Monday, October 5, 2020
A senior man and woman enjoy the view by a lake.
Anthony C. Kure, CFP®

Anthony C. Kure, CFP®

Managing Director of Northeastern Ohio Market, Senior Portfolio Manager, Principal
Management Team, Wealth Management Services, Cleveland - Akron

5 Steps to Retirement Planning

Typing the word retirement in Google’s image search returns millions of pictures of silver-haired folks sitting in Adirondack chairs by the lake, cruising in boats, or hiking through scenic vistas. In reality, everyone’s vision for and definition of retirement is unique. We all bring elements of our past to the process: upbringing, career experience, money mindset, relationships, health, and goals for the future. Although we’re all different, it is valuable to follow a step-by-step framework when considering retirement, even for those who have already taken the leap. In this article we’ll cover these five steps:

  1. What are the goals?

  2. Understand the budget

  3. Assess financial readiness

  4. Review estate plan and insurance coverage

  5. Understand tax implications

 A successful retirement strategy isn’t just numbers driven. There are significant non-financial issues to consider as well. It’s wise to spend as much time considering these subjective issues as the objective, numerical factors. And it’s imperative that all the moving pieces of a retirement strategy work together.

That’s why we help our clients assemble a trusted team of advisors who can provide in-depth and up-to-date guidance on all the relevant factors. Financially speaking, the main planning elements are related to cash flow, investments, taxes, insurance, and estate planning. Communication is key. As financial advisors it’s our job to identify issues and coordinate solutions, integrating feedback from the retirees, their family, and their other professional advisors to arrive at the best outcome possible.

While not exhaustive, this step-by-step guide is meant to provide a starting point, with insights gained from our decades of experience guiding thousands of households to and through retirement.

Step 1:  Invest the Time to Consider Retirement Planning Goals & Mindset

Some think setting retirement goals is the easy part of the process, but goal-setting goes well beyond buying a beach house or improving your golf game. Goal-setting for retirement should start with defining your purpose.

Purpose is a powerful force, and there are massive benefits to waking up day after day with a bigger purpose in mind. We have counseled many individuals and couples who initially found retirement to be great fun, but after a while found there was something missing. This is most commonly experienced by those who have spent a lifetime building a business or a career that became their identity. 

Additionally, the structure and daily personal connections that work brings is often missed in retirement and many become isolated and lonely. At the core is a belief in the value of people and living for something bigger than self. To address these challenges, it is helpful to consider the following:

  • Answer the Tough Questions:  The following questions are relevant to all, but couples especially, must dedicate time to discuss what they each want out of the retirement years. Given the high probability of spending much more time together, it’s critical the couple align their priorities and manage expectations. 

    • How will you occupy your own and each other’s time?

    • What meaningful activities will you pursue?

    • What personal connections can you make with others?  Do you have a “friend group” of fellow retirees?

    • What activities will you do alone, and together?

    • What will your living situation be? Stay in the current home/location? Move? Snowbird in the winter?

    • How will decisions be made about spending? This could change from the working years.

    • What legacy do you want to leave to your children and grandchildren?

    • What are your charitable intentions?

    • What control do you want to have on your assets post-mortem?

    • Who will care for you when you’re not able to?

  • Consider a Phased-In Retirement:  Because retirement can be a shock to the system, it might make sense to consider a phase-in period to retirement. This provides not only financial benefits, but also mental and emotional benefits. Very often, retirees still have much to offer in their profession. It is becoming more common to contribute and stay mentally sharp through part-time work, gradually reducing hours over time. 

  • Strike the Balance Between ROS and ROI:  When facing a financial decision, crunching the numbers is usually the first step to calculate the ROI (Return on Investment) on the various options. This is important but factoring in ROS (Return on Sleep) is equally important. ROS is simply the subjective “return” on that feeling of security or removal of a worry.  For example, the peace from knowing the mortgage is paid off or from holding on to a life insurance policy, even if it’s not the textbook decision.

