I am often asked about how to invest during retirement. My first reaction is usually to wonder why they're so worried about it. Just as investing for physicians is 95% the same as investing for everyone else, investing in retirement is 95% the same as investing before retirement. It seems to me that if you can figure out how to stash away enough money to retire on, then it shouldn't be that hard to figure out how to keep investing that money. However, there are few unique issues unique to retirees that are worth discussing.
Table of Contents
- Strategies to Manage Sequence of Returns
- Strategies to Deal with inflation
- Withdrawal Rates
- Getting Income in Retirement From Your Various Asset Classes
- What To Do With Cash Value Life Insurance in Retirement
- Using Non-Portfolio Income – Social Security, Pensions, SPIAs and Rental Real Estate
- Early Retiree Issues and Tax Diversification
- Other Retirement Challenges: Spending, Estate Planning, and Asset Protection
Investing While Retired: The 3 Big Issues
#1 Sequence of Returns
The first thing that needs to be understood about investing in retirement is the sequence of returns issue. Basically, this is the fact that not only do your returns matter, but WHEN you get those returns matters. Many times, just to keep things simple, we use average returns for an investment over decades when illustrating investing principles like compound interest and when doing financial planning. However, in the real world, and especially with volatile, high-return investments like stocks, returns are very irregular. Even if you have a solid average return of 8-12% on an investment, if you get a long series of poor returns at a critical time in your personal investing timeline, it can sink your plan. This is why safe withdrawal rate studies come out with numbers in the 4% range, even when the investments historically might have averaged 6-8%.
Dealing with this issue should be one of the biggest focuses in any type of retirement planning. In short, your plan needs to account for the fact that your investments may have terrible returns for 5 or 10 years during the critical time period composed of perhaps 5 years prior to your retirement and 10 years after your retirement.
- De-Risk Portfolio: Perhaps the most common is to de-risk the portfolio (ie. a less aggressive asset allocation) during these time periods. Increasing bonds with age is commonplace.
- Increase Stock Allocation Later in Retirement: Wade Pfau has demonstrated that the ideal strategy may actually be to increase your stock allocation later in retirement, but the effect of both strategies is similar — a lower stock allocation during the critical years.
- Buckets of Money and TIPS: Other strategies include a “buckets of money” strategy or a TIPS ladder strategy where you basically have the money you intend to spend during the critical period outside of volatile instruments. Using a pension + SPIA + SS for your basic income needs has a similar effect.
- Adjust as You Go: Finally, many investors use a “adjust as you go” strategy and watch their returns carefully those first few years, adjusting their spending down if the dreaded poor return sequence materializes.
Another major factor retirees need to deal with is the dragon of inflation. Far too few investors realize that their “opponent” in investing, both before and after retirement, isn't other investors or “Wall Street.” It's inflation, not inflation as measured by the government CPI, but their own personal rate of inflation. We all know of a widow living on a “fixed income” that on an after-inflation basis is becoming lower each year. This is less of an issue before retirement, when (hopefully) your income and annual savings is increasing each year with inflation and you have plenty of high-risk, high-return investments that are growing faster than inflation.
- Continuing to hold some percentage of risky assets in the portfolio
- Using inflation-adjusted pensions, SPIAs, and Social Security
- Using a higher percentage of inflation-linked bonds on the fixed income side
- Owning your residence, which will hopefully eliminate a big chunk of your expenses that rise with inflation
I often discuss the concept of a safe withdrawal rate on this site, but that is often while doing a calculation to determine how large your nest egg needs to be for retirement, to give you a number to shoot for. As a retiree, withdrawal rates become much more interesting, since your current lifestyle is dramatically affected by your selected portfolio withdrawal rate.
Pick a rate too high, and you're likely to run out of money before time. Pick a rate too low, and you may unnecessarily impoverish your lifestyle just to leave more money to your heirs, charity, and possibly even the IRS.
