Up your retirement planning game


When I was 12, I attended a religious weekend camp for young men. I was brand new to the group and, as the youngest participant, I was, predictably, mostly ignored by the older boys. But this refusal turned out to be a blessing, because it allowed me to learn one of my favorite games, chess. I liked other games, like checkers, but the complexity of chess appealed to me because it required more thought, planning, and strategy. In retrospect, it was clear that I was an aspiring retirement planner.

“How is planning for retirement like chess? Retirement planning is like a game of chess because of the complex number of factors at play in both cases.

Every time I embark with a new client on their retirement planning journey, it’s as if they have a checkerboard and a bag full of red and black checkers, which represent their current investments and financial plans. My first step is to set up this checkerboard and help get the pieces into their correct spaces while I organize their finances, tax situation, and potential inheritance issues.

This is where my chess skills come into play as I swap each pawn with a specific chess piece. Why the replacement? Each chess piece has a particular job to do, unlike queens, which all move the same way. By assigning each element of a client’s financial plan a specific task, our goal is to maximize the effectiveness of that element and the plan as a whole.

But that doesn’t entirely do justice to the complexity that can come with retirement planning, which is why I like to think of retirement income planning as akin to the three-dimensional chessboard shown in star trek. The first level corresponds to investments and retirement income; Level two is taxes; and level three is legacy planning. Understanding this interaction can help position you to achieve your retirement goals.

When you understand these factors and how they relate to each other, you can apply these lessons to your own retirement planning. This involves three steps:

Step #1: Organize your retirement assets

Put a pen to paper — or open Excel — and list each of your investment-type assets. These should include assets in your retirement accounts and assets intended for retirement outside of your retirement accounts:

  • Species
  • Certificates of deposit
  • Life insurance with cash value
  • Shares
  • Obligations
  • Mutual fund
  • exchange traded funds
  • Investment property

Then create a subcategory that groups them according to their tax treatment. This means that anything held in a traditional retirement account, such as a traditional IRA, 403(b) or 401(k), would be labeled as tax deferred. All accounts outside of retirement accounts in a brokerage account would be classified as taxable. All accounts in a Roth IRA or Roth 401(k) would be classified as non-taxable. Do not include your principal residence or personal property.

Tax treatment is important because taxable assets may be worth less in retirement than non-taxable assets. This means that a Roth’s assets are generally the most valuable as their qualifying distributions are tax exempt, while the assets of a taxable account are next in line as they are potentially eligible for favorable long-term tax treatment for capital gains. Assets in a tax-deferred retirement account come last because you pay taxes at the ordinary income rate when you withdraw money in retirement. Plus, when you turn 72, you must withdraw a required minimum distribution from your tax-deferred retirement accounts, whether you need the money or not.

Step 2: Determine your retirement goals, needs and wishes

If you don’t know where you are going, it will be difficult for you to figure out how to get there. What do you see yourself doing with your newly discovered free time in retirement? Will you be volunteering? To work part-time ? Turning a hobby into a business? Devote more time to your hobbies? Traveling? Do you see family?

Also, where are you going to live? Will you have two houses? Are you going to reduce, increase or simply move? Or maybe you’ll hit the road as a full-time camper or live on a houseboat.

And then the big question: How long could you live in retirement? Yes, it’s time to consider longevity. What is your family history? How do you take care of yourself? I get it, no one knows how long they will live, but it helps to have a goal. And don’t be afraid to add another five years to it. Medical advances are growing at an exponential rate – you can live longer than expected.

Financial advisors generally expect their clients to live to be 90, 95 or 100 years old. It is better to overestimate the life span than to underestimate it.

Step 3: Make a plan to go from what you have to what you want

There are many areas here that will need to be addressed, but I think the most important is creating a lifetime income plan. This process begins with estimating the pre-tax income you will need in retirement. This may be easier said than done, but a good place to start is to use 70-80% of your employment income.

Now that you know your “rough” need, list the sources of income you can count on. These include social security, defined benefit pensions, part-time work, etc. This will help you determine what gap exists – if any – between the income you need and what you will have. If, for example, your need is estimated at $8,000 per month and your Social Security and part-time work income is estimated at $7,000, you have a gap of $1,000 to fill.

You should also consider the tax implications of your assets and how this affects your retirement income plan. If, for example, your sources of income – such as tax-deferred retirement accounts – are subject to tax, you will need to subtract the estimated amount of taxes from the income you will receive. This means that if you plan to withdraw $3,000 per month from your tax-deferred retirement account and you are in the 20% federal tax bracket, you will owe $600 per month in taxes, which will reduce the real income you can use at $2,400 per month.

Once you’ve determined your income gap and factored in taxes, you’ll need a plan to close that gap. There are many options and strategies available, depending on your risk tolerance and knowledge of what is available, as well as the reasons why and why not for each. Some of the possible strategies could include a high dividend investment account, a guaranteed income annuity*, a laddered bond portfolio, or simply taking a chance and getting out of the stock market.

One last word

Whatever you decide, I believe the income plan is the most critical part of an overall holistic retirement plan. That’s because covering your spending needs in retirement brings financial and emotional stability to your retirement years. When you know your income needs are covered, you can relax and enjoy your retirement, confident that you won’t run out of money.

*Warranties are based on the claims-paying ability of the insurance company.

Licensed insurance professional. We are an independent financial services company that helps individuals create retirement strategies using a variety of investment and insurance products tailored to their needs and goals. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon, accounting, legal, tax or investment advice. 21775 – 2022/3/21
Investing involves risk, including loss of principal. No investment strategy can guarantee a profit or protect against loss in times of falling values. Any reference to protection benefits or lifetime income generally refers to fixed insurance products, never to securities or investment products. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.
The information contained herein is based on our understanding of applicable tax legislation. Tax and legislative information may be subject to changes and different interpretations. We recommend that you seek professional tax advice for the applicability to your personal situation.

Founder, CEO, MasterPlan Retirement Consultants

As President and Founder of MasterPlan Retirement Consultants, Mark Fricks takes pride in providing his clients with the right tools for planning and executing retirement strategies. For nearly 30 years, he has focused on helping clients strategically navigate their retirement income, while taking steps to ensure possible future risks are considered and lifetime income strategies have been reviewed and implemented as appropriate.

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