Retirement Financial Security: Making Good Decisions

Investing
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By Mark Shemtob CFP, RMA

Learn more about Mark on NerdWallet’s Ask an Advisor

A successful retirement generally requires that one does not run out of money before he or she runs out of life. In general, achieving success is linked to either good luck or good decisions. Leaving our financial retirement security to luck though an option; is a poor one at best. Thus making good decisions is the key to achieving a successful retirement. The most fundamental of those decisions is made very early on; decades before retirement is even on the radar screen. Starting to save early and at meaningful levels is crucial. Not invading one’s retirement savings prematurely is another key choice. Carefully deciding between Roth and traditional IRAs and 401(k)s is important.  Making investment selections along the way requires good decisions as does selecting investments that minimize fees.

But how about once we enter  the pre-retirement zone, those five years leading up to retirement; or those at retirement.  What are the good decisions to be made. Unfortunately this is a far more complicated process than we face in the accumulation years which is essentially about saving and investing. However that doesn’t mean there are not good decisions to be made. They will vary by individual circumstances and will likely be dynamic, thus possibly requiring changes along the way. So when charting out your retirement planning the following are among the key topics that may require well thought out decisions.

  1. When should I retire? Not all of us have the option to work later; but for those that do there are very few decisions that can help insure retirement success as much as worker longer.
  2. Should I use some of my nest egg to purchase a guaranteed lifetime income annuity? Though there are some downsides to these products such as a lack of liquidity and potential loss of inheritance for loved ones, they are still worthy of consideration. This is especially true for those with long life expectancies and as a form of diversification of one’s overall retirement plan.
  3. If covered by a traditional pension plan should I take the lump sum payout (if offered) or stick with the plan’s annuity choices? Lifetime income offers piece of mind for those that expect to live long, but may not be a good idea for those in poor health. In addition retirement plans are required to use lump sum conversion factors that are more attractive to males but not to females; thus gender might affect one’s decision.
  4. When should I start collecting Social Security? The tendency for many retirees is to collect sooner than later. However for those with at least average life expectancies this strategy could result in the loss of a significant amount of benefits in the long run.  In addition there are timing approaches that married couples can elect which could mean far larger cumulative benefits.
  5. How should I manage portfolio risk? There are many strategies and financial products designed with this challenge in mind. One key consideration is that one needs to attempt to eliminate risk with those funds that are crucial to satisfying basic needs.
  6. How can I estimate my life expectancy? Projecting how long one will live is crucial to so many of these decisions. There are many websites that allow one to develop an estimate. Use several, get an average, and then consider adding 5 or so years to be extra conservative.
  7. Should I purchase long term care insurance? For those retirees barely getting by financially this may not be a viable option and for those with significant wealth this is not necessary. All others need to carefully evaluate this decision and if they elect to forgo long term care insurance they need to have a plan in place to deal with this potentially large expense.
  8. Should I leave my 401k account with my employer’s plan (if permitted) or roll it over to an IRA? This decision should be based on the investment and payout options as well as the expenses associated with your 401k plan. There are many options going the IRA route; though the expenses could be much higher if the services of an advisor are required.
  9. How do I minimize taxes on distributions form tax qualified accounts? This requires some careful planning as to one’s expected tax bracket in future years especially if one is still under age 70 1/2 and has sizable tax deferred accounts. It may in some case make sense to take out funds sooner than later even if taxable. The use of Roth conversion may be worth exploring.
  10. Should I maintain life insurance in retirement? Paying life insurance premiums will seldom insure a more financially sound retirement, but for some may be a good or necessary choice for other reasons. This will depend on whether one still has dependents or may be subject to a significant estate tax. Premiums are high in older age unless an individual has had a permanent policy for many years and has accumulated significant cash values.

This is not an exhaustive list of key decisions to be made. In addition a decision with respect to one issue may likely impact on another. Thus the overall strategy needs to hold together. In addition there may be elements outside of maximizing the likelihood of having enough money in retirement that one should consider which could impact the decision process.  Many individuals will rely on the help of advisors. When consider the advice being provided one should be diligent in assessing whether such advisor is sufficiently qualified, independent and unbiased. This can be very challenging and even if an advisor is biased it doesn’t necessarily mean that the advice is not appropriate. One should be comfortable getting alternative advisor recommendations before making any decisions especially if non reversible. It is important to always keep in mind that one’s overall situation is unique and that the decisions made should be well informed based on his or her circumstances.