The classic Trinity Study gave us the often-quoted “4% rule” but it is important to understand where that rule came from and what it means. Basically, using HISTORICAL data (and the future may not resemble the past, especially given our very low interest rates and higher than average stock and real estate valuations), the authors demonstrated that a 50/50 portfolio of large cap stocks and intermediate government bonds was extremely likely to last throughout your retirement if you only took 4%, adjusted to inflation, out each year. Here's a copy of that data updated throughout 2009, pilfered from Wade Pfau's site.
Updated data looks even better, even just a year or so makes a difference as this table goes through 2010.
Every potential retiree, especially an early retiree, should spend some time staring at these charts. The point of the Trinity Study wasn't to determine whether a safe withdrawal rate (SWR) was 3.5% or 4.5% or 4%, but to demonstrate that it wasn't the 6%, 8%, or 10% that many investors and planners were using up until that time. It is also important to understand the concept best shown in this chart:
This shows where the “4% SWR” comes from, i.e. a period of time between 1960 and 1975. Basically, if your “critical investing time period” included the Great Depression or the stagflation of the 1970s, you better not be taking out more than 4% a year. However, if your own personal critical investing window was any other time, you may have been just fine taking out 5-6% a year. That might seem like a tiny difference, but on a $2 Million portfolio, that's the difference between spending $80,000 a year and $120,000 a year, a 50% difference.
Also bear in mind that these charts use gross income, and never include taxes OR investment fees. If you've chosen to pay 1/4 of your retirement income as a 1% AUM fee to an advisor, you're going to need to live on 25% less money in retirement, although Michael Kitces makes a good argument about how a 1% AUM fee really only reduces the Safe Withdrawal Rate by 0.4% rather than 1% per year. That's still $8000 a year on a $2 Million portfolio, hardly insignificant.
Converting Investments to Income
First, a caution. Investors, both before and after retirement, are often inappropriately focused on “income” such that they ignore their total returns, which in the long run are far more important. While it is true that income is generally more stable than total returns, it is not true that you can “only spend income” or that you “don't want to eat into principal.” There are two main issues that focusing on income can cause you.
- Income for many solid investments that probably should be in your portfolio is far lower than the usual 4% SWR, especially given current stock and bond yields. The SWR studies all assume you're willing to spend principal. If your portfolio only provides 2% income, and that's all you spend, it's true that you won't ever run out of money. However, it is also true that you are almost surely unnecessarily limiting your retirement spending.
- The second issue is what investors often do about this fact. Rather than stick with a solid portfolio, they start holding all kinds of bizarre portfolios in an effort to increase income. Higher-income asset classes such as REITs, high-yield stocks, investment real estate, and junk bonds start showing up in ridiculously large proportions, causing terrible overall portfolio returns due to a lack of appropriate diversification. A total return investor, on the other hand, has far more control over the interaction between her actual portfolio performance and her spending.
Declaring Your Own Dividend
So what does a stock investor do if she wants to spend 4% but her stocks are only yielding 2%? She simply declares her own dividends by selling stock when necessary. It's not that big of a deal. Think about it. If your stocks increase in value by 6% and kick out 2% in income each year and you sell 2% of them, your total stock value still, barring the sequence of returns issue, increases each year.
In a taxable account, declaring your own dividend has an additional benefit. Most high-income investments are terribly tax-inefficient. By tax-loss harvesting, using the lower capital gains and qualified dividends tax rates, and selling high-basis shares, your investment-related taxes may be MUCH lower, causing your net income to be much higher than an income-focused investor.
How to Deal With Low Bond Yields in Retirement
Investors often make similar mistakes on the fixed income side of the portfolio. They don't accept the relatively low yields of traditional, broadly diversified bonds like:
- intermediate treasuries
- short term corporates
- intermediate TIPS and
- intermediate municipals,
and deal with the issue of low yields through a simple annual portfolio rebalancing after a reasonable withdrawal. Instead, they start reaching for yield by including much riskier fixed income including:
- long-term treasuries
- junk bonds
- peer to peer loans
- exotic strategies involving leverage and options.
Lots of money gets lost in the reach for just a little bit more yield. While there is room in a portfolio for some higher-yield fixed income, be very careful when giving up broad diversification in order to chase yield.
Real Estate Income in Retirement – Is Real Estate Ready-Made?
