Retirement Planning
Retirement planning and decision-making.

There have been thousands of articles written with catchy titles about, “the one secret to a safe retirement.” However, there’s no silver bullet when it comes to retirement planning.

Rather, there are four main focus areas, all of which should be optimized during working years:

1. Assets
2. Liabilities
3. Income
4. Expenses

Assets

There are many types of investment accounts, including:

• Roth accounts
• Pre-tax qualified accounts
• Nonqualified deferred compensation
• Taxable investment accounts
• HSA accounts

Each account has a role. Some accounts, like your pre-tax qualified accounts (401k, 403b, etc.) allow for tax breaks upon contribution, but require taxable minimum distributions later on. Other accounts, like your Roth IRA, do not incur future taxes and are amazing tools for transferring wealth. One lesson that we continually preach to clients is the need to diversify assets across account types.Because each account has a different taxability profile and timeline, proper asset location (i.e., where to place equities, fixed income, cash, alternatives) and planning is required.

Trying to predict what Congress will do with federal taxes is a fool’s errand, so it’s best to hedge your bet by investing across account types. While it’s more punishing from a tax standpoint to contribute to a Roth 401(k) account today, it could be very rewarding if the 2017 Tax Cuts and Jobs Act sunsets at the end of 2025 and tax rates jump. Conversely, if you’re in your peak earning years and a few years from retirement, saving on a pre-tax basis could save you tens of thousands of dollars in taxes in the short-term.

Liabilities

There’s a common thought that owing money to someone else in retirement is a bad thing. Our opinion is that:

1. Liabilities are not always bad, nor are they always good
2. If the interest rate on your debt is very low (like a 3% mortgage), that’s a gift per se
3. Some interest expense is deductible, like mortgage interest, subject to limits

Understand the rate, deductibility, and nature of your debt. If you have credit card debt rolling over from month to month in retirement, that’s a bad thing. If your investment assets are earning a return greater than your fixed debt payments, that’s a good thing.

Income

Retirement income can be generated from several sources. The old and outdated “three-legged stool” retirement income model illustrated the following:

1. A pension plan
2. Social Security
3. Personal savings

We’ve seen a significant and steady move away from pensions by major corporations. For most employees retiring in the coming few years, a pension will not be a part of their plan.

Social Security is limited to $3,627 per month at full retirement age (FRA) or $4,555 at age 70 in 2023. Therefore, what the pension leaves exposed needs to be filled by personal savings. Those savings should generate interest, dividends, and gains to replace the income that otherwise would’ve come from the pension. Therefore, the investor needs to be prudent in achieving a high personal saving rate. Personal saving rate = total amount saved annually divided by total annual gross income.The higher your personal saving rate, the more retirement income you should have.

Expenses

Expenses are arguably the most important aspect of retirement planning. You simply cannot out-save a bad spending habit. Personal bankruptcies have been realized by individuals that earned hundreds of millions of dollars. ESPN made a 30 for 30 episode called Broke that explained how this happened (and is still happening) to many athletes.

That said, a defined annual budget is the key metric in understanding how your personal net worth, retirement income, and estate planning strategies will play out. If you overestimate your future expenses going into retirement, your net worth upon your passing will be much larger than expected if you do not gift away assets or spend more during your retirement years. If you vastly underestimate your future spending going into retirement, your retirement assets could enter a period of “tailspin,” whereby your investment earnings don’t keep up with your spending.

The bottom line is that when you monitor and stick to your budget, you can live an absolutely wonderful lifestyle during retirement.

In conclusion, there is no silver bullet to retirement planning. There are daily decisions that we can all make to:

• Increase and diversify our assets across accounts
• Manage good liabilities, and get rid of the bad ones
• Bolster retirement income by increasing personal saving rates
• Live a great lifestyle while sticking to a budget

Advisory services offered through The Nemes Rush Group LLC. Securities offered through J. Alden Associates, Inc., member FINRA/SIPC. The Nemes Rush Group LLC and J. Alden Associates Inc. are not affiliated. The information presented is for informational purposes only. Please consult your tax professional to determine the tax effects on your personal situation prior to making any investment.