Retirement is an exciting and frightening time, especially if you’ve been working for the past forty years. Yesterday you were working, today your retired.
I helped an individual jump into retirement. We consolidated multiple accounts and assets after completing a financial plan. He worked for more than forty years and enjoyed receiving a monthly paycheck. While working, he didn’t pay too much attention to his retirement or investment accounts. They were on auto-pilot. His 401(k) contributions were automatically deducted from his paycheck and invested across several mutual funds. He had a few legacy retirement accounts held at previous employers as a result of changing jobs during his long career. He also owned a few IRAs.
When he retired, he was unaware of how to generate monthly income. How will he generate and receive the income? What are the mechanics of moving money from his retirement accounts to his bank account? Would he live off the principal, or will the investments generate enough income to meet his needs? How much is enough? Will it last? Will he be okay?
The first course of action we took was to gather his data. What did he own, where was it held? We reviewed his asset allocation, risk level, and fee structure. We then evaluated his spending patterns and household expenses to create a sustainable retirement budget. Fortunately, he’s debt-free. The analysis included a realistic income projection.
Once we evaluated his financial foundation, we moved on to discuss his Social Security benefit. His financial position will allow him to defer his payout until age 70, the maximum age at which he can start receiving his benefit.
Next, we talked about risk management. Would he still need life insurance? What about disability or long-term care insurance? We decided to keep a small amount of term insurance, but he doesn’t need disability insurance because he’s no longer working. We spent a considerable amount of time discussing long-term care insurance. His asset level will allow him to self-insure an extended stay in an assisted living facility. However, I did encourage him to obtain a quote for long-term care insurance to see if it makes sense to transfer this expense to the insurance company. Buying a long-term care policy will protect his assets for his beneficiaries.
After we spent time reviewing his financial and insurance information, we talked about his expectations and concerns. What would he do in retirement? How will he spend his time? Will he expand his hobbies? Will he volunteer and help others? What are his hopes, dreams, and fears? The emotional side of retirement is just as important as the financial side.
I now had all the information I needed to complete his plan. I suggested he consolidate his 401(k) plans and IRAs into a single IRA. We transferred several accounts into one to simplify his reporting. Once we completed the consolidation, I reviewed his projected income to show him that the monthly payout would be a combination of interest, dividends, capital gains, and principal. Relying on interest and dividend payments will produce sporadic income payments, so we’re going to send him a set amount each month, regardless of the source of income. The steady income stream will allow him to better budget for his retirement spending. He’ll receive a net check because we’re going to withhold a certain percentage of his payment to send to the IRS for taxes. The budget we created will give him the freedom to spend his money without worry.
We built a globally diversified balanced portfolio of low-cost mutual funds that we will rebalance annually, or as needed, depending on the movement of the underlying investments. We will aim to keep the asset allocation and risk level intact so he can enjoy a lifetime of retirement income.
I let him know we will review his account and budget quarterly to make sure all is working well. We will adjust his plan as needed, depending on how well it is working.
Last, I told him to enjoy the fruits of his labor and enjoy the next chapter of his life.
I have seen personally what is the only beneficial and appropriate course of action for people: to eat and drink, and find enjoyment in all their hard work on earth during the few days of their life that God has given them, for this is their reward. To every man whom God has given wealth and possessions, he has also given him the ability to eat from them, to receive his reward, and to find enjoyment in his toil; these things are the gift of God. For he does not think[i] much about the fleeting days of his life because God keeps him preoccupied with the joy he derives from his activity. ~ Ecclesiastes 5:18-20
December 11, 2019
Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
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