Real estate advocates love to point out that real estate is a ready-made asset class for retirees due to the relationship between its yield and its total return.
Consider a paid-off rental property. Perhaps it has a cap rate of 6%. So it kicks off 6% in income every year. To make it even better, the value of the property tends to keep pace with inflation as you can charge increased rent each year, providing a ready-made inflation-adjustment to the investment.
In fact, many real estate aficionados argue that real estate is a far better investment in retirement than stocks and bonds because the sequence of returns issue is minimized due to the relatively stable income. They make a very good point. However, it is important to still consider the downsides of real estate.
Downsides of Real Estate
It's still a second job that you either need to do yourself or pay someone else to do.
It is also a single asset class. Real estate is all local, and if you buy in the wrong area you may not only see decreasing housing values but also decreasing rents (or worse, a high vacancy rate.)
Real estate also requires significant expertise, unlike purchasing a handful of index funds. Great returns are available in real estate, but don't kid yourself that all real estate investors are getting them. If your skill level at buying, managing, and selling property is low, your personal real estate returns may be terrible.
Although economically, rent tends to be sticky, it does go down (usually in the form of a higher vacancy rate) and can stay flat for years at a time. The rate of inflation in rents may not relate at all to your personal rate of inflation.
A retiree also must deal with the issue of leveraging. Leverage cuts both ways, and it is probably best for a retiree to use much less leverage (if any at all) than she used twenty years earlier. Properties that still carry a mortgage in retirement don't kick off nearly as much income since the income is being used to pay a mortgage. Unlike stocks, where it is easy to declare your own dividend, selling off part of a rental property can be impossible and selling the whole thing can be very expensive, especially when considering the tax aspects. Refinancing to pull out home equity can be problematic when you are no longer working, not to mention it increases leverage-related risks and decreases future income from the property. It also becomes trickier to invest in real estate using typical retirement accounts such as 401(k)s and IRAs.
Despite these issues, real estate, especially paid-off real estate, can be a fantastic addition to a retiree's portfolio, whether purchased long-before retirement, near retirement, or in retirement. Just be careful to maintain diversification in your portfolio and to be cognizant of the dramatically increased effects of leverage in retirement.
Many people, for better or for worse, own significant amounts of cash value (whole life, variable universal, and indexed universal) life insurance upon retiring. While I'm generally not an advocate of purchasing these policies as retirement assets, if you happen to own some as a retiree I wouldn't necessarily ignore it. Ignoring it is, of course, a reasonable option. You can simply use the insurance as an insurance policy — to give money to heirs or favorite charities upon your death. In fact, this is often a great use for it.
Likewise, if you're looking at an estate tax problem (a problem few of us have nowadays) and have bought insurance inside an irrevocable trust to try to pass money to heirs free of estate tax, you're not going to be able to spend the cash value in that policy. But if you own a more typical policy, and were counting on borrowing from it tax-free (but not interest-free) as part of your retirement plan, you need to decide when and how to access that money.
There are two principles to keep in mind:
- Remember that you don't get the cash value AND the death benefit. You get one or the other. Whatever you take out in cash value is subtracted from the death benefit before it goes to your heirs.
- It is very important that you make sure your policy never collapses. While the details of each type of policy are different, many policies have ongoing costs of insurance that must be paid from somewhere, either from your pocket, policy dividends, or from the policy cash value. If those costs cannot be paid, the policy collapses and all gains from it become FULLY TAXABLE at your regular marginal tax rates. That is a catastrophic occurrence but does happen occasionally. If you are withdrawing from a cash value policy, you and any advisor you may have need to be continually monitoring for this issue.
Also depending on the policy, the more you take out, the more interest you owe on the loan (yes, you pay interest to access your own money). That interest too must be paid from somewhere. You can minimize these risks by only withdrawing a small amount, or by accessing cash value late in retirement, but that will also minimize the tax diversification provided by these tax-free loans, which is probably one of the main reasons you bought the thing in the first place!
Surrendering or exchanging the policy is also probably not a great idea. The bad returns of cash value life insurance are heavily front-loaded. Once you get to retirement they should all be behind you. The returns on cash value life insurance, while rarely spectacular, can be acceptable (3-5% is typical for whole life) when held to death. An exchange generally involves another commission and more years of poor returns, although exchanges to low-cost variable annuities or even long-term care insurance is possible.
