Are you an ostrich or a magpie? What is your approach to financial planning for your retirement? Are you simply sticking your head in the sand hoping it will be all right in the end, ostrich-like, or are you keeping your wits about you, putting money aside like the magpie and investing wisely for your future?
Like many, you might see retirement as the end goal, a single point in time towards which you have been working your entire working life. All your savings, investments, retirement plans, and compensation schemes are aimed at this moment of fulfillment. You can add all this up and see this total amount as the ultimate reward for your labor.
There are alternative ways of looking at this, though. As with golf, tennis, and shooting, it is important to "follow through", to look beyond that particular moment in time toward life after the date of your retirement. Here are some questions to consider: Do you know how much income you need to have in order to maintain your current lifestyle? If you are expecting to have a simpler, downsized life, have you thought about how much of a change you are prepared to make? Have you already decided how much cash or which assets you want to leave to your children, other heirs, or charitable causes?
It is easy to plan what you will do when you retire. Many of us will have been dreaming of that moment for decades, whether it is traveling or going on cruises, taking up or re-starting hobbies, spending time with the family, or evening starting a new venture. Less easy is the other side of retirement planning—planning to (a) maximize your investments and (b) limit your tax exposure. Put simply, without these you will have less to spend and more to worry about.
How can this be done?
Here are 6 steps you can take to help maximize your retirement fund:
#1. Know your needs
It is helpful to cost out your proposed future lifestyle over a year. Be realistic, and include all those club memberships, magazine subscriptions, spa treatments, trips, and so on that make life more worthwhile. It can be fun to visualize your future in this way, so don’t see it as a chore. This exercise gives you a figure to aim for.
#2. Look at the numbers
Evaluate ongoing and future income streams, and then total them up to again give you an annual figure. Include:
- proposed pension income
- any Supplemental Executive Retirement Plans (SERPS) you might have
- any Deferred Compensation
- any Equity Compensation that will be available
- any other expected retirement income
- all portfolio income streams
- any ongoing earnings.
Obviously, these totals are variable to a certain extent, but without these numbers you can’t plan at all. (One would also hope that the first figure is somewhat less than the second figure; if not, please talk to us as a matter of urgency.)
#3. Think tax
Look carefully at the tax implications and features of each potential revenue, and make sure you understand these. In order to structure your total portfolio of assets for efficiency, decide on a strategy to manipulate your assets so as to reduce your tax exposure in as many of these areas as possible. Implement this strategy without delay.
As an example here, although non-qualified options are always taxable in the state in which you reside, this is not necessarily the case with other resources, so it is prudent to understand the local tax rules in detail and plan accordingly.
#4. Check timing
Apart from the fact that you might not actually need all your potential income straight away, by delaying the release of a pension the fund has an opportunity to grow further. There might also be tax advantages relating to a future move between states.
An illustration of this latter point is the case of an executive moving from a high income tax state such as Connecticut to a low income state like Texas. Deferring salary into retirement could potentially avoid the higher Connecticut taxes and save money. Then use option sales to offset the current income loss, as these would always be subject to CT taxes in any case. Creativity is a wonderful thing when planning the structure of your income.
#5. Be unique!
What your friend or neighbor has set up may not be right for you and your individual circumstances, however clever it sounds, so don’t be swayed by others. It is your future and your decisions. Think laterally and research the options. Create a unique strategy—utilize current “tax loopholes” such as Net Unrealized Appreciation. It is not necessarily the case that the more lucrative an investment sounds the riskier it is (although it is always useful to know your attitude to risk, and to calculate what you could afford to lose); assess the riskiness of each option, particularly with concentrated investments.
#6. Use the experts
Build a talented team of advisers for your retirement. Look for people who:
- take the time to really get to know you and your individual needs
- are experts in tax and retirement planning
- have the experience and ability to best formulate strategies, by leveraging your assets, in order to accomplish your goals, giving you the retirement income you need, when you need it.
The head-in-the-sand approach is not the way to go—we can help you be a magpie rather than an ostrich, and build your wealth for a more confident and enjoyable retirement.
Until next time…
Tim Golas
Partner
*Please consult a financial professional and/or tax advisor prior to making an investment decision.