The Five Pillars of a Sound Retirement Plan

The Five Pillars of a Sound Retirement Plan

In the past, many retirees counted on pensions and Social Security as the pillars of a sound retirement.

Now, there are five pillars future retirees should take into account when creating a solid plan for retirement.

1. Estate Planning

The first pillar of a sound retirement plan is estate planning. Estate planning is all about creating your own rule book versus relying on the government’s rule book. If you’ve never put together a plan to avoid probate, both while you’re alive as well as when you pass away, then you are inviting another entity to make decisions regarding your affairs.

Clients should explore setting up a comprehensive plan that would include a trust, pour-over will, financial power of attorney, medical power of attorney, personal care plan and a deed. Working with a good estate planning attorney or elder law attorney can help a family accomplish its estate planning goals. A good resource to find a Certified Elder Law Attorney is via the National Elder Law Foundation.

2. Income Planning

The second pillar of a sound retirement plan is income planning. An income plan focuses on your income needs in retirement. When retired, you will no longer have wages from income, and relying on Social Security or a pension may not be enough to cover your income needs in retirement. Therefore, a plan should be developed to utilize assets to generate revenue.

There are different strategies for creating income in retirement. One thing to note is that in retirement, a retiree is now in the distribution phase, instead of the accumulation phase. During distribution, it is important to know which assets will be tapped to generate income. Drawing on the wrong asset at the wrong time can have a drastic effect on your retirement, because you don’t have the same time you once did to make up for mistakes.

3. Investment Planning

Once you have your rule book created with an estate plan and an income plan created to cover basic expenses, then an investment plan must be developed to determine how to invest the assets that are not allocated to creating income. An investment plan should be engineered to meet a client’s volatility tolerance and be calibrated with the right amount of risk they are willing to take on.

Not all investment plans are the same for every client. Retirees will have a varying amount of risk they are willing to take on as well as different time frames for when to draw on those investments. For example, assets used over the next few years should likely be invested differently with different risk than investments used 10 years out or more.

4. Tax Planning

Next up is developing a strategy for tax planning. This is different than just filing a tax return. Tax preparation is more of looking back historically, versus true tax planning. Tax planning involves looking at creating tax diversity in assets between tax-free, tax-deferred and taxable accounts. There is an emphasis on tax planning due to the 2018 Tax Cuts and Jobs Act that is set to expire in 2025.

It is important for a retiree to pay careful attention to assets that are tax-deferred, such as IRAs, 401(k) plans and 403(b) plans, because these accounts have required minimum distributions built into them. This means that at age 70 1/2 required minimum distributions on those accounts will have to be taken out, and taxes will have to be paid.

5. Health Care Planning

The final retirement planning pillar is health care planning. Health care planning falls into two categories. First, it involves planning for prescription and normal health care costs; this is typically covered by Medicare. The other part of health care planning that is more complicated is planning for long-term care costs. For example, last year the average cost of long-term care in a private room in a nursing home was over $100,000 per year. The question then becomes how to pay for long-term care.

How to pay for long-term care comes down to private paying, utilizing long-term care insurance strategies or relying on governmental benefits. One key takeaway is that the earlier you start thinking about long-term care, the more options you’ll have on the table and the better the quality of those options and the quality of care will be.

Rome Wasn’t Built In A Day, Neither Are Retirement Plans

There is quite a bit that goes into planning for retirement. Education is the first step. Moving into retirement is a big step that should be planned out. Understanding the five pillars of retirement planning will help you create a safe, sound retirement.

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