Certainly, including life insurance cash value in your retirement spending plan will make for more complex planning than you would otherwise have to deal with.
Let's discuss how to minimize sequence of returns risk by minimizing how much of your portfolio has to have a safe withdrawal rate applied to it. How does non-portfolio income help reduce your need for portfolio income during retirement.
Many investors wonder how to include their Social Security, pension, or immediate annuity in their asset allocation. The beautiful thing about these non-portfolio sources of income is that you simply DON'T HAVE TO include them in your asset allocation. Instead, use these sources of income, especially if they are inflation-adjusted, to reduce your need for income. If you need $100,000 a year to live on, and Social Security will provide $30,000 a year for you and your spouse, then your portfolio only needs to provide $70,000 in income. This decreases your sequence of returns risk by 30%. If you also have a pension that provides $20,000 in income, your sequence of returns risk is now decreased by 50%, since the portfolio need only provide $50,000 in income. If you don't have a pension, you can buy one. It is called a Single Premium Immediate Annuity (SPIA), and can even be purchased with an inflation-adjustment. These common, competitively-sold, straightforward insurance products (in contrast to most annuities) are easy to understand. You pay one lump sum to an insurance company, and they send you money every month until you die. You can be much more cavalier about spending from your stock, bond, and real estate portfolio when you've put a floor under your retirement spending by using guaranteed sources of income such as a SPIA.
Social Security Planning
Many retirees fail to understand the importance of their decisions about Social Security. I blame the government for this overly complex system, just like I blame it for the difficult financial planning issues new doctors are facing in deciding how to deal with their student loans. Your only defense is spending the time to understand how the system really works. While every situation is a little different, there are a few general rules about when to take Social Security:
- If you are very healthy, take it later.
- If you are not healthy, take it earlier.
- If you are married, both spouses probably shouldn't take it at the same time.
- The higher earner should generally take Social Security at age 70, while the lower earner should take theirs earlier.
Every retiree needs to put Social Security planning on their retirement checklist. If you are doing your own planning, I recommend you read something like Mike Piper's Social Security Made Simple and perhaps even use one of the relatively low-cost online calculators. If you're using a financial planner, make sure this topic is covered in depth. If he seems to be glossing over it, it is probably because he doesn't really have a handle on this critical detail, a real concern for a financial planner.
How To Take A Pension
Upon retirement, those who have earned a pension are often offered several choices about how to take it. They may be able to take a lump sum. They also may be offered payments for life, with several different categories if they are married. A typical offer might be a lump sum, 100% of a lower payment each month until both you and your spouse die, or a higher payment in exchange for a lower payment (perhaps 50-75% of the higher payment) after one of the two spouses dies. In each of these situations, it's best to run the numbers to decide what you should do. For example, in the lump sum vs annuity decision, it's pretty easy. Look at what the lump sum would purchase on the SPIA market. If there is an inflation-adjustment or a health care aspect to the pension, be sure to account for those benefits. If a SPIA available for the lump sum pays more than the pension, take the lump sum and buy a SPIA. If not, annuitize the pension. In general, I would caution you NOT to take the lump sum and toss it into the rest of your portfolio (or worse, spend it.) This is a time in life to be reducing your sequence of returns risk, not increasing it.
When trying to decide what type of annuitized option to take, consider the health of you and your spouse, the age difference between you, and the consequences of lowered income in the event of one spouse dying long before the other. If a 25% drop in that pension payment is no big deal, (especially with only one mouth to feed, clothe, house, and take on vacation) then the higher payment available is probably a great option. If it would be a big deal, then perhaps 100% payments until the second death would be best. You could also use an insurance product to evaluate how good of a deal you're being offered. For example, since a option where the second to die spouse only gets 50% of the payment pays more than one where the spouse gets 100% of the original payment, you could use all or a portion of that payment to buy a permanent life insurance policy on the first to die. Upon the first death, the death benefit can be annuitized to make up the difference in payments. The key is to compare the pricing of the insurance policy to the difference in annuity payments.
