Why a good retirement plan is not a separate, but a comprehensive strategy
Effective retirement planning goes beyond investments and numbers related to the various accounts a person owns. First, it is about understanding the scope of an individual’s future financial needs and goals. From this framework, it is about putting all areas of the plan together so that they complement each other and act as an integrated whole.
At times, the financial world can seem fragmented to clients, with professionals appointed as experts in only one area of the plan – investments, insurance, taxation, estate planning, etc. But comprehensive financial planning includes and links every relevant aspect of retirement strategy. It analyzes and seeks to improve each part of a person’s plan by making these pieces work together identically.
One way to think about overall planning is that most people have many pieces that make up their retirement puzzle, and they all need to fit together to form a complete picture. But I find when I talk about overall planning in seminars, it opens people’s eyes because they didn’t think about it in that context. Here are the key elements in most people’s retirements:
- social Security
- tax planning
- Investments (401(k) plans, Roth IRAs, non-qualified accounts, etc.)
- Income plan (drawing a strategy for how you will use your money)
- real estate plan
All of these pieces need to work together. You cannot maximize your position if you look at each of these aspects in a vacuum.
Putting the Parts Together: Getting Started with Social Security
You should look at Social Security in the context of three of the above points: investments, an income plan, and tax planning. You should also know how long you will be working and your spouse’s needs – especially if one spouse has a shorter life expectancy. Then the question is how your Social Security will be taxed. Most people have no idea what determines whether or not your Social Security will be taxed.
Sometimes people think they need Social Security to get the income, but maybe they take it too soon and get extra taxes as a result. When you look at Social Security in relation to someone’s investment accounts, it helps determine their strategy for when to run a Social Security faucet.
Let’s take a hypothetical example. Spouses think they’ll start taking Social Security right when they retire, but once a comprehensive planner has done an overview with them and looked at all the other parts of their retirement plan, it makes sense for one spouse to delay Social Security payments until age 70. It depends on How much they plan to operate, their other sources of income, as well as their investments. At the same time, the other spouse may want to start receiving Social Security immediately, which may allow them to stop withdrawing money from their 401(k), thereby lowering their taxable income while also allowing their investments to grow for a longer period of time.
Each piece affects the tax
You have to look at the tax efficiency part of getting every aspect of the retirement plan to work together. When saving for retirement, it’s a good idea to diversify the way you tax your savings. Doing so can help you get through the unknowns of retirement: how much of your income will be taxable, and what your tax rate will be in retirement.
Tax planning becomes complicated as an individual’s wealth grows, which is why a comprehensive financial planner works alongside your tax advisor and real estate attorney. The idea is for them to take a proactive approach to reducing taxes in different areas of your retirement plan. For example, placing a married couple in a higher tax bracket makes it more difficult to make a Roth transfer with tax efficiency (Roth transfers are taxed in the year of the transfer). One reason for Roth transfers is the tax efficiency they give you when you retire, because qualified distributions of Roth money are tax-deductible. Couples who are able to make Roth transfers over several years can significantly reduce their overall tax burden at retirement, perhaps to the point where the vast majority of Social Security is not taxed later in retirement. Additionally, Roth money is tax-deductible for your heirs as well, ensuring that no tax burden is left to the next generation.
You’ll want to make sure your investments are regulated to be as tax efficient as possible. I’ve also met quite a few people with non-qualified accounts like stock portfolios, and they don’t use tax-managed strategies. They generate a lot of dividends, and people with mutual funds really don’t have any control over the capital gains that are catalyzed in their accounts. This all turns into their tax returns, as well as the income they live on. This can dramatically change the tax bracket and make making tax-saving Roth transfers more difficult.
Typically, when people think of income planning for retirement, they think of using their bank accounts and non-qualified funds first, then their IRAs and/or 401(k) accounts, and finally their Roths. This isn’t a bad strategy, but a simple tweak to it can help: At the same time, you’re using your bank’s money and other money, and transferring some IRA and 401(k) money to a Roth is a reasonable idea.
Remember, if all parts of a retirement plan work independently of each other, you’re not getting the best results from each. Each part affects another part. Many people do not view retirement planning in this context, and it is extremely important to do so in order to maximize retirement success.
If you currently feel that your retirement plan is just a collection of individual pieces, a good comprehensive plan can potentially add significant value to your overall retirement.
Dan Duncan contributed to this article.
Senior Partner, Creative Financial Group
Brian Kwik is a senior partner and financial advisor to the Creative Financial Group. Raised with a stockbroker father and a lifelong mentor to a mother, he developed a love for the financial markets at an early age. With over 30 years of experience in the financial services industry, Kwik focuses on tax diversification planning through tax-efficient/tax-exempt income strategies, comprehensive financial planning and financial security planning focused on risk management. He received his Bachelor’s degree in Business Administration from Indiana Wesleyan State and continued with the American College of Financial Services to earn his professional designations as a certified life insurance insurer and certified financial advisor in 2001.
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