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Friday Financial Five – October 12th, 2012

Friday, October 12, 2012


A look at five barriers to successful retirement given the current economic environment . . . .

Failure to consider tax implications

If you’re retiring this year or next, the current tax uncertainty is enough to make you throw your hands up and forget about planning altogether. What will income tax rates be? What will be the tax on capital gains? Will there be a surcharge from President Obama’s health care plan? Your social security income might be taxable, so take it strategically if possible. Your pension is very likely taxable. Distributions from your retirement plans will be taxable as income. Once the elections are over and future policy becomes clearer, act immediately to minimize your tax liability.

Improper investment allocation

There may still be apprehension in opening monthly statements, but it’s a necessity. Regardless of where you are in the accumulation phase, you have to make sure you’re properly balanced and that your investments are behaving according to plan. As you approach retirement, examine the breakdown of your investment accounts. If you’ll need investment income, include assets that produce interest and dividends, as bank account interest is currently negligible. Be smart in the use of social security, as it’s a powerful annuity that you have some control over. If you have retirement income sources such as a pension or part time work, you might focus on growing your retirement accounts until they’re needed for supplemental income.

Ignoring inflation

Inflation has been close to 2 percent for a long time but historically it’s been much higher than that and the “CPI” doesn’t tell the whole story. This means reaching retirement doesn’t necessarily mean moving all of your assets to cash. You will still need exposure to assets that hedge for inflation, such as equities or inflation linked bonds. The Federal Reserve has kept inflation held at bay for a long time, but that may not always be feasible, especially with the open ended bond buying of QE3.

Poor budgeting

During working years, it’s easier to deal with a budgetary mistake. If you have a shortfall one year, you can try to work and earn extra money the next year in order to compensate. At retirement, the focus shifts to reducing core expenses and eliminating unnecessary expenses. And despite the current mortgage interest tax benefits, there’s been a renewed focus on retiring without any debt, including loans against your house.

Unforeseen medical costs

During the accumulation phase, you get life insurance to protect income and house insurance to protect what is many people’s largest asset. The greatest threat to a successful retirement is a costly medical issue. If you have a good size estate, a long term care analysis is in order. If you have enough money to self insure, you may forgo insurance coverage.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected]


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