retirement planning and general financial planning
As you may know, we specialize in helping clients in retirement and those transitioning into retirement. In our view, there is a major difference between retirement planning and general financial planning.
Retirement planning typically does not focus on building credit, exercising stock options, reducing student loans, growing a family, etc. Those are milestones that happen earlier in life.
In a nutshell, retirement planning helps you figure out how to optimally make the money you've already earned last the rest of your life. In other words, the financial planner helps you accumulate your money while the retirement planner helps you use your money to generate reliable paychecks in retirement.
OUR TAKE: Just in the same way a neurologist differs from a family medicine doctor, the retirement planner differs from a generalist financial planner.
When you retire, a fundamental shift happens – you go from accumulating assets to decumulating (living off your) assets. This shift changes the entire planning framework and resulting recommendations. It is this shift that makes the entire planning process completely different.
3 Major Differences between Retirement Planning and General Financial Planning
The goal of the accumulator is to maximize wealth at a specific level of risk.
The goal of the retiree is to maximize and ensure income at specific dates. The retiree no longer has the luxury of waiting indefinitely for a portfolio to recover from losses. The portfolio becomes more than just a pool of money, but something that is tethered to a client’s life. This added dimension results in very different portfolios.
The greatest risk to the accumulator is job loss.
The greatest risk to the retiree is an unfavorable sequence of returns (SOR). Even if the retiree experiences a strong average market return, SOR is the risk that ongoing portfolio withdrawals on top of a series of early bad returns will cause the portfolio to be fully depleted before the good returns finally arrive to average out in the long-run.
Having the right tools and strategy to adjust to a poor SOR is critical.
OUR TAKE: You want to balance living fully (spending freely) with living responsibly (not running out of money). Spending too little is just as big a problem as spending too much. We developed the Sustainable Spending Analyzer (SSA) to solve this problem.
Accumulation has different phases than decumulation (AKA retirement).
According to the MIT Age Lab, retirement has four phases – (1) the honeymoon phase, (2) the big decision phase, (3) the navigating longevity phase, and (4) the solo journey phase. If you are interested in learning more about these phases, check out our blog article here.
Retirees typically have different goals and concerns within each phase. Therefore, it is important to revisit past assumptions. Sometimes developing an entirely new financial plan is required.
As the retiree navigates retirement, he/she will most likely require the expertise of a Medicare consultant, eldercare attorney, gerontologist, etc. Working with a financial planner than can advise when, and who you should speak with is invaluable.
Retirement Advisors Have Specific Training
Advisors that focus on retirement must have deep knowledge about how to develop a "paycheck replacement portfolio" and the accompanying tax considerations. Specifically, good retirement advisors have specialty in the following areas:
- Portfolio withdrawal strategies that are more customized than the "4% rule"
- Strategies that reduce taxes such as Roth Conversions
- Social Security claiming strategies and how best to coordinate among spouses
- Pension analysis (i.e. do you take the lump-sum or annuity)
- Long-term care analysis (i.e. do you self-insure vs. buy a policy)
- Medicare options and managing IRMAA (i.e. surcharge on premiums)
- Investment allocation that goes beyond just maximizing return
- Estate planning and making sure you are properly protected!
OUR TAKE: Retirement planning requires a specific skillset. Look for the Retirement Management Advisor® (RMA®) credential. As you near retirement, talk to a specialist like us!