wealth plan will help you prepare for retirement with confidence, providing a road map that leads to financial stability in and through retirement.
If you’re not sure where to start, an experienced financial professional can be your co-pilot and help you build a customized plan to reach your desired destination.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Bradley Rosen is the owner and president of Longevity Financial, an independent financial professional with over 24 years of financial planning experience. Bradley provides each client with a customized Design for Life By Longevity FinancialⓇ plan that encompasses each part of their financial picture, including investments, insurance, taxes and legacy planning. He is passionate about creating longevity with one’s finances and prioritizing holistic health, both physically and financially. His unique approach to retirement planning is the result of watching both his grandmothers outlive their retirement income. For his dedication to educating and empowering women, he was awarded the Thelma Gibson Award in 2015. He has been featured in Forbes and on the local CBS, NBC and FOX TV news affiliates in his new hometown of Atlanta.
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