â€śTo improve is to change; to be perfect is to change often.â€ť â€” Winston Churchill
Ah, retirement. The â€śGolden Years.â€ť Once weâ€™ve earned our fortunes, we can sit back, relax and not think too hard about what weâ€™re doing with our moneyâ€”after all, the hard part of earning it is over…
If only it were that simple.
As Churchill so eloquently illustrates for us, change is not only good, itâ€™s necessary if we want to stay one step ahead of lifeâ€™s pitfallsâ€”including the financial ones. Thatâ€™s a lesson Iâ€™ve felt increasingly compelled to impart to my clients lately as they head into retirement. So many of us believe that once weâ€™ve earned our nest egg, we can leave it largely undisturbed throughout our decades of retirement, and everything will work out as planned.
But thatâ€™s a huge mistake. The ideal investment approach and financial needs of retirees change significantly as they move from their 60 into their 70s, 80s and beyond. In other words, change is the only constant in every stage of our financial lives.
Before we dive into exactly how you should be differentiating your investments in retirement, itâ€™s important to understand the three stages of life through which every member of the earning public moves: accumulation, protection and transfer. These stages are the same for everyone, regardless of how much money you make or what your life goals are.
The accumulation stage isâ€”as the name impliesâ€”your time to earn and accumulate as much money as you can. You work for your dollars, you gain equity in your home, and you contribute to your retirement accounts, all with your next stage of life in mind. And, ideally, youâ€™ll be thinking of that next stage as financial independence, not retirement. After all, we arenâ€™t aging machines to be decommissioned off the assembly line due to lack of usefulness. Rather, weâ€™re vibrant human beings seeking to be financially independent because we desire more freedom to explore and enjoy new adventures in our lives.
Once you transition to the protection stage, youâ€™ll no longer be working for your dollarsâ€”theyâ€™ll be working for you. In this stage, the most important ingredient is investing wisely, and not losing what you spent your whole life accumulating. Investors at this stage would be wise to look into building a recession-proof portfolio (which absolutely can be done) and always steering clear of emotional temptation to make sudden moves in the markets.
In the transfer stage of life, many folks will shift their energies to creating a lasting legacy, and exploring how they can transfer wealth to family, friends, or a charity of their choice. It sounds easy enough, but this stage can actually be the trickiest. A recent BlackRock study uncovered that nearly 20 years into retirement, most retirees are still hanging on to 80% of their pre-retirement savings. Simply put, many of us are afraid to spendâ€”we get nervous that weâ€™re going to outlive our money, and we stop living life.
But failing to regularly draw down on our savingsâ€”and banking the resulting liquid assetsâ€”could be a huge mistake. Unfortunately, we might not fully realize that mistake until weâ€™re in our 90s and weâ€™re in need of a large deposit to move into a retirement home. If we donâ€™t have that money liquid, itâ€™s going to result in an enormous tax hit, that many of us may not be able to bear. The solution is easy enough â€” you can do wonderful things with a whole life insurance policyâ€”but retirees have to prepare early, in the transfer stage.
In order to make it successfully through all the stages, retirees have to plan ahead, and be ready to make changes in every decade to ensure their money is positioned where it needs to be, and that itâ€™s working for them. Hereâ€™s a look at some of the things you should be thinking about as you move through each decade.
In your 60sâ€¦
Devote some time to thinking about Social Security. Itâ€™s going to take a while to navigate the maze of more than 800 rules and claiming options that are part of the system, so starting your research early is the way to go. Many people assume Social Security is a simple, guaranteed benefit, which is why so many of us claim as early as weâ€™re eligible, at 62. But that can be a costly mistake. For every year you delay taking Social Security–from age 62 to age 70â€”benefits increase by 6%-8%. Try beating that guaranteed rate of return anywhere else in the market!
In addition to social security, folks in their 60s should look at establishing portfolios that will support their income needs. (For more, check out my article on how to arrange a secure set of portfolios that can ensure your finances will weather any economic storm.)
In your 70sâ€¦
Now itâ€™s time to start thinking about those required minimum distributions (RMDs). This is the stage where many retirees realize that to some extent the government now controls their wealth, which is why you should focus on minimizing taxes, including the Medicare surtax called the â€śincome related Medicare surtaxâ€ť (IRMA), which in a single year can shift your income tax bracket from 22% to above 40%. This is why itâ€™s so important to have both taxable and non-taxable accounts in retirement so that we can adjust our withdrawals to ensure weâ€™re as protected as possible from Uncle Sam. While itâ€™s true that most of us will be earning less in retirement than we did during our accumulation stage, itâ€™s oh-so-easy to underestimate how much weâ€™ll owe in taxes as we take our RMDs. And, through all of this, you must make doubly sure youâ€™re setting aside enough liquidity for your next stage of life.
In your 80sâ€¦
Nowâ€™s the time when you begin to realize that the only thing that matters is liquidity, and having a safe place to shelter your money thatâ€™s not going to result in your getting hit with more taxes. For example, as much as you might like to give your IRA away, you canâ€™t do it without paying taxes unless you give it all to charityâ€¦ And you also canâ€™t protect it from creditors unless you pay taxes. Think about it this way: moving into that nice retirement community with your friends will be twice as expensive if you have to pay the lump sum entrance fee with IRA money. No, these equations arenâ€™t fun to run, but imagine how much worse youâ€™ll feel if you put off doing the math until itâ€™s too late, and you donâ€™t have enough cash set aside.
As you move into the next stage of your lifeâ€”whatever it may beâ€”remember that Wall Streetâ€™s retirement goals are not necessarily yours. Wall Street will always be singing its siren song, luring you in to focus only on growth and accumulating more assets for the future. But who cares about beating the S&P 500 when itâ€™s time to focus on your family and legacy? No matter what stage of retirement youâ€™re in, make sure you give yourself permission to enjoy your moneyâ€¦ It really is true what they say â€” you canâ€™t take it with you.
Â John E. Girouard is the author of Take Back Your Money and The Ten Truths of Wealth Creation, a registered principal of Cambridge Investment Research and an Investment Advisor representative of Capital Investment Advisors.