How to Buy A SPIA
I've written before about SPIAs. There are a few things to keep in mind when purchasing one. First, just like with Social Security the later you buy one the better. If you buy one when relatively young (say your 50s) the main effect on the payments comes from current interest rates. If you buy one when older (say your 70s) the main effect comes from your age, minimizing the effect of our relatively low interest rates. Plus, simply by their nature, they pay a lot more when you're older. You may only get 4-5% a year (3-4% if inflation adjusted) for a SPIA bought in your 50s, not much different from a 4% SWR. However, you could get 8-10% (6-7% if inflation-adjusted) in your 70s. The longer you wait to purchase one, of course, the longer you have for your money to grow at a rapid pace if invested aggressively. While there is risk there, the actual return from a SPIA isn't great. It's insurance against running out of money, and mixing insurance and investing usually lowers returns.
Second, give very careful consideration to planning for inflation with a SPIA. You can often buy an inflation-adjusted SPIA, but that inflation-adjustment may be capped at just 3%. If we hit an era of moderate or even high inflation, that isn't going to help much. You might be better off just buying a nominal SPIA, with a plan to either buy another one or two in a few years, or using more standard investments in the rest of the portfolio and getting your inflation adjustments there.
Last, remember that the guarantees in a SPIA are only as good as the insurance company backing them. Check into your state insurance guaranty corporation. They probably only “insure” up to $100-250K in annuity values for each spouse. If you wish to annuitize more than that (and many doctors will), consider using several different companies to provide some diversification against the risk of insurance company failure.
Rental Income as Non-Portfolio Income?
The further we go into this series, the more it is becoming obvious that for retirees, just like for young physicians, the complicated issues aren't necessarily investing issues, but financial planning issues. The actual investments just aren't that different. Paid-off real estate, however, can almost be looked at as “non-portfolio” income, especially with very stable rents. A good argument can be made that a very stable rental income stream can be used to reduce your need for portfolio income, just like a pension, Social Security, or a SPIA. There are no guarantees (and a new roof eats up a lot of that “guaranteed” income) but some would argue that the guarantees from a corporation, an insurance company, or even the US government aren't worth much anyway. Rental income, although taxed differently, spends just as well as Social Security income.
In 2011, I wrote a post entitled 14 Reasons Why You Shouldn't Retire Early. Although many of us dream of early retirement, especially after a bad day at the hospital, there are many good reasons not to. Early retirees face a number of financial issues that someone who retires in his 60s or 70s doesn't.
Perhaps the biggest issue for an early retiree is that he has to save a ton of money. When you shorten your career, you also shorten the amount of time for your money to compound prior to beginning to spend it. Not to mention you have fewer years in which to save up the money, and are often forced into using a taxable account instead of a tax-advantaged one due to the heavy savings load required. There are several other issues an early retiree has to deal with.
Paying for Health Insurance Before Medicare
This is less of an issue for a physician early retiree than for others. Many doctors are used to paying for their own health insurance anyway. They did it before retirement, so it won't be a shock to see what it costs after retirement. PPACA changes help keep costs down for early retirees by shifting them on to younger folks (although many would argue they're higher for everyone now.) Doctors should also be a little wiser about what really needs medical care and what doesn't, perhaps saving a few bucks in office visits, labwork, and imaging. Hopefully a doctor also takes good care of herself. The cheapest health care is for a healthy person who doesn't need much! But even with these factors, someone who retires at 50 has 15 years of health care costs to cover before getting Medicare. Early retirees need to have a plan for this. The plan may simply be a larger portfolio. But it could also be retiring to another country, continuing part-time work at a level just enough to qualify for health insurance, or using an HSA built up during their working years. The important thing is to have a plan, as you don't want health care costs to force you back to work after 5-10 years of retirement.
