Joe Lucey for MarketWatch writes: We're commonly reminded that the two certainties in life are death and taxes. Unfortunately for many retirees, neither certainty is included in their comprehensive financial planning.
While the omission of tax planning most often will slowly erode the value of retirement resources as unnecessary taxation trickles away, avoidance of death planning will typically result in sudden and unexpected financial crises that can rearrange and upend an otherwise secure retirement for a surviving spouse. Each can be costly and leave families living on considerably less than they had hoped for or needed to fulfill a stress free retirement.
It's important that you recognize these potential sinkholes in your own retirement plan so you can discuss them with your financial adviser and make the necessary corrections.
Remaining aware of these potential oversights can avoid damage to your future retirement dreams.
Not planning around taxes
Tax planning should not be a seasonal thing you look at during filing deadlines, but year-round. Sit down with your financial adviser or tax preparer to review this year's tax return line item by line item, addressing additional tax saving strategies both tactically, over the next 12 months, and strategically, looking farther out into the future.
Tax smart financial planning creates additional money earned and reduces the requirements on other retirement resources. Tax efficient withdrawal and investment strategies will enable you to withdraw fewer assets and achieve a similar net income result, allowing unused assets to accumulate untouched. Identifying which accounts you elect to withdraw first, coordinated with the timing of those withdrawals (called the sequence of withdrawals) can make a tremendous difference in the amount of overall net income planning.
While many consumers have been told to continue to defer their retirement assets as long as possible, proceed with caution. Doing so can create a tax planning crisis at the onset of triggered required minimum distributions or when passing IRAs to beneficiaries. Advanced analysis of tax efficient sequence of withdrawals can protect your retirement funds from rising tax rates in the future.
Consider a proactive approach which may include paying more tax today at lower tax rates in order to avoid the erosive effects of rising taxes in the future. Also, learn how Social Security payments are taxed and how to avoid "stealth taxes" where additional income is taxed at higher rates than at the individual's tax bracket.
Thinking in terms of ‘me’ and not ‘we’
At the death of the first spouse, the surviving spouse will lose a Social Security benefit, a possible reduction in a pension, and likely an increase in tax brackets when going from joint to an individual filed return.
80% of all men die married, while 80% of all women die single. Additionally, 75% of all women living in poverty were not poor before they were widowed. Early income and retirement planning decisions should be made with survivor benefits in mind to ensure that both husband and wife are protected in retirement. Evaluate your retirement savings to ensure that a loss of 30%-60% of household income will allow a surviving spouse enough resources.
Consider implementing insurance or annuity tools in addition to traditional market investments to provide adequate protection for your loved ones.
Not planning for longevity
Longevity risk, or living longer than expected, should be one of the biggest concerns of a family entering retirement today. It is hard to imagine a longer life span being classified as a "risk" but if you have not planned for the extra years, they can be filled with the stress of wondering where your income will come from. Statistically, married couples age 65 and older should be planning for a future in which they have a 50% probability that at least one of them will celebrate their 92nd birthday.
Failing to plan for the effects of inflation on a retirement income and investment portfolio can be disastrous. Be cautious when electing fixed payment lifetime income streams that do not adjust for inflation or by not allowing for enough growth in your overall portfolio by leaving too much in cash or CDs.
Ignoring health-care expense planning
Retirees should consider reviewing their Medicare plans on an annual basis in the same way they review their portfolios. Prescriptions change, plans change, and an annual analysis on which is the best plan for you can create valuable premium savings. Also, consider the impact that a chronic illness or long-term care expenses would have on your portfolio.
The national average cost of nursing home care is $200 per day or $6,000 per month. Not having a plan in place that can provide the necessary income to replace these costs can be difficult. An adviser who specializes in working with families entering into retirement should be able to discuss both traditional long-term care insurance, as well as asset-based hybrid plans that utilize life insurance or annuities. These often are better options for families who might otherwise assume they are best self insuring this potential retirement risk.
Planning for the events of death and taxes should be included in all comprehensive financial planning processes. Often financial plans only focus on product selection and consequently many consumers expect only investment selection advice from their financial planner. When that is the case, you are working with a portfolio manager or investment manager, but don't confuse their planning with the financial professionals who are willing and competent in offering comprehensive advice.
A holistic advice approach will include planning for life's certainties.
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