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Dooley: Follow a three-phased approach for living in retirement

Published: Tuesday, Feb. 11, 2014 4:50 p.m. CDT

Although many Americans now plan for a retirement up to 30 years, your retirement may last much longer.

Traditionally, retirees were advised to project income needs over the length of time of retirement, add on an annual adjustment for inflation, and then identify any potential income shortfall. But the planning required may not be that linear. For example, research suggests some retirees’ expenses – other than health care – may slowly decrease over time. That means many retirees – depending on personal expenses – may need more income early in their retirement than later. This necessitates taking a fresh look at retiree expenses and income, as well as withdrawal and estate planning strategies. 

• Phase 1: The Go-Go Years (60-70). The need to potentially stretch out income over a longer period than previous generations also means some people may not want to tap Social Security when they’re first eligible. Consider that for each year you delay taking Social Security beyond your full retirement age until age 70, you’ll receive a benefit increase of 6 percent to 8 percent, depending on your age. One caveat: If you do decide to delay collecting Social Security, you may want to sign up for Medicare at age 65 to avoid possibly paying more for medical insurance later.

Also plan ahead as to how you’ll pay for health care costs not covered by Medicare as you age. Remember Medicare does not pay for ongoing long-term care or assisted living, and qualifying for Medicaid requires spending down your assets.

If you have accumulated assets in qualified employer-sponsored retirement plans, now may be the time to decide whether to roll that money into a tax-deferred IRA, which could make managing your investments easier. A tax and financial professional also can help you decide which accounts to tap first at this point in your post-retirement planning – a situation that could significantly affect your financial situation, especially your taxes.

Finally, don’t overlook any pension assets in which you may be vested, especially if you changed employers over the course of your career. Pensions can supply you with regular income for life. Because many retirees are quite healthy in early retirement, this may be the best time to maximize your “bucket” list. Take that trip you’ve never taken, go visit the grandkids or hit the golf course. Enjoy life in this phase. As one of my clients likes to say, “Nobody gets out of this game alive. You may as well enjoy.” 

• Phase 2: Slow Go Years (70-80). By April 1 of the year after you reach age 70½, you’ll generally be required to begin making annual withdrawals from traditional IRAs and employer-sponsored retirement plans (except for assets in a current employer’s retirement plan if you’re still working and do not own more than 5 percent of the business). The penalty for not taking your required minimum distribution can be steep: half of what you should have withdrawn. Withdrawals from Roth IRAs, however, are not required during the owner’s lifetime. If money is not needed for income and efficient wealth transfer is a goal, a Roth IRA may be an attractive option.

Also, consider reviewing the asset allocation of your investment portfolio. Does it have enough growth potential to keep up with inflation? Is it adequately diversified among different types of stocks and income-generating securities?

• Phase 3: No Go Years (80+). Review your financial documents to make sure they are true to your wishes and that beneficiaries are consistent. Usually, these documents include a will and paperwork governing brokerage accounts, IRAs, annuities, pensions and, in some cases, trusts. Many people also draft a durable power of attorney (someone who will manage your finances if you’re not able) and a living will (which names a person to make medical decisions on your behalf if you’re incapacitated).

You’ll still need to stay on top of your investments. For example, an annual portfolio and asset allocation review are important. Keep in mind a financial adviser may be able to set up an automatic rebalancing program for you. And finally, be aware that some financial companies require that you begin taking distributions from annuities once you reach age 85.

Depending on the size of your estate, consideration of some gifting may be appropriate. It is always fun to watch your kids manage the pre-payment before you are gone.

The big unknown in this phase is the end of life medical expenses. Long-term care also may be a consideration.

Preparing for a retirement that could encompass a third of your life span can be challenging. Regularly review your situation with financial and tax professionals and be prepared to make adjustments. Happy planning.

• Timothy J. Dooley, CFP, is president of Comprehensive Retirement Resources Inc., an independent firm at 201 N. Draper Road, McHenry. Reach him at 815-578-42170.

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