To learn more about Return on Sleep, click here

Take Action - Schedule a Meeting With a Johnson Advisor to Review Your Retirement Goals


Step 2:  Know Your Number: Calculate Living Expenses

Once the hard work of getting into the retirement mindset is complete, it’s time to begin analyzing the numbers related to retirement cash flow. The number that is critical to the retirement formula is net living expenses. Most people don’t budget in detail, so this is not easy to calculate. But it is foundational to a successful retirement plan as it drives other decisions like investment strategy, withdrawal strategy, and decisions about life insurance coverage. To calculate:

  • Add up monthly expenses including household bills, monthly credit card payments, debt service, etc.

  • Add irregular or annual expenses such as vacations, insurance premiums, etc.

  • Add projected federal and state tax liability and property/local tax if applicable

  • Add future medical expenses including out-of-pocket supplemental insurance premiums, even when covered by Medicare

  • Add future one-time expenses such as a new car, weddings, or home upgrades

  • Subtract annual transfers to retirement accounts if no longer saving for retirement

  • Subtract annual income from expected Social Security, part-time employment or pension payments

  • Once complete: apply an inflation factor to the net living expenses

Critical to this exercise is formal evaluation of the best claiming strategy for Social Security. This analysis can be complex so it’s helpful to perform a detailed review if possible. 

For more on Social Security, click here.

The net number is, in theory, what you will need to pull from the retirement savings nest egg on an annual basis. This also helps in determining the amount of conservative cushion that should be reserved cash or bonds in the portfolio. This protects funds needed for living expenses from the volatility of the stock market.

For more on calculating living expenses, click here.

Take Action - Schedule a Meeting With a Johnson Advisor to Review Your Retirement Budget


Step 3:  Evaluate the Sustainability of Your Retirement Savings

One of the most common questions we hear is “when can I retire?” Some expect the answer to be based solely on the amount saved. But the real answer is dependent on the relationship of living expenses to retirement savings. This is the primary reason it’s so critical to have a solid estimate of current and future living expenses as noted in Step 2. Knowing “The Number” is crucial to estimate the sustainability of the portfolio supporting the living expenses in retirement.

There are a multitude of sophisticated software tools that analyze how well the portfolio can sustain living expenses. These dynamic tools allow us to change assumptions for market returns, expenses, real estate transactions, health events and just about every situation a retiree could imagine. 

But in the absence of these tools, what’s a simple way to evaluate retirement readiness? The following can serve as a starting point and maybe a reality check. The output may indicate whether one should work longer and save more, or if retirement expenses need to be lower, or some combination of the two:

  1. Assume an emergency fund of six months of living expenses is set aside in cash.

  2. Take the remaining balance of the nest egg and apply a reasonable assumption of portfolio returns.

  3. Compare net living expenses (from Step 2) as a percentage of the portfolio to the portfolio return assumption.  

If net expenses as a percentage exceed expected annual future portfolio growth, consider working more (even part time) or reducing spending expectations, or a combination.

If net expenses as a percentage are less than expected annual future portfolio growth, you may be on the path to a sustainable retirement.

Take Action - Schedule a Meeting With a Johnson Advisor to Find Out When You Can Retire


Step 4:  Review the Estate Plan and Insurance Coverage

With all the elements to consider, it is understandable that dusting off the binder labeled “Estate Plan” and paging through the legalese is not something future retirees look forward to. But the estate plan and life insurance review are essential pieces of the broader comprehensive plan. Over the years, events such as births, deaths, divorce, inheritances, etc. are all reasons to review and update your estate planning documents (or create one for the first time). Without a proper estate and insurance plan, assets may pass to unintended or irresponsible parties in an inefficient and very public manner. 

