Simply contributing to qualified accounts isn’t enough
Over the last several months, I’ve written about three planning concepts that traders should consider: (1) Establishing a solo 401(k) if your trading activities allow it under IRS rules, (2) Making the right assumptions when creating a retirement plan, and (3) The importance of planning when it comes to your investment strategy.
In today’s article, I’ll combine these three concepts into a single, overarching view on how to put together a comprehensive plan for your retirement.
SET GOALS
It’s hard to reach your destination if you don’t know where you are going. Setting goals for retirement, while relatively simple, is critically important. The best way to manage the goal setting process is to ask yourself some basic questions.
• When do I want to retire? Timing is everything. While the average life expectancy in the U.S. is 77.97 years, you can potentially live for decades after retiring. This means the difference between retiring at 50 or retiring at 70 can be huge, especially when it comes to social security.
• What will I do in retirement? You can expect to live 30 years or more in retirement (hopefully, you won’t spend them watching television). Whether you choose to further your education, travel around the world, or simply spend more time with your grandchildren, you should treat your lifestyle choices as goals.
• What is my money for? This is an especially important question because it affects other aspects of your retirement plan (most notably your estate). You can spend all your money, leave it to your heirs, or pay for a new library at your alma mater. Whatever you choose to do, you should express your choices as goals in your retirement plan.
PARTS OF THE PLAN
A comprehensive retirement plan has many components including—in no particular order—investments (I will cover this topic in the next section), estates, insurance, capital needs, and of course, taxes. And each of these components, while inextricably linked, has its own unique challenges when it comes to planning.
• Estates ― Planning for the ultimate dissemination of your assets is a key piece of your retirement plan. Determining who will receive the assets is likely the first step. Then you need to decide how they will be distributed, such as in cash, in-kind or through a trust. Finally, you must have the proper legal documentation in place to ensure your assets are dispersed according to your wishes.
• Insurance ― You should consider insurance to be a tool for income protection and wealth retention. For your plan, review your current coverages and make any necessary adjustments to ensure they align with the goals you’ve established for retirement. The insurance industry is very competitive, so you should be able to purchase policies at a reasonable price.
• Capital needs ― How you spend your money in retirement is just as important as how much you have. Making well-informed assumptions about future expenses is crucial to your long-term financial success. Medical expenses, room and board, and leisure spending should all be considered when formulating a capital needs plan. And don’t forget to account for inflation and the general increase in prices over time.
• Taxes ― Taxes represent one of the biggest obstacles to growing and preserving wealth. It’s no wonder when you consider all the taxes you pay (state, federal, FICA, sales, real estate, etc.). That’s why you must include in your plan a strategy to limit your potential tax liability during the accumulation phase of your life and position yourself in the lowest tax bracket possible during retirement.
CONSTRUCTING A PORTFOLIO
As traders, you understand how global markets work and are probably comfortable accepting higher risk for higher expected returns. But for your retirement accounts such as a solo 401(k) or IRA, you should consider a portfolio that features global allocation with diversification across asset classes. This will help limit volatility and give you more predictable returns over longer periods in preparation for retirement.
And remember, when constructing your portfolio make sure you allocate the right asset class to the right type of account. For example, in general you should allocate less tax-efficient (subject to ordinary income tax) assets such as bonds and dividend paying stocks into qualified accounts, and more tax efficient (subject to capital gains tax) assets such as stocks into taxable accounts.
IMPLEMENTING THE PLAN
If you choose to engage the services of a financial planner to assist you in implementing your retirement plan, be sure he/she is experienced and has the right professional credentials (CFP, CFA, CPA/PFS). If you decide to do it yourself, choose a custodian that can provide portfolio/client services at a reasonable cost. Also, it’s a good idea to engage an experienced attorney to prepare your estate documents and a qualified tax professional for help with tax planning and preparation. Finally, for your insurance needs, we recommend an independent agent who represents many different carriers.
ON-GOING MONITORING
Your retirement plan is a living document that needs to be reviewed periodically and adjusted if necessary. This will ensure the plan meets your current needs and is on target to help you achieve your long-term goals.
CONCLUSION
The legendary investor, Peter Drucker, once said, “Unless commitment is made, there are only promises and hopes; but no plans.” He’s right. Hope is not a strategy, and promises—like past performance—are no guarantee of future returns. So, create and implement a realistic plan, and make the commitment to see it through.
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David L. Blain, CFA, is president and chief investment officer of D. L. Blain & Co., a registered investment advisor in New Bern, North Carolina. You can reach David at davidblain@dlblain.com
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Retirement: Making The Right Assumptions by David L. Blaine CFA