Managing the Social Security Gap if You Retire ‘Early'
Bridging the gap to Social Security can also be an issue for many. If you retire at 50 and don't plan to take Social Security until 70, you almost have to eliminate Social Security from your planning all together. Not only are your payments lower (since you paid in less due to fewer working years) but you've got to make it two decades without it. If you can make it two decades, you've probably got a nest egg that will last another 10-25 years. Nevertheless, the principles of when to take Social Security remain the same. You don't necessarily want to take it at 62 just because you retired early. The later you take it, the more insurance it provides against running out of money late in retirement. Social Security is insurance that you probably won't need if you die early in retirement anyway. Yes, you'll have spent less than you could have, but that's much less consequential than eating Alpo in your 90s.
Breaking Into the Retirement Account Vault
Lots of people worry about how to access their money without penalty before age 59 1/2. It's really not that big of a deal as I've written about before. You can access other sources of funds including taxable accounts, 457s, cash value life insurance, or an HSA (for health care costs). Depending on your 401(k), you may also be able to access that prior to age 59 1/2 without the usual 10% penalty, once you've separated from your employer. There are lots of exceptions for getting into your IRAs, including death, disability, health costs, an IRS levy, education or first home costs for your children etc. You can also take advantage of the SEPP rule. Basically, you can retire at 50, and as long as you take the same amount out of your IRA every year, there is no 10% penalty. Roth IRA contributions can always be withdrawn without tax or penalty as well.
Tax Diversification in Retirement
I'm always harping on young accumulator investors to make sure they'll have some tax diversification in retirement. That means making Roth contributions while in training or the military, continuing backdoor Roth IRAs throughout your career, perhaps using a Roth 401(k), and perhaps even doing some Roth conversions during low income years (perhaps even after retirement.) So what do you do with tax diversification now that you have it?
First, use up the low tax brackets, especially as an early retiree. If there is no Social Security income, rental income, or working income, then you can withdraw a substantial amount of money from your tax-deferred accounts at a very low effective tax rate. In 2014, a married couple filing jointly taking the standard deduction can withdraw $20,300 at a 0% tax rate, $18,150 at a 10% tax rate, and another $55,550 at just 15% (plus any applicable state tax, of course.) If your marginal tax rate was 28-39.6% when you put that money in, that's a heck of a great deal. Even if you don't want to spend all that money, you can always use some of it to pay for Roth conversions.
Second, take a careful look at that taxable account. Capital gains and qualified dividend distributions are taxed at a very low rate, especially if you're able to stay in the low tax brackets (the rate is 0% if you're in the 15% bracket or lower). You can also sell high-basis shares with minimal tax consequences.
Third, if you need/want more income, you can raid your Roth accounts. That married couple discussed above could easily have $200,000 in spending money while paying less than $10,000 in taxes, an effective rate under 5%. Further tax-free (but not interest-free) money can be obtained by borrowing from the cash value of permanent life insurance policies, but this does bring on some additional risk of policy collapse as well as reduce the death benefit payable to heirs.
What About That HSA?
I'm a huge fan of Health Savings Accounts (HSAs), the stealth IRA. Personally, I max mine out on January 2nd every year, invest it aggressively, and don't plan to touch it until retirement. There are really four ways to use an HSA. The first is to use it to pay for your health care expenses throughout your career. This might be the intended use for the account, but it isn't the wisest. The second use is as an extra IRA in retirement. After age 65 (NOT 59 1/2 like IRAs), you can pull the money out without penalty and spend it on whatever you like. However, that converts it from a triple-tax-free account to a double-tax-free account, not exactly wise.
The third use requires a lot of work. If you keep all the receipts you spent on health care throughout your career, you can pull the money out tax-free in retirement and spend it on whatever you like. There is no rule that you have to pull the money out of the account the same year you acquire the health care expense (could change, of course.) The fourth, and best use, of an HSA is simply to spend it on health care as late in retirement as possible. That preserves it's triple tax-free benefits, and also maximizes the time for that money to compound in a tax-protected manner. Plus you don't have to keep all those receipts. Of course, not only do you not know when you're going to die, but you also don't know when you're going to get sick. But you're not stupid, and can adjust as you go. If you have a huge HSA, start spending it earlier in retirement (or even before retirement) and if you have a tiny one, you can hold on to it for another decade or two.