Diligence in planning for our own end-of-life is not just for our own benefit. It is a gift to loved ones, especially those responsible for navigating the final days of life and settling the estate thereafter. Here are a few basic elements of such a review: 

  1. Confirm asset titling and beneficiary designations:  Inventory all accounts and life insurance policies, then confirm with each institution that the beneficiary designations and titling of accounts is up-to-date and accurate. This should also include an inventory of how other assets like real estate and business interests are titled. When in doubt, an estate planning attorney will advise how assets should be titled and how beneficiary designations ought to be completed.

  2. Ensure the proper estate planning documents are in place: These typically include a will, financial power of attorney, health care power of attorney, living will, and could include one or more trusts. The importance of these documents is difficult to overstate. Obtaining them is well worth the investment of time and money, and could save money, time, and heartache for the heirs. When appropriate it can also help to discuss these plans with family, especially those who will be involved in dealing with your affairs when you’re gone. For a more detailed article on this topic, click here.

  3. Evaluate life insurance needs: Understanding annual spending (as described above) allows potential retirees to determine how remaining expenses for a surviving spouse will be financed, including education expenses, weddings, a mortgage, and many others. Ideally, the investment portfolio would suffice as the funding mechanism for all these expenses. But if a shortfall would still occur as a result of an early death, life insurance can serve as the perfect mechanism to supplement these savings. But buyer beware: there are many complicated and potentially expensive products that may or may not make sense, and any policy must be customized to meet your unique needs. 

When it is time to manage how you will share your wealth with others, Johnson Trust Company will align your estate plan with your values to ensure that those who benefit from your legacy will thrive. Our integrated team of estate planning and trust experts serve as nimble partners to you—and to everyone involved in your estate including your beneficiaries, tax advisors, and attorneys. This gives you access to an unparalleled depth of knowledge from a team who acts with an empathetic and problem-solving mindset, ensuring that the right decisions are made to preserve your wealth over time. 

Take Action - Schedule a Meeting with Johnson Trust Company to Evaluate Your Estate Plan and Insurance Coverage 


Step 5:  Get a Handle on Tax Strategy

Income taxes are often a family’s largest cash outflow over the course of their lives. Knowing how much is spent (or withheld) for taxes is usually a wakeup call to focus on efficiently and legally managing the tax burden before and after retirement. While it may be boring and complicated, legally lowering your tax burden can provide a serious boost to retirement cash flow sustainability and should be a high priority. 

At Johnson we work with clients and their accountants to uncover opportunities to save material dollars. Techniques such as bunching charitable deductions, utilizing Qualified Charitable Distributions and capital-loss harvesting are just a few strategies that can help offset income and keep taxable income in the lower brackets. Evaluating Roth conversions is another worthwhile exercise related to managing taxes in retirement.

Take Action - Schedule a Meeting with Johnson to Evaluate Your Tax Situation 


Bringing It All Together

Even in the most secure financial circumstances, planning for what could be the most radical lifestyle shift one ever goes through can be complicated. With so many moving pieces, it’s difficult to stay up to date and ensure harmony across all aspects of the plan. Working with a trusted team of experts well-versed in these topics is crucial. One of the most substantial benefits of this is objectivity. As “outsiders,” competent advisors can almost always provide impartial, clear-eyed perspective and a ballast against knee-jerk emotional reactions that can irreparably harm long-term wealth preservation. 

The steps above provide ample food for thought, but are no substitute for a well-researched and consistently-updated plan. 

There’s no better time than the present to begin retirement planning. Procrastination is not a strategy. Don’t be like so many who say, “it will work out somehow.” Do yourself and your family a favor by diving in, and one step at a time, you can arrive at the destination with confidence.

Feeling overwhelmed planning for your retirement? Over the years we have helped thousands of people do so confidently with our full scope of wealth management services, including retirement planning.

Learn more about our integrated wealth management services or schedule a meeting with a wealth advisor near you


Find more practical advice on a wide variety of wealth management topics by exploring our JIC Blog: Beyond the Numbers library.