PLANNING FOR RETIREMENT

If you are near your retirement date you should be doing at least an inventory of your investments and calculation of your income requirements.  My website offers a free exercise called “Retirement in a Nutshell” for example. (Safeharborfinancialmgt.com)  There are also decisions about finding a Social Security strategy to maximize your benefit.  The Social Security Timing program is also free on the website. Finally you might also want to investigate Medicare choices and Medicare Advantage programs.

The years approaching and immediately after retirement can be a significant life style adjustment period.  From my view those who transition slowly seem, most comfortable.  Spending more time with hobbies and perhaps traveling are certainly noteworthy but might also require new spending and income needs.  Should you sell the house and move to Florida or wherever?  It is pretty impossible to undo this type of move so why not rent here and there if you have the urge to find somewhere cheaper and maybe warmer? Are you comfortable making new friends and leaving old ones?  Do you maintain memberships in organizations?  How about new memberships in hobby oriented clubs (golf or yacht), civic service clubs or those of a fraternal or religious nature for example? 

Reviewing your debt obligations during this transition period is a very wise decision.  The easy one is to review your consumer credit picture.  Furniture, large appliances or cars are items to evaluate, if they involve time payments.  Credit card debt balances that never seem to get to zero may be particularly expensive.  A precursor to paying them down might be to consider an offer involving zero interest for a period for switching banks.  The ideal situation is to pay everything possible, even utility bills, using a credit card to get all the “cash back” or points you can but pay off the entire balance each month so you pay no interest.  Putting big purchases, more than you can pay off in a month, on the “plastic” is a very expensive choice. 

I hear people say that they don’t want to have a mortgage during retirement.  This sounds reasonable enough at first.  Then you ask, “What is the plan to pay it off?” and find out they will take it from their IRA.  This has got to be one of the least though out emotionally based ideas I hear.  Let’s see, hmmm pay state and federal taxes on the IRA withdrawal and then lose the mortgage interest deduction on your taxes.  That’s not even considering the loss of liquidity when the funds are tied up and very hard to access in your home. Forget about the fact that houses also decline in value sometimes.  I feel that if you have a high interest rate, then refinance and the mortgage can be paid off if and when the house is eventually sold. 

After doing an inventory of your assets and liabilities, then determining your likely income requirements using perhaps a software driven program like Retirement in a Nutshell for example, the next step is to prioritize which accounts to tap.  My feeling on this is pretty conventional.  IRA’s should be tapped as slowly as possible for tax reasons first and legacy reasons second.  If you want to leave something to your children, a rollover beneficiary IRA (STRETCH) may preserves the tax deferral the longest. A “Stretch IRA” is designed to allow the beneficiary of a Decedent’s IRA to withdraw the least amount of money at the latest allowable time in order to maintain the inherited IRA assets for the longest period of time possible.* Investments typically held in an IRA generally have good liquidity (except for some insurance and partnership investments) so that you really don’t have to maintain overly large amounts in an emergency fund.  Of course you should be sure to consider the tax implications of IRA withdrawals.

When you are retired or even almost retired, the fate is that you don’t have time on your side anymore.  If you make a big mistake you will probably not be able to recover to your former financial position due to age restraints and possibly income needs.  You must be willing on the other hand to assume some risk in pursuit of a sufficient return especially during your withdrawal period.  It’s not realistic to expect to have no negative returns unless you stick to money markets or bank CDs.  Some compromise is necessary to invest in a prudent as well as productive manor.  This brings me to a common psychological mistake I call, “myopic investment measurement”.  The ultra-short measurement gets into daily balance monitoring.  Failure to view the big picture when thinking about performance mostly leads to “knee jerk” reactions to small normal variations.  If your investments are of the income and low volatility variety then don’t expect them to become “jet propelled” when the market in general is rising.  In my experience most investors do not sufficiently focus on the income flow while de-emphasizing small variations in market value.  If you have done the preparation and the income flow is sufficient, calm down, take a little longer view, reduce your anxiety, and enjoy your new leisure time. 

Market update:  Interest rates have been on the rise as predicted. There are very few bulls on bonds now.  We might see rates lower for a while but the big picture will likely be higher rates eventually.  The S&P 500 has made no real progress since May.  Even though the process seems to be dragging out I still think we will see lower prices and increased volatility soon.

Donald Hutchinson lives in Milford, CT.                                                                                       

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor before investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  The economic forecast set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.