By Dave Mirolli, Pilot and Managing Director, Wealth Management Advisor | Apollon Catalyst
Prior to liftoff, a pilot will run his aircraft through a series of checks to ensure the plane is in tip top shape to achieve a safe and efficient flight. Once airborne, the pilot navigates the plane to the intended destination while avoiding weather, traffic and other pitfalls that could jeopardize the success of the mission. Most Americans define retirement as a goal in which one can continue to live at their current lifestyle without having to work: while having their assets work for them. For most of one’s working years, retirement is something in the distant future, however, to achieve a successful retirement one must be as diligent as a pilot. Financial planners have titled the five years up to five years after starting retirement as the Red Zone. Here are a few preflight and in-flight checks to do for a successful retirement flight.
Cash Flow:
Debt.org states “A generally accepted rule of thumb for retirement planning is that you should have at minimum, 80 percent of the yearly salary you earned while working. This is sometimes called “replacement income.”
On average, retirees spend around 80% of what working households spend annually. Some research shows that the first few years are often the most expensive years of retirement since retirees will first consider retirement an extended vacation. “I often ask people, what is the most expensive day of the week or month for you?” Most will respond with Saturday when they might play a round of golf or tennis, have lunch with friends and then head out to dinner and a show. I then explain that in retirement, every day is Saturday. That long delayed trip to the Far East or a month of sailing in the Caribbean are just a few of the things you may be looking forward to once retirement starts. Work with your financial planner to determine your retirement income. Take your annual income needs, subtract out pensions, social security and other non-savings sources of income; the remaining will be the amount you need to generate off your investment assets. The 4% rule is a guideline that suggests withdrawing 4% of your portfolio in the first year of retirement and adjusting that dollar amount for inflation thereafter. This has historically been used in research to improve the odds of funding a 30-year retirement, but actual results depend on market returns, inflation, and individual circumstances.
Asset Allocation Adjustments:
Most portfolios in one’s working years are heavily focused on stocks. A very old and outdated rule of thumb is simply one’s age to determine bond allocation (a 75 year old retiree would have 25% in stocks and 75% in bonds). In a low-interest rate environment like we’ve been in for the last 10 + years, bonds have not been able to provide enough income to stay ahead of inflation. Work with your financial professional to determine what asset allocation is needed to sustain your income needs knowing that investing in high quality domestic companies that provide dividends to stockholders can be one way to seek to stay ahead of inflation.
Budget:
One to two years out from retiring you should sharpen your pencil and be diligent in listing your current expenses and decide which are necessary — groceries and housing, and which are discretionary – eating out, travel and hobbies. Many people today use credit cards for everyday expenses to accumulate reward program points. Make sure a line-by-line review of your monthly expenses is completed, giving special attention to holiday months when expenses increase. Consider paying off home mortgages, auto loans and other consumer debt lines as you approach retirement. Consolidating various accounts can help to simplify your budget and help you keep better track of your investments. Consider rolling over company 401(k)s to a self-directed IRA that can offer lower fees and more investment choices. Have your financial planner verify your budget to make sure your numbers account for inflation and possible expenses you may have overlooked.
Healthcare:
Perhaps the single largest expense in retirement will be healthcare expenses. Medicare can cover some costs, but you still may wish to consider Medigap insurance. Typically, Medicare starts at age 65 but if your situation is different you may need to plan for other types of coverage. Consideration should be given to a long-term care insurance policy. According to the Department of Health and Human Services, 70% of those over age 65 will need some amount of long-term care. The often-suggested age to purchase this type of insurance is in your mid-50s. There are numerous types of long-term care insurance so consult with a professional to see what is right and affordable based on your situation.
Liftoff and Market Timing:
Just like a plane loaded with passengers, cargo and fuel is most vulnerable to mishaps on takeoff, your retirement plan is most vulnerable in the first five years to living off your investment assets. If market loss occurs in the first few years of retirement the impact may be severe enough to alter your plan for years to come. Work with your financial professional to ensure a portion of your investment portfolio is structured to reduce loss risk, allowing for fixed expenses to be met with guaranteed income sources such as pensions, Social Security, or insurance-based products. Having fixed expenses covered by reliable income sources can help you to weather a severe market downturn.
Like any good pilot does once airborne, a good retirement plan will need numerous updates along the way. Changes in taxes, inflation rates, market performance and health are just a few possible storms that may require deviations along the way. Work with a reputable financial planner to help you work toward a successful flight knowing that it’s too important to be left to chance.
Apollon Wealth Management, LLC (“Apollon”) provides advice and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, Apollon has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing price to make decisions. This content is for informational purposes only and does not constitute investment, financial, tax or legal advice. It is not a recommendation or solicitation to buy or sell any security. When information is sourced from third parties, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Please consult a licensed professional before making investment, tax, or legal decisions. Please visit our website https://apollonwealthmanagement.com for other important disclosures.
