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What to do when your Retirement Plan Retires

What to do when your Retirement Plan Retires
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Most nearing retirement have spent decades building their retirement plans at their employer. Some were even fortunate enough to have pensions as well. Along the way, we have enjoyed meeting with them and bringing together a comprehensive retirement planning strategy to meet their desired goals. The addition of a new car or purchase of a vacation home is built into the financial plan, but what happens when your retirement plan retires early?

Retirement Ready, or Not

Unless you have been living in a cave for the last three months, you are well aware of the coronavirus pandemic, the stock market crash and its resurgence. You likely have altered your lifestyle by cutting out extra amenities, scaled back on travel plans and hopefully heard from your financial advisor about updating your financial plan. Sadly, tens of millions have been laid off and many baby boomers closing in on retirement were forced to retire from their position early.

It’s staggering to me that millions continue to have no plan for retirement. The only financial plan they seem to have is to work until they no longer can and then draw social security. Unfortunately, that “plan” will not produce an enjoyable experience for people in their later years in life. For the purposes of this blog though, lets put that group aside and focus on those who have done the prep work for retirement and got hit with an unexpected layoff.

For those who have done proper saving and financial planning, you’ve been going along for years putting money back in your employer’s 401K/403B or TSP retirement plan. You have watched as your balance has grown over the years and you have been thinking ‘my financial future is looking solid.’ Then, a global pandemic shuts down the economy, employers beginning looking at their employees who are close to retirement, announce a small severance package and that 20 years you just put in, is quickly met with a thank you and have a great retirement. Bye.

Before you panic, let’s sort out what you need to do.

Distribution Specialist

Hopefully you have had some help from a financial advisor throughout your lifetime, working with you to accumulate assets. When you hit retirement, it’s a good time to reevaluate the type of financial planning firm you work with.  Be sure you are working with an independent fiduciary financial planning firm that will be looking after your best interest. Second, when you cross over into the retirement phase of life, it’s time to start looking for a Distribution Specialist.

Financial advisory firms typically operate in two forms: accumulation specialists and distribution specialists. When you are young, you are looking to grow your money fast and you typically take much greater risk in your portfolio to try and generate higher returns on your financial investments. You have time on your side so risk is not as great of a financial concern. During your working career, you’ve worked with an accumulation specialist to help you grow that nest egg, you’ve taken risk and typically paid a higher fee to the financial advisor. When retirement comes, it is time to reevaluate that relationship.

As you approach retirement, your mindset should shift from high risk growth to a safer investment strategy that ensures you don’t outlive your money. This is the time to work with a retirement planning firm who specializes in asset distribution. At Strategic Wealth Designers, we are focused on mitigating risk, reducing investment fees on your portfolio and providing legacy planning to help you secure your estate as well. Once you have found a distribution specialist financial advisor here’s what to do.

Dormant Accounts Left Behind?

Once you have processed the fact that you and your retirement plan have been retired, it’s time to turn your focus to what you have in your investment portfolio.  Start with your now former employer, because once you leave or are asked to retire from there, your retirement accounts become dormant.

A dormant 401K simply means you are holding money in an investment account that is no longer being actively funded. Many times it is wise to move your money away from an employer sponsored plan when you are not contributing to it. When you rollover that 401K into an IRA it will give you greater options in which you can invest and could lower the fees that you are paying in your investment portfolio.  Also, if your former employer were ever caught up in a lawsuit, your assets could be frozen while the litigation played out. You would eventually get your financial assets owed to you, but most people would not want to have to wait a significant amount of time while that played out in the courts. Once you get those assets moved, it’s time to look at the rest of the picture.

Retirement Social Security Considerations

Tell me when you are going to die and I’ll tell you when you should take Social Security. Of course no one can do that, but Social Security planning is another key piece of the financial landscape as you enter retirement. In some cases in makes sense to take social security right at 62 but with most of our clients, it doesn’t make a lot of sense to start it right away. A lot of our clients have pensions or other income producing assets which allows for Social Security to be taken a few years later than the age of 62.  We use a comprehensive analysis which is complimentary for our clients to know when they should begin to draw.

The analysis will give us immediate clarity on what age they should draw. Your health and family history of longevity are also determining factors every person should consider. If you need the money to live on, then you will need to take Social Security right away. Once you have determined your draw date your retirement plan is one step closer to being solid regardless of whether you are forced into retirement or not.

Retirement Tax Planning

When you retire, whether forced or planned, you need to take a look at the implications for your taxes.  We strongly believe that taxes are on sale right now in United States from a historical perspective, but with all of the stimulus money being pumped into the economy, taxes have to go up soon and here’s how to financially plan for it.

Despite what you may have heard, you do not automatically go into a lower tax bracket when you retire. You may not have the income from your employer, but you may have income from your investments, social security, rental income from properties you own, or your spouse could still be working. When you build a financial plan with an independent fiduciary financial advisor they should be taking all these elements into consideration for the distribution phase of your life.

One key difference between working with most CPA’s on your taxes each year vs consulting a financial advisory firm is: This Year vs Your Lifetime.  CPA’s and accountants do excellent work, but they typically are focused on the tax ramifications of the current year they are dealing with. It can be a very high stress situation, especially when it’s nearing tax day. What may be good for you this year in taxes may kill your financial planning landscape for the long run. Be sure to consult a financial professional when you are in or nearing retirement to make sure you tax outlook for the long haul is positioned well.

1 Ounce = 1 Pound

As our Chief Compliance Officer often says, an ounce of prevention is worth a pound of cure.  If you have put the proper financial planning groundwork in place, being laid off 1 to 3 years earlier than expected shouldn’t have a significant impact on your retirement goals and dreams. We begin with the end in mind. Everything I have written above are pieces of the journey that we walk through with our clients long before they have ever worried about being laid off

If your retirement plan was intended to last another 2 years and your employer forced you to retire, we would likely make a few tweaks to realign things for the goals desired but it wouldn’t be a drastic change like it would have been if the financial planning hadn’t already been put in place.

If you have been laid off or forced into early retirement and have not consulted a financial planning expert, don’t put this off any longer. Retirement is meant for exploring the world, spending time with family and doing the things you couldn’t do while you worked every day. We are here to help you with that journey. We want to ensure that you retire, but your retirement plan never does!

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