Time a vital factor in retirement planning

By Amaris Elliott-Engel
BridgeTower Media Newswires

The ideal time to do a formal retirement plan is five to 10 years before your anticipated retirement, says Brennan Redmond, first vice president and financial advisor at Sage Rutty and Co.

“If you don’t have a retirement plan by the time you’re five years out you’re making a mistake,” he says.

But what can you do if you face an unexpected early retirement because of a layoff, health concerns or just your desire to retire earlier than planned?

If you already have a retirement plan in place and you are forced into retirement earlier than expected, “you already have in place, a construct through which you can evaluate how that will impact your financials in the long term,” says Redmond, who is a certified financial planner and chartered financial analyst.

Nannette Nocon, a private wealth advisor with Nocon & Associates, an advisory practice of Ameriprise Financial Services LLC, says that even if someone does not already have a financial plan upon an unexpected retirement that it is not too late to put one together.

“It’s a good time to take inventory of what’s available to them,” Nocon says.

Barbara Clemons, a certified financial planner with ESL Investment Services, says that in the event of an unexpected retirement, people need to take stock of “what your spending needs are and what your spending wishes are.”

At this juncture, the analysis is whether your needs are covered by your resources and whether your wants are covered by your resources, too, Clemons says.

“Sit down with a professional,” Clemons says. “Take stock of where you are and what your goals are. A professional advisor will help you sort through your goals and help you sort through what’s realistic or not.”

Christopher Brodhead, principal and chief growth officer at Alesco Advisors, says credentialed financial advisors can help clients make informed decision even in the face of duress.

“It’s important to develop a thorough understanding of your current budget and your cash flows, as well as any expected budget parameters for retirement years,” Brodhead says.

A credentialed financial advisor should be in touch with the best data about retirement strategies and can advise you on the best asset allocations, the best diversification of your assets, the impact of investment fees on investments and the impact of tax planning, Brodhead says.

“Timing the market is very difficult, if not impossible,” Brodhead says. “All of the academic knowledge that we have amassed as a society is that time in the market is the most important factor.

“Applying a consistent, academically proven approach is not about timing the market. It’s about optimizing your chances of success” by minimizing investment fees, through prudent allocation of assets and prudent diversification of assets.

Clemons says that sometimes people are afraid to talk to a financial advisor because they are concerned they’ll be judged for what they’ve spent or not spent, what they’ve accumulated or not accumulated and about whether they’re too conservatively invested.

But Clemons says that people should not be “afraid to go to a financial advisor because they’re afraid of judgment. We’re completely agnostic.”

One step people should take is to review their bank account statements over the past year to understand what they are actually spending, Nocon says.

Another step people should take is to register with the Social Security Administration website to find out what money they have available to them depending upon when they would start to draw on Social Security between the age 62 or age 70, says Nocon. Additionally, people might be eligible at the age of 60 for Social Security benefits based upon their ex-spouse’s or deceased spouse’s benefits, she says.

Clemons notes that one way that people can minimize their debt liabilities would be to refinance their mortgage to cover some of those debts because of the currently low interest rates.

Nocon adds that people can use money held in a Health Savings Account (HSA) to pay for continued health insurance from their former employers through COBRA if they are not Medicare eligible yet. Money in a HSA also can be used to pay for Medicare Part B premiums, she says.

Nocon says it is important to assess the tax advantage of having money in a 401K plan versus an Individual Retirement Account(IRA). For example, the law around 401Ks requires that 20 percent of distributions be withheld for taxes if you're under the age of 72, she says. As a result, there is an advantage to use IRAs to control the rate of tax withholding.

Redmond says that one thing people who have an unexpectedly early retirement should keep in mind is that the contributions they would have continued to make to their portfolio “are not that impactful on their retirement scenario.”

A retirement portfolio could swing more on a day-to-day basis based on the markets than what added contributions over a couple of years would mean to your wealth accumulation, Redmond says.

The most important issue for people who have had to retire early unexpectedly is minimizing the amount of distributions, Redmond says, especially if they are retiring into a bear market.

This is called “sequence of return risk,” which is the risk that the longevity of your retirement portfolio will be significantly reduced by market declines in the early years of retirement when paired with ongoing withdrawals, Redmond says.

Redmond says that part-time work can be a way to handle an unexpected layoff and reduce the sequence of return risk by limiting distributions.

Both Nocon and Redmond note that a portion of a retirement portfolio needs to be allocated in equities as a hedge against inflation.

“The standard rules of thumb don’t work anymore because interest rates on conservative investments are so low,” Redmond says.

The 10-year interest rate on government bonds is 1.3 percent while inflation is “clipping along at 5.5 percent,” Redmond says.

“Your bond portfolio is almost certainly going to lose value because inflation is higher than the return of safe investments,” Redmond says.
Amaris Elliott-Engel is a Rochester-area freelance writer.