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A Retirement Guide for Today Thumbnail

A Retirement Guide for Today

Retirement Funding

In the wake of the COVID-19 pandemic, Baird has been talking to our clients about what their chief concerns are. Many of these issues revolve around retirement: What should I be worried about now? Do my plans need to be revisited, or changed? Here are some answers to the most common and universal of these questions.


My husband and I are both retired and collecting Social Security. What should we be doing now? It appears we are going to live awhile.

One key step is to revisit your asset allocation. As you know, your portfolio should be shifting into safer investment vehicles as you get older, but that’s not the only consideration. Ask yourself, Am I taking the appropriate amount of risk right now? Would I feel more comfortable with my portfolio if it were concentrated in less risky vehicles? Or do I need to grow my portfolio more, and maybe think about moving back into equities?

One aspect of your personal finances that becomes more important in retirement is cash flow planning. If you have plans for an expensive vacation or a project like remodeling your kitchen, be forward-thinking about how and when it will be funded. The amount of liquidity you have changes as you move through retirement.

Despite the fact that you both appear to be in good health now, there’s an uncomfortable but inevitable concern to deal with, preferably long before it becomes an issue. In retirement, you need to plan for the good days, the bad days – and the beyond days. For every married couple, one of you will end up being the surviving spouse; have you planned for what happens when that day arrives, both personally and financially?

There are always new things to be thinking about, financial decisions that may have changed while you’re in retirement. For instance: Do you have a strategy in place if you have a long term care need? If you haven’t addressed these questions before, it may be time to ask yourself where you would go, and who would take care of you, if you’re unable to care for yourself.

If we are already retired, should we be revisiting our plans based on the current situation?

Even apart from the pandemic, there’s always room for improvement, no matter how thoroughly you’ve worked on your plans for retirement. You can always find additional efficiencies in tax planning or new strategies in estate planning, and this is especially true when the law changes in substantive ways, like we recently saw with the CARES Act.

For instance, the new law waives the rules around Required Minimum Distributions from an IRA or 401(k). For people who don’t have to live off these distributions, this creates valuable planning opportunities; you can let that money grow further before you withdraw it from your savings plan.

One possible move: If you are accustomed to a high income but, as a result of the markets and the economy, your taxable income is down right now, this can be an advantageous time for a Roth conversion. When you convert a traditional IRA to a Roth, you pay taxes on the assets at your current tax rate, so if you’re in a lower bracket now, it may be an advantageous time. Then in retirement, you can withdraw those assets tax-free.

As an investor nearing retirement, what should I be thinking about over the next five years?

One way to approach this question is to think about your cash flow. Generally, you can break down your retirement spending goals into four areas:

  • Essentials: Shelter, vehicles, basic healthcare
  • Lifestyle: Travel, hobbies, toys 
  • Unplanned: Emergency medical care, family needs
  • Legacy: Inheritance, charitable giving

What kind of cash flow will you need to fund those areas in retirement? If necessary, where would you be willing to make sacrifices?

Once you have a reasonable idea of what might be required to cover those expenditures, ask yourself if you will have sufficient assets to fund your needs. Take stock of your income resources, starting with your guaranteed sources, which include Social Security and any type pension or defined-contribution plan you have. Your investable assets would constitute a second category, and real estate holdings a third. Managing the return and reliability of these three income streams can help you sort out where you stand in terms of meeting your retirement needs.

One rule of thumb: Try to maintain two years of your fixed expenses on hand, minus any immutable sources of income, like a pension or Social Security.

As you approach retirement age, there are also non-financial questions for you to answer for yourself. Healthcare is an area where you will have important decisions to make. Will you be eligible for Medicare without having to pay extra premiums? What part of Medicare should you buy on your own? Your Baird Financial Advisor can help you answer these and other questions to ensure that you can enjoy the retirement you deserve.

I had planned to start drawing on an annuity soon, and waiting until age 70 to collect Social Security. Should I think about changing that plan?

It really depends on the type of annuity you have. Annuities have all different kinds of tax benefits, payout schedules, funding mechanisms, etc. The best way to assess this for your own particular situation would be to compare what the annuity would provide you to what the benefit of a delayed Social Security payout would be. Remember, you can start taking a reduced Social Security benefit at age 62, but if you wait till age 70, it gives you the maximum annual payout.

The coronavirus and the accompanying fiscal downturn have changed the Social Security strategy for many would-be retirees. Here’s a quick rule of thumb: If you’re find yourself having to sell assets that have declined in value in order to maintain your lifestyle, turning on Social Security now may be a good idea. If you have other assets you can live off of, it’s better to wait as long as possible for the Social Security benefits to grow.

How does this recent downturn in the market affect someone like me, close to retirement age? Would it be wise for me to put off retirement for a while?

Part of the reason you have a long-term plan in place is that you can avoid having to revisit your decisions in times like these, when many people may be reacting emotionally rather than logically. Choosing your retirement date should be a five-year decision, rather than a five-month decision. A robust retirement plan should recognize that there will be disruptions and crises along the way, and have ways to deal with them.

To fully answer this question, you really need to know your current state of affairs: your income, your spending lifestyle, your risk tolerance. When you choose to retire depends on how you balance these other three factors.

Planning is a highly personalized process, and everyone’s retirement journey is different. These guidelines and rules of thumb can help you think about what is most important to you, whether you’re in retirement now or approaching it rapidly, but we can help you take that next step and turn your goals into action.