3 Potentially Devastating Issues to a Retirement Strategy and More Questions
1. Of the three issues: taxes, long term care and inflation, which has the potential to be the most
devastating to an investor’s retirement strategy?
Long-term care (including healthcare) could be the most devastating. A Fidelity study concluded that a married couple’s out of pocket healthcare expenses could exceed $12,000 per year and based upon average life expectancy over $250,000 of total expenses in retirement. If unaccounted for, one preparing for retirement, this expense could absolutely cause irreversible damage to a retiree’s portfolio. While we can’t control inflation, we can account for it in retirement planning. If not taken into account, the long term affects can be equally devastating as long term care/healthcare costs.
Another very important factor to include is the need to reduce portfolio volatility when in retirement, while still maintaining reasonable growth to maintain the sustainability of the portfolio. There are several strategies for controlling the volatility in a retiree’s portfolio.
2. Asset location matters from a tax perspective. What do investors most
often get wrong when it comes to utilizing tax-advantaged and
taxable accounts as part of their retirement plan?
Most investors, as well as traditional advisors, don’t realize the effect that taxes can have on a long term retirement plan. Additionally, investors don’t know how to effectively and efficiently convert traditional IRAs and 401ks to Roth IRAs. By doing so, an investor can reduce a potential burden of forced RMDs and the negative effect of Social Security taxation. Utilizing tax efficient money management strategies and/or tax deferred annuities can offer a more tax efficient retirement outcome.
Investors fall flat on how to tax efficiently withdraw from their tax advantage and taxable accounts. This is not a simple task due to the variables involved and the complexity of the correct withdrawal strategy. Investors could potentially add 10 or more years to their portfolio by working with a tax knowledgeable retirement advisor who relies upon sophisticated tax software that provides the correct withdrawal strategy.
3. Annuities and TIPS can be effective ways to hedge against inflation, with
annuities offering the dual benefit of creating a guaranteed
income stream in retirement. What should investors consider in
deciding whether either one makes sense for their retirement
strategy?
Annuities are a critical component in a retiree’s income plan. They provide the inflation AND volatility protected “safe money” portion of a portfolio. As one nears and enters retirement, it’s critical to have a buffer against stock market downturns. Annuities provide this buffer without loss of return.
In fact, my research indicates that leading FIAs (linked to the S&P 500) averaged over 6.88% net return from 2012-2016 vs. the 10 year treasury averaging 1.32% during that same timeframe. They are a perfect safe money alternative in a retiree’s portfolio.
TIPS can be an effective hedge against inflation, however, due to the low interest rate environment and forecast for inflation rates, TIPS long term returns could be well below what is necessary for a retiree’s safe money portion of their portfolio.
4. Long-term care insurance is designed to cut down
on the risk of health care costs eating into your retirement but
this cover often comes with premiums. Does LTC insurance make
sense if you can afford it, or would investors be better off
using that money to invest and grow their portfolios instead?
What about a long term care annuity, is that a better option?
A person at age 65 has a 70% chance of needing some type of long term care during retirement, but fewer than 8% actually carry any type of long term care insurance. Long term care insurance is critical for those retirees who cannot afford to lose a large portion of their portfolio to a long term care incident.
I believe the cost for long term care is well worth the investment, and prudent from a peace of mind perspective as well. However, retirees don’t necessarily have to pull the premium from their portfolios. If a retiree has a low or no mortgage balance in retirement, setting up a reverse mortgage with an increasing reserve account can be an effective method to cover long term care needs. In many instances, a combination of long term care insurance, proper planning with an elder care attorney and a reverse mortgage can be a very cost effective method to reducing the burden on a potential long term care event.
For more affluent individuals a long term care annuity can be a good way to leverage discretionary monies such as CDs, savings accounts, etc.
5. Once you’re in retirement, how can you optimize your withdrawal
strategy to keep taxes, inflation and the cost of health care
from diminishing your investments too quickly?
A Multi-Discipline Retirement Strategy (or MDRS), coupled with a sound risk management strategy will enable a retiree to maintain a 4% or higher withdrawal rate, while also providing for a sustained income for life. By properly combining the investing disciplines of stock (for growth) and annuities (for guaranteed income), with a proper tax efficient withdrawal strategy, a retiree can keep taxes as close to 0 as possible, while protecting against volatility, inflation and unexpected costs such as healthcare.
To read more about our MDRS strategy see our white paper: https://yourretirementadvisor.
If you have additional questions or would like to learn more about how we can help you craft your retirement plan, we welcome you to fill out a form to schedule a complimentary consultation with Brian.
