A generation or two ago, the perception of retirement changed from a relatively short period of physical decline to “golden years” that offer opportunities for a new and exciting life. With Americans living longer, these golden years may now last 30 years or longer. Will you be prepared?
Retirement requires careful financial planning and preparation to lead to the “golden years” you envision. For all of us, preparing for retirement requires making the most of our working years, establishing financial priorities, preparing for the unexpected, reviewing and updating a financial plan along the way, and getting the right advice from a trusted advisor.
For wealthy individuals, retirement planning may bring additional questions that relate to more complex financial planning needs, management of larger investment portfolios, optimizing tax strategies, and potentially complicated family discussions.
Here are four questions wealthy individuals can ask to ensure they are ready to retire smart:
1. Is my financial plan up to date?
A financial plan is the roadmap to the retirement you dream about: it needs to be customized to your goals, expectations, and specific concerns. To help ensure you retire smart, your plan needs to adjust along the way so you can achieve your financial dreams. As you approach retirement, you and your advisor need to confirm that your financial plan reflects your current financial and family situation and is structured to help you live the life you imagine in retirement.
Your advisor will help you assess the following key areas of income, expenses, and critical years to put you on track to retire smart.
Income in retirement:
Your team of certified professionals will help you assess whether the streams of income you may have in retirement can support the lifestyle you imagine. Wealthy individuals may have multiple income streams in retirement that include pensions, IRAs, Social Security, annuities, rental income, and dividends from investments. If you are a business owner, the sale of a business could be another source of potentially significant income.
One decision we all face on the path to retire smart is when to take Social Security retirement benefits. Your advisor can help you review strategies so you can decide. You can start receiving your Social Security as early as age 62. However, you are entitled to full benefits when you reach your full retirement age, which is 67 for anyone born in 1960 or later. If you delay taking your benefits until you reach 70, your benefit amount will increase.
Expenses in retirement:
It is likely your expenses in retirement will be different than in your working years. Costs related to work like commuting or wardrobe may go away but the costs of vacation travel or hobbies may increase. How will your housing costs be different? Will you retire to one home or will your income need to support multiple homes? Will you stay put or move, as many retirees do, to a state with a lower tax burden?
Healthcare costs, which are another key component of financial planning, may increase with age. According to the CDC, average life expectancy in 2022 was 74.8 years for men and 80.2 years for women. Your advisor can help you review strategies to minimize the impacts associated with costs of assisted living, nursing homes, and in-home care.
The final years approaching retirement:
The answer to the questions above will be different for everyone. Answering them as you approach retirement can help ensure your financial plan is up to date and that you are on the path to retire smart.
As you enter the “retirement red zone,” those last 3 to 7 years before retirement, planning and preparation to address the issues above become even more critical. For advice as you enter this stage of your life, read our Insights blog, Five Steps to Take When You're in the Retirement Red Zone.
2. Is my investment portfolio structured to achieve my goals?
A well-diversified investment portfolio is the cornerstone of a solid retirement plan. Allocating investments across different asset classes can reduce overall portfolio risk and potentially enhance returns. This is a key function of the advisory team for any wealthy individual, one that is crucial to your future ability to retire smart. Wealth managers will help custom tailor a portfolio that aligns with your risk tolerance, time horizon, and individual financial goals.
The principle of diversification involves spreading investments across traditional asset classes including equities (commonly known as stocks), fixed-income, liquid cash reserves and potentially, alternative asset classes like hedge funds and private equity as well.
Diversification allows wealthy individuals to mitigate the risks associated with investing and potentially improve their financial returns. By investing in long-term holdings, often equities, which are less susceptible to short-term market volatility, investors can potentially enhance the performance of their portfolios.
Alternative investments are those outside traditional stock and markets. This broad term encompasses investments in hedge funds, private equity and credit, crypto-currencies, and tangible assets like art, jewelry, and real estate. These types of investments are popular with high-net-worth investors as well as institutional investors. Alternatives can have low correlations vs. traditional asset classes which can improve overall portfolio performance, and can serve as a hedge against inflation. They often have high investment minimums, however, and come with their own sets of risks. These may include illiquidity, which means they are difficult to sell quickly and complex structures that make them difficult to understand.
