Wealth Planning Strategies: What You Should Do to Maximize Retirement Income and Successfully Plan for Retirement

Whether you are a pre-retiree or retiree, there are several major areas you should think about to successfully plan for retirement.  Retirement planning can reduce anxiety and increase happiness, security, and peace of mind.  If you take the time to plan wisely, retirement can be a richer and more rewarding time of life.

The first area involves having an income plan.  This building block component involves listing all your guaranteed sources of retirement income —pension, investment portfolio returns and income retirement savings and investment accounts, such as a traditional IRA, 401(k), Roth IRA or Roth 401(k), Social Security, annuity income (if you have one), and any other sources of income.

Working past the traditional retirement age, either part or full time, is a great way to stretch and supplement retirement income.  Delaying retirement can have a significant impact on retirement finances by giving your existing retirement savings more time to grow and shortening the period of retirement you will need to pay for.  The 4% rule is a guideline stating that you should take out only about 4% of your retirement savings annually. Each person’s situation is unique but having some guidelines can help you prepare.

Choosing the Right Investment Strategy is involved in this component of your plan.  There are many investment strategies available, from aggressive to conservative. Generally those who are younger are advised to invest more aggressively, tapering to more secure investments as they grow older. Safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement funding strategy. On the other hand, if you invest too heavily in growth investments, your risk is heightened.

It is common for a retiree who has worked at the same company for many years to accumulate a large amount of that company’s stock in his or her portfolio. Some retirees choose not to diversify because they have comfort in being invested in their employer’s stock. A retiree’s investment portfolio, however, should hold no more than 5% to 10% of any one particular stock, so that the portfolio can be protected and properly diversified for risk management purposes. In the early 2000’s, companies like Worldcom and Enron went out of business creating significant retirement account losses for employees who had worked there.

Forecasting your expenses is a second key financial building block for retirement.  How much you want to spend in retirement is one of the biggest factors driving how much you need for a secure retirement. 

Most of your money in retirement is spent on 3 major categories including housing, transportation, and medical expenses.  According to a Bureau of Labor Statistics’ Survey, for adults age 65 and older: Housing Represents 34%, Transportation is 16% of Spending, and  Health Care Represents 13% of Spending.

How long you live and how much you need to spend on out of pocket healthcare expenses and long-term care are big factors for figuring out how much you will need.

Health care costs pose one of the most serious risks to retirement security, so it’s important to understand how to plan for this major expense and navigate the system. A study conducted by the Employee Benefit Research Institute estimated that a couple with drug costs at the 90th percentile throughout retirement would need savings of about $325,000 by age 65 to have a chance of covering their health care expenses during retirement.  Even for those on Medicare, health care costs can still erode spending power. Out-of-pocket expenses for people in retirement have risen over 50 percent since 2002. Long-term care costs can be even less predictable than out-of-pocket costs.  About half of people 65 and over won’t incur any long-term care expenses, and an additional quarter will pay less than $100,000. Fifteen percent, however, will pay $250,000 or more.

Of course, you may find out that there is a disconnect between your desired lifestyle and your ability to fund it.  You may need to make some compromises once you start building a retirement plan. When budgeting, it can be useful to break out your spending into needs and wants. Your needs are things that you must spend money on such as: groceries, utilities, transportation, health care, and housing.

Another area that retirees and potential retirees need to think about is their tax strategies. Most will have less income after they retire so it is critical to be smart about what you can keep andhow much you will have to pay out in taxes.  It is important to match different types of accounts (such as taxable or retirement, accounts) with particular investment strategies.  Not regularly contributing to tax efficient accounts is a common mistake in financial planning. Making increased contributions to retirement accounts (and there are many options involved here depending on age and circumstances) can help put you on track to be prepared for retirement.

Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans. The reason these plans are so important is that they combine the power of compounding with the benefit of tax deferred (and in some cases, tax free) growth. For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis. A key part of a tax planning strategy is to reduce the taxes from withdrawn funds from tax-deferred accounts, such as 401(k)s or IRAs.

One effective strategy that many overlook is converting tax-deferred funds to a Roth IRA or Roth 401(k). While the conversion amount is taxable in the year it is converted, the upside is these Roth accounts let your retirement savings grow tax-free and are not taxable when withdrawn (as long as you’re 59½ or older and have owned a Roth for at least five years). It’s important not to let the upfront tax bill prevent you from moving your retirement funds from accounts that are taxed no matter when you take them out into accounts that are tax-free. The point is to not be shortsighted at the expense of being hit with large tax payments in retirement.

Using Health Savings Accounts and Flexible Savings Accounts for medical expenses are also strategies that should be explored and utilized.

Maximizing your Social Security income is another building block for retirement. United Income, a financial-planning advisory service, released an important study in 2019 called, “The Retirement Solution Hiding In Plain Sight.” Using government data and proprietary software, it calculates how much money retirees have lost, and are losing, by making mistakes about when to start claiming Social Security benefits.  This study found that 96% of retirees are leaving up to $111,000 per household behind by claiming Social Security at the suboptimal time. The majority of retirees choose to begin receiving Social Security payouts within a few months after turning age 62 or immediately after they stop working, even though it is generally beneficial to delay the benefits.

Because everyone has a different situation and there are many claiming strategies available, you should determine what’s best for you based on your age, life expectancy, income needs and other retirement assets. A few small mistakes can take a big hit on your golden years.

The earliest age you can sign up for Social Security is age 62, but if you file before full retirement age (as defined by the IRS), you’ll be looking at a reduced benefit of approximately 75% of the amount you’re eligible for. Full retirement age depends on your year of birth. You can also delay your filing past full retirement age. For each year you delay your benefit, up until age 70, your benefit will grow 8% enabling you to receive a maximum of up to approximately 132% of your regular benefit amount.  Delaying your filing will clearly leave you with more money on a monthly basis but you need to consider whether it will mean getting the most money on a lifetime basis. If you don’t expect to live very long because of health issues or your personal family history, then it could make more financial sense for you to claim benefits at full retirement age or even sooner to receive the highest lifetime payout. 

If you have already started collecting and are now regretting it you can still take some corrective actions.  Social Security beneficiaries between full retirement age and age 70 can voluntarily suspend payments to maximize earnings in the future. If you started collecting within the last 12 months, you can even withdraw your claim by repaying the benefits you have already received.

To maximize Social Security benefits for you and your spouse, you need to know which of the separate claiming strategies for married couples is right for you. Maximizing Social Security benefits isn’t easy as there are hundreds of rules governing payments alone.

Planning your estate is a final area everyone needs to think about for successful retirement planning. Estate planning allows you to make decisions that your loved ones carry out while following legal directives in your estate plan. An advance healthcare directive, also known as living will is a legal document in which a person specifies what actions should be taken for their health if they are no longer able to make decisions for themselves because of illness or incapacity. In a POA, the principal (you) names one or more agents (often an adult child) to act on your behalf. You need a POA, because someone needs to manage your assets, pay bills, and make decisions if you become incapacitated. The alternative is for your loved ones to ask a court to declare you incompetent and appoint someone to act on your behalf, known as guardianship in most states. One of the primary goals of estate planning (in addition to minimizing estate taxes) is giving the surviving family members and beneficiaries less stress and some privacy. 

Retirement can be a time of freedom, enjoyment, and security without significant stress and distractions, but in order to achieve these things retirement needs to be planned for.  Those who follow a specific financial plan can expect to have better average returns and long-term success in retirement than those who do not.