Required Minimum Distributions
Once you hit age 70 1/2, be sure to at least withdraw the required minimum distributions (RMDs) from your tax-deferred retirement accounts. Uncle Sam wants his money eventually, but he's perfectly content to get it bit by bit. RMDs are only 3.6% at age 70 and only 8.8% at age 90. Remember you don't have to spend an RMD (but don't feel badly about doing so) and can always just reinvest it in a taxable account.
The Retiree Spending Cycle
Retirees don't generally spend money in the same way financial planners usually model it (i.e a constant level of spending or an inflation-adjusted level of spending). They spend lots of money early in retirement in the “go-go years.” Then they spend decreasing amounts in the “slow-go years.” Then, during the “no-go years” they spend less and less until the very end, when spending goes through the roof, usually on health care and long-term care related costs. If you really want to delve into the details on this subject, I suggest the Bogleheads Wiki page on it. But the point is that all that stuff you imagine when you think about retirement isn't nearly as appealing at 80 as it was at 60. You're probably not going to want to go on a cruise every month. This effect (higher spending in early retirement) can exacerbate the sequence of returns issues discussed earlier in this series, of course.
What Happens When You Die?
If you're reading this post, there's a good chance you're the one in your marriage or partnership who handles the money and is good at it. You know about all the investing accounts, insurance policies, bank accounts, bills etc. While every investor needs to have a plan in place in case something happens to them, this becomes more of an issue for a retiree, especially an older retiree. Perhaps having your investments spread across 15 mutual funds in 12 different accounts at 4 different brokerage houses isn't such a good idea. The older you get, the more appealing a simple investing plan should be. Combine all your 401(k)s and IRAs into one place. Keep your taxable accounts all at one brokerage house or mutual fund provider. Reduce the number of asset classes and consider fund of fund investments like Vanguard's Life Strategy and Target Retirement Funds. You don't necessarily want to sell low-basis taxable shares (especially if you're likely to die in the next decade) but you can transfer them in kind. Consider holding taxable investments in the name of the older, sicker spouse to enable the step-up in basis to occur sooner. Maintain an updated instruction list for what to do financially in the event of your death. If this isn't something you envision your spouse doing, have a plan for a trusted family member or advisor to assist. Don't make your spouse feel guilty about getting help that you don't need. Remember it may not take avoiding very many mistakes to more than make up for reasonable advisory fees.
Your Own Incompetence
How many 90 year olds do you know who really seem to be competent enough to manage their own money without assistance? What makes you think you're going to be any different? Just like you need a plan for your spouse in the event of your death you also need a plan in the event of your own incompetence. A trusted child you've spent 60 years training might be a great choice to step in. An adviser who might not be needed at 60 might be very useful at 90. It's dreary to think about, but seems better than the situation many of us have watched grandparents go through.
Balancing Estate Planning, Asset Protection, Investing
Finally, just like throughout the rest of your life, you'll see that there is a balance to be struck between solid investing returns, asset protection, and estate planning. In retirement, the return of your principal often becomes more important than the return on it. Asset protection is likely less of a concern for you once you have quit practicing medicine (unless you're an OB/GYN or pediatrician with a long statute of limitations!) Protecting assets from conniving family members or unscrupulous advisers may become more of an issue.
Estate planning will likely become much more important to you as you move into retirement. If you don't yet have a revocable trust to keep most of your assets from going through probate, it's time to do that. Keep your will updated. You may want to redesignate beneficiaries for retirement accounts or insurance policies. Your children (if you've done your job well) may be in a good financial position and you can leave that stuff to the grandkids. Consider the benefits of stretch IRAs. Consider doing Roth conversions (far better to inherit a Roth IRA than a traditional one!) If you're going to have an estate tax problem, start giving money away to your heirs and charities, or start an irrevocable trust. Spend some money on a meeting with a good estate planning attorney in your state. If you expect to leave money to both heirs and charities, remember which accounts should go where:
Best for heirs:
- Life Insurance and Taxable
Best for charity:
- Life insurance and Taxable
Investing in retirement has a few unique issues associated with it. Proper planning, whether done on your own or in association with highly-qualified professionals is critical.
Do you plan to retire early? What issues are you most concerned about? Comment below!