Your investment advisor can help guide you to the right, diversified portfolio for your specific situation and goals. If you want to retire smart, stay in regular touch with your advisor regarding your investment portfolio. Make sure to review how your portfolio is invested with your advisory team on a regular basis, at least annually.
For additional insights, see Unique Retirement Challenges for the Wealthy
3. Am I doing what I can to minimize my tax liabilities in retirement?*
No one likes paying taxes and perhaps no one less than retirees. Thinking about taxes in the approach to retirement can help maximize your retirement income and minimize your tax burden. Here are a few topics to address with your advisor on your path to retire smart.
Retirement accounts are taxed differently:
Specialists recommend savings as much as possible as early as possible for retirement. But savings accounts have different tax treatments. Savings in a company-sponsored 401(k) plan or individually-funded IRA accounts are not taxed until funds are withdrawn. A Roth IRA, on the other hand, is taxed when it is funded so you will not pay taxes on distributions when you retire. Withdrawals from IRA and 401(k) accounts become mandatory at age 72, or 73 if you reach age 72 after Dec. 31, 2022, and you will pay income tax on those withdrawals.
Taxable investment accounts may generate capital gains taxes when assets are sold that you need to consider. Withdrawing more from these accounts will increase your income and may potentially increase your tax liability. Talk with your advisor and CPA about how to plan withdrawals from these accounts to minimize your tax impact.
Tax efficient investing:
There are a variety of ways for wealthy retirees to take advantage of tax-efficient investments. Your advisor can help determine which of the following strategies may make sense for you:
- Municipal bonds are not taxed at the federal level and may be a smart investment for retirees in higher tax brackets.
- Qualified dividends are another tax-efficient investment. While ordinary dividends are taxed as ordinary income, some qualified dividends are taxed at a lower capital gains rate.
- Capital gains incurred in managing an investment portfolio can be offset by other capital losses experienced in your investments.
- Holding onto your investments for the long-term can lower the tax burden because you are only taxed on realized capital gains, or when you sell an investment. Holding taxable assets for at least one year means you pay the long-term capital gains tax rate, which is lower than the short-term capital gains rate.
- Diversifying your investments across different types of retirement accounts, like Traditional vs. Roth IRAs, offers more flexibility from a tax efficiency perspective when you start to withdraw your retirement savings.
A trusted team that includes a wealth advisor, investment manager and CPA will be able to assess opportunities to determine if they are right for your situation.
Read this article if you’re thinking of retiring early - 5 Things to Know Before Retiring at 62
4. Are my spouse and I on the same page?
For couples looking to retire smart, it is important to do everything possible to be on the same page when it comes to their joint financial picture. Open conversations and planning together can help couples determine a cohesive vision for retirement. It may be hard for couples to have these discussions on their own so a wealth manager may serve a vital role in supporting and guiding these conversations.
Discussing individual visions of retirement, reviewing both spouses’ financial pictures, and understanding each other’s goals for retirement timelines and lifestyles may all help ensure a smooth transition to retirement for both spouses. Key questions spouses or partners can discuss as a couple include:
- Are our ideal retirement timelines in sync?
- Are we financially prepared? Do we have confidence about our sources of income, and can we accurately estimate our expenses in retirement?
- Where will we live and how will we occupy our time? Will we be completely retired, will we do part-time or volunteer work, will we fill our days with hobbies, travel, and/or family obligations?
When it comes to financial planning discussions, advisors recommend that couples participate together at planning meetings, annual reviews or any time a couple has a major life change that could impact a financial plan. This can help ensure couples are on the same page when it comes to retirement planning.
For more insights related to couples and planning for retirement read our recent Insights blog - Five Reasons to Include your Spouse or Partner in Financial Planning
Let us help you retire smart
Many of us now look forward to our golden years when full-time work is over and new, exciting opportunities in retirement are open to us. But building wealth so you can take advantage of these opportunities takes years of hard work – and a plan. Feeling confident that you are in a position to retire smart requires preparation, careful planning, and trusted advice you can count on.
Whether you are just starting to think about retirement or are already on your way, Your Hancock Whitney team can help. We have deep experience working with the complex retirement planning needs of wealthy individuals and we are here to answer questions, provide insights and guide you on the path to retire smart.
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