Retirement today is vastly different and more complex than retirement a generation ago. Those in the “Greatest Generation” enjoyed retirement income buoyed by generous pensions and Social Security.
The scar of the Great Depression impressed upon this cohort the importance of frugality and living within one’s means. This translated into a retirement mostly free of debt and with well-defined income needs.
This stands in stark contrast to today’s retiree.
The modern retiree faces a challenging web of issues, from health care and longevity concerns to investment income risks to support for sandwiching generations. Ever-shifting political and economic winds force constant adjustments to previously laid plans. Further, byzantine legislative rules add another layer of complexity to retirement and legacy planning.
It’s a lot to manage!
Whether you are in retirement today or are preparing for your transition out of the workforce, let’s use the turn of a new year and new decade to shore up the retirement readiness of your portfolio and your plan. Here are three quick tips to help you with your 2020 retirement resolutions.
1. Update Your Financial Plan for the SECURE Act
The most important 2020 retirement resolution is to update your financial plan for the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act represents the single largest change in retirement legislation in over a decade.
What are some of the key considerations affecting today’s retiree? While the full rundown of the SECURE Act is a blog post (or a book) in and of itself, here are three key updates that will invariably affect your retirement and legacy planning goals.
a. Required Minimum Distribution (RMD) and IRA Contribution Age Updates
The SECURE Act pushes out the date at which retirees must start taking withdrawals from retirement accounts to 72 from 70.5. Further, retirees could not previously contribute to traditional IRAs once they reached 70.5, though they could do so in other retirement accounts like Roth IRAs and 401(k)s. The SECURE Act now aligns retirement account contribution ages.
b. Elimination, or Adjustment, of the “Stretch” IRA
In order to pay for the RMD age change, as well as a host of other changes not discussed here, Congress now requires that inherited retirement accounts be emptied by the tenth year following the date of death of the original account holder.
Previously, distributions from inherited accounts could be “stretched” across the life span of the beneficiary. This dramatically affects legacy planning, particularly given the tax implications of the accelerated withdrawals for beneficiaries in what are typically high-earning years.
c. Conduit Trust IRA Issues
IRAs that have revocable trusts as beneficiaries should be carefully reviewed to understand how the language of distributions is affected by the SECURE Act.
This is a complex issue and we recommend speaking with your tax, legal, and estate advisors to understand all of the tax and legal nuances and ramifications.
2. Protect Against Sequence of Return Risks
Sequence of return risk, or withdrawing funds during a market downturn, can severely inhibit your ability to generate the income you need over your full retirement horizon. Retirees no longer have the luxury of averaging long-term returns across decades, as they did while accumulating savings during their working years. They should carefully consider how to create portfolios that can survive the “fragile decade” — the five years before and after retirement.
There are a few ways to help mitigate sequence of return risk, though there is no single strategy to completely remove all market risk. One can employ income laddering or bucketing approaches, adjust portfolio withdrawal rates based on market performance, or tap into other assets (like home equity) during market downturns.
2019’s banner equity market performance likely shifted the overall percentages of the equity and fixed income exposures in your investment portfolio. Be sure to make the necessary adjustments to align your portfolio with your retirement income needs, especially in the “fragile decade.”
3. Review and Categorize Your Spending
It’s quite easy to set up subscriptions and memberships or swipe your card when making purchases. Are you acting intentionally, though, to understand your expenses as you prepare for your retirement years? Categorizing your expenses into core and discretionary is a helpful first step to understanding how to manage your income in retirement.
Additionally, other unknown expenses can crop up in retirement, such as family, health, or long-term care needs. These are complicated topics unique to you and also require discussion with qualified advisors to understand the options available to mitigate or insure against these risks.
Retirement Planning with Harbor Crest Wealth Advisors
Gone are the days of lifetime pensions, simple financial situations, and dinner by 5 p.m. Family, economic, and political dynamics introduce a near limitless number of variables to optimize how your retirement portfolio will support you in your greatest transition.
You’ve worked your entire life to enjoy this time. Don’t let a few overlooked details or mistakes upend all of your hard work. If you want to make sure your financial plan is ready for the new year and new decade, feel free to give Harbor Crest’s financial planning tools a try.