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Retirement Strategies

Retirement Strategies

Retirement planning is something that most people don’t take the time to do. They often only put as much money and time into a retirement plan they think they can afford and hope they hit the lottery. Some max out their options, but max out some wrong choices, like purchasing too much company stock (remember Enron?). Remember what your mother always said, “Don’t put all your eggs into one basket!”

Retirement planning can be accelerated by proper tax planning in the accumulation phase, and also when it’s time to pass your legacy on to your loved ones or charity. Get control of your taxes and improve your retirement!

Phases of Retirement Planning

Retirement planning has several phases to it, including accumulation, transition, preservation, and distribution.

Accumulation Phase

The one most people think about is the accumulation phase, which is accumulating the assets that will hopefully allow you to live the retirement of your choice. Most never achieve the level they hope for because of all kinds of reasons, the most common being: putting it off, starting late, setting wrong priorities, putting money into everything else but the future, and bad investment choices. Even if you haven’t started, begin now, no matter where you are in life. A small amount for a cushion is better than nothing.

Another part of accumulating assets is protecting them from loss. If you were to become sick or injured, you may not be able to continue to save. Losing the ability to save in the early years can impact retirement substantially. Protecting yourself from this is important.

Disability insurance can protect your nest egg from being depleted if you become sick or injured by paying you an income (up to ~65% of working income) while disabled.

Life insurance can protect your family if you or your spouse were to die prematurely. Life insurance can make sure your promises to your family come true even if you aren’t around. It can help put your children through college or help your spouse maintain their lifestyle and retirement needs. Who are you responsible for? Life insurance is for them, not you.


The younger you are the more risk you can take because you have time to recover from a down market. The older you are the less risk you should take, especially in the 5-10 years before retirement.

We believe in the Rule of 100 in many cases. Take your age and subtract it from 100. That number is the maximum percentage of your assets you should have at risk in the market (or other risky investments). If you are age 50, 100 – 50 = 50, so 50% is the maximum you should have at risk. If you were age 65, 100 – 65 = 35, so 35% of your portfolio is the maximum you should have at risk and 65% should be where the principal is guaranteed. These are only basic guidelines, but they’re helpful in establishing a baseline.

Transitional Phase

The second phase of retirement planning is the transitional phase. Accumulation planning is different than transitional planning. At this phase of your life, you’re starting to think about retirement — if and when you can afford to retire. In this stage, you generally don’t have the time to wait out a down market to recover. Most retirees use their retirement funds to supplement their Social Security and pension in retirement. If you have accumulated assets and are thinking about retirement, it’s time to speak with us about transitional planning.

If you’re still positioned in the stock market for your retirement funds and it drops, it can devastate your future income, especially in the transitional phase. It will make recovery very difficult if not almost impossible. Transitional planning consists of deciding what level of income you will require, what amount of risk you’re willing to take, and what level of risk your portfolio size can take to survive a down market.

You should also consider protecting your retirement assets from catastrophic losses if you ever need nursing home care. At the current nursing home cost of $300-375 per day in western Pennsylvania, an extended stay could wipe out your savings.

A friend of mine moved his mother to a nursing home. It costs them $7500 per month on top of the income. How long could your retirement hold out without affecting you and your spouse’s lifestyle? With the Deficit Reduction Act of 2005 (signed on February 8, 2006) in effect, the estate preservation strategies we once had have been severely limited. The look back period has increased from three years to five years for gifting.

State recovery laws can require gifts be given back if there is not enough money to pay for the nursing home costs. Medicaid coverage can be disqualified for a period of time. They calculate the average cost per month divided into the amount gifted, i.e.: If the gift is $90,000, it’s divided by the average nursing home cost of approximately $9,000/month, equaling 10 months of ineligibility for Medicaid coverage in a skilled nursing home. They would have to wait for 10 months for Medicaid to cover the costs. We recommend purchasing long-term care insurance or other planning options to protect the estate at this phase of your life if you haven’t already purchased it. The cost is more affordable now and you may not medically qualify later in life.

There are also hybrid life insurance policies that have long-term care benefits payable from the higher death benefit amount as well as return of premium, which means that you have access to the amount you funded the policy with in case of an emergency. This option has become very popular, as well as asset protection planning to protect your next egg for your spouse if care is needed in the future.

Proper planning in the transition phase can allow you to know, without a financial doubt, when you want to retire and what amounts you’ll have to fund your retirement, without worrying about a market crash delaying your retirement plans.

Preservation Phase

The third phase is preservation phase. As you get older, you should take less risk. You may not be able to withstand any losses of principal at this phase of your life. Accumulation brought you to retirement, and preservation will keep you there. For most, very little should be at risk in this stage of your life. You should also be considering how to protect your assets from catastrophic losses due to medical bills or lawsuits, if you haven’t already.

Today, we have some great options to create retirement income you cannot outlive. You can start the income when needed and stop it if you don’t need it for a while. If you’re in the retirement red zone, or the 5 or 10 years before retirement, you can be guaranteed an increase of 4 – 8% per year through insurance products on the money you want to use for retirement income. This accumulation can provide a guaranteed income you cannot out live!

Distribution Phase

The fourth phase is the distribution phase after you pass. Retirement money or qualified money has usually not been taxed to this point, except for Required Minimum Distributions and what you spend during retirement. During the distribution phase, whatever is left is passed to your intended beneficiaries.

When your beneficiary receives your IRA inheritance, it is taxed very heavily. In general, if someone inherits a $200,000 IRA, they will only receive about $120,000 – 150,000 on average. The total amount is added to their income taxes, which generally can raise them to the top tax bracket. Add in federal and local income taxes along with inheritance taxes and it can take about 40% off the top.

Then to top it off, if the total estate is worth more than $11,400,000, it’s taxed at 40% for federal estate taxes. With taxes, a sizable estate with a large IRA can be more than cut in half if not properly planned. Inherited IRAs can lose even more, up to 80% without a good plan. Don’t forget the Pennsylvania inheritance taxes of 4.5%, 12%, or 15%, depending on the beneficiary designated.

One option for IRA holders is to stretch the IRA over the lives of up to two generations, creating a much larger legacy. For instance, a $200,000 IRA can be stretched and pay out up to $5,000,000 to the next two generations, instead of a one-time distribution. There are several other options that are possible to create even a larger legacy, but they are more complicated and need to be discussed one on one with us. This Stretch Provision has the potential to be stopped by congress in the near future.

One other important note about distribution planning is the fact that a large amount of money received at one time can cause issues because most people aren’t used to handling or planning for a lump sum. It’s said that most inheritances are gone within 6 months, no matter the size. Sometimes it may be better to create a regular income stream rather than a lump sum.

This is an often-neglected part of planning, but a major part of our comprehensive plan.

For more understanding about inheritance strategies, we recommend reading “Splitting Heirs” by Ron Blue.

Call us today for a no-cost, no-obligation consultation at 724-837-3553.

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