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Roadmap to Retirement
March 21, 2016

There are several financial moves that investors should be making in the years before they leave work that might result in an easier time preserving savings, reducing tax bills, and overall being providers for loved ones and heirs. Financial advisers reporting for The Wall Street Journal have proposed that investors nearing retirement should consider the following four tips:

  1. Understand revocable versus irrevocable choices.
    1. Spend the majority of time thinking about and making conscious decisions about financial choices that can’t be reversed. Invest your time and energy into decisions that are final.
    2. Start by distinguishing between choices that are revocable (can be changed) and those that are irrevocable (cannot be changed).
    3. Some housing decisions are also irrevocable—choosing to live in certain senior living environments, such as continuing-care retirement communities, can also lead to irrevocable financial outlays—in the form of six-figure nonrefundable down payments for entry.
  2. Spend some of it now, and stay liquid.
    1. Cash flow in retirement takes the form of ‘spending down’ saved assets, rather than accumulating and increasing income. Planners and clients are both not mind readers—there’s no real foolproof way of foretelling life expectancy or the future cost of health problems or inflation, so it’s important to manage cash flow to preserve income. You certainly don’t want to spend all your money and not have anything left to comfortably live on!
    2. While you are still in the pre-retirement phase, plan on springing for needed repairs or purchases while you are still earning money. Take a good look at your home, roof, car, etc. and replace or repair anything that needs attention before you retire—preferably during the three to five year period before retiring.
    3. In the early stages of retirement, follow the conventional wisdom of dipping a ‘small toe’ in your resources. Wait to tap streams of income such as Social Security or retirement-accounts. Make sure you don’t get too comfortable—continuously consider what could happen in the market around the time of retirement.
  3. The taxman looms, so be sure to diversify.
    1. Traditional retirement accounts like 401(k), non-Roth IRA, etc. are taxed by the government, so you won’t get to keep all of your spoils.
    2. Keep on top of your tax implications—start doing this before you start taking ‘required minimum distributions (RMDs) at age 70 ½.
    3. Those who own their homes outright have already lost their mortgage-interest tax deduction, while those who no longer work may lose deductions such as a home office.
    4. Tax diversification is important. Don’t wait to do it until you’re already drawing income—then it is too late.
      1. If your financial investor offers you retirement tools, consider using them. Look at all of your assets in one place and come up with model retirement scenarios.
      2. Adults between 63 and 70 ½ still have considerable control over income—regardless of their retirement status—and it is possible to take proactive steps to avoid a potentially devastating tax hit.
      3. Consider moving some funds into brokerage accounts—so they remain in the market but in a vehicle where withdrawals are taxed at capital-gains rates versus ordinary income-tax rates.
  4. Know your benefits and how choices affect heirs.
    1. Double check the fine print in your employer’s 401(k), pension or other benefit plans, as well as the fine print connected to any annuity choices up in consideration.
    2. For example: higher earners often find that their employers offer not only a 401(k) plan but also a ‘non-qualified deferred compensation’ (NQDC) package.
      1. NQDC plans often begin paying employees at age 55, at retirement, or within a five-to-ten year window past age 55. Employees need to vet how their plan works to put the money to work in the most sensible way.
      2. Pre-retirees should also consider choices for using annuity and pension plans. These plans often require a choice between withdrawals in the form of ‘straight life’ income stream or over a multiyear term (10 years, 20 years, etc.)
    3. ‘Straight life’ scenario: people get the maximum allowable monthly payment for the rest of their lives—so they can’t outlive income from the annuity. When they die however, spouse and heirs get nothing—this turns into a bad bet if the investor dies soon after payments begin.
    4. ‘Multiyear term’ scenario: investors receive the annuity payments monthly for the duration of the term they choose. If they die before the term ends, their heirs get the payments for the duration of the term.

All retirement planning strives to provide a mix of resources for enjoying life, alongside resources that can cover unforeseen costs and events, plus expectations about inflation. To make sure your mix of resources is secure, consult a professional. If you have any questions about the above material, or wish to speak to an attorney, please contact HoganWillig at (716) 636-7600. HoganWillig is located at 2410 North Forest Road in Amherst, New York 14068, with additional offices conveniently located in Buffalo, Lancaster, and Lockport.

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