By Tema L. Steele, MBA
With so many sources of advice on personal finance and retirement planning, it’s easy to not be sure what to do with your master retirement plan when the time comes to start a new plan or update an existing one. The newspaper tells you to convert your IRA to a Roth IRA, but your uncle tells you it’s a bad idea. Maybe your current advisor recommends value stocks, but CNBC tells you growth is the way to go. It’s easy to get mixed messages and end up doing nothing out of uncertainty.
What is certain is that one of the three outcomes will occur: death, disability or retirement. Since you never know which one will come first, it is critical to plan for all three. Everyone’s favorite outcome is obviously retirement. Typically, most people spend the majority of their lives working to afford the things they need and want then they save some amount of money on a regular basis towards their retirement funds.
If you have read a newspaper or watched the news lately, you will already be aware of the statistics that are popping up everywhere about inadequate savings. Many people are spending more money and are not saving enough for retirement. Even the President of the United States is urging Americans to save more money, but it is yet to be seen if that strong message is falling on deaf ears. If you’re under age 55, you are not even guaranteed to receive social security benefits in retirement. Even if you have a pension plan you are participating in, you can not feel one hundred percent confident that the plan will pay out what is expected. The Pension Benefit Guaranty Corporation (PBGC) is officially up to its neck in debt. The reality is that the PBGC may not be around when it’s most needed. It’s somewhat of a flashback to when the Federal Savings and Loan Insurance Corporation (FSLIC) went defunct some time ago. No one ever thought that would happen. This is all assuming you get to retirement without a disability or a long-term care occurrence, once retired.
This may sound like a terrible forecast of the future, but it’s really not as bad as it seems. As long as you can personally count on yourself to set enough of your income aside specifically towards retirement in the most appropriate vehicles, you should come out okay. The old three legged stool that was used to explain retirement income sources (social security, pension and personal savings) is down to a one legged stool. Unless it’s a big, solid leg, you can reasonably expect the stool to topple over. Any extra benefits you may receive from the government or a pension should be considered extra money for yourself. For most things in life, you have to count on yourself anyway to make sure things come out in the optimal way for you. Keep in mind that the further you are away from retirement, the more you need to sock away into your retirement savings.
In summary so far: save, save, save! Keep in mind that, as difficult as it is to put your hard-earned money away into accounts you can’t typically touch until 59 1/2 years old, there are a few other things you will want to plan for just in case; namely disability and death. The good news is that you don’t have to plan on dying or becoming disabled. However, you do need to account for them to some degree since they are statistically possible.
Term life insurance is “planning to die” insurance since if you don’t die within a fixed period of time you just wasted good money which could have been used for retirement. Term life insurance does have many wonderful uses for younger families and those with lower incomes, but I would like to assume that a physician reading this article is not interested in planning to die anytime soon or is interested in wasting money.
Disability insurance is an expense that is a necessary evil. You hope to never use it, but you typically want to get as much as you can, unlike life insurance. If you have the opportunity to be in a group disability plan, you’ll get the best benefit for your dollar. At this time, there really isn’t a good disability plan that is an asset like permanent life insurance. Your only real smart choice here is to insure your income up to the typical maximum of approximately 66 percent though a group and/or individual disability plan. Hopefully, you will never become disabled, but if you do this will help save your future and your family’s future.
Two other critical issues that many people ignore are insuring their retirement savings contributions and funding a long-term care insurance plan. Addressing long-term care insurance is very easy. Get it! Disability insurance is only half the battle. It only replaces some of your income to meet your living expenses. It doesn’t give you money to fund retirement and it doesn’t pay for extended medical expenses. A long-term care insurance plan will complement, not duplicate your traditional health insurance plan. It’s never too soon to talk to a trusted insurance professional about your long-term care needs and concerns.
Insuring retirement savings contributions is unfortunately uncommon among most people. There are several ways to put such plans in place. If this is a concern to you, as it should be, talk to a qualified insurance professional. You will be amazed how little it costs to insure your retirement. In some cases, it can actually cost you nothing. Since everyone saves different amounts and in different savings vehicles, it is usually best to address this issue on an individualized basis.
Death, disability and retirement are a part of life. Death is ultimately going to happen. Disability can hopefully be avoided. But since retirement is where everyone wants to get to, wouldn’t you think more people would put more money away in the most appropriate vehicles? Appropriate refers to the most tax efficient vehicles in retirement planning.
There are three kinds of “money buckets” for tax efficient retirement planning: tax deductible, tax deferred and tax free. Most people, including accountants, will always tell you to take the tax deduction because it’s immediate and the most important thing. That makes a lot of sense. The concern is that this is where many people stop considering the impact current and future taxes will have on their retirement savings. If you are a higher income earner, you do want to contribute to a qualified plan to reduce your income and pay fewer taxes now. However, you can’t deduct all of your income because you need money to live on and to keep some money handy in case you need quick access to it. You also can’t deduct all of your income because of the IRS limits which can really limit your maximum savings ability. In summary, what needs serious attention is: where do you put your after-tax savings dollars?
If you cannot get the deduction for you money, you should look to get the tax deferral and potentially the ability to take those deferred dollars tax free as income in the future. Tax deferral means you do not pay taxes on money you are not using. As it grows, the interest credited becomes part of the principal and therefore causes a growth effect similar to a snowball rolling down a hill getting bigger and bigger. There are several vehicles available to investors who see the value of tax deferral.
It’s obvious what tax free means. However, when most people think of tax free investments they think of tax free bond funds being the only real option. Again, this is where people are mistaken about the options available to them.
The best way to find out the best strategy is to meet with your trusted financial professional and ask to open up a conversation about where some of your money should be invested related to the three money buckets: tax deductible, tax deferred and tax free. Just as a patient would explain symptoms to a doctor and the doctor will provide the right treatment or medication, an investor should explain the goals of what he or she wants their retirement money to do. From there, a qualified financial professional will be able to present some recommendations so you have a healthy retirement plan outlook.
Lastly, don’t wait to map out a comprehensive retirement plan until later. Do it now! Your financial health should be checked regularly, at least once per year, just like your physical health.
Tema L. Steele, M.B.A., has been “creating, preserving and distributing wealth since 1981” as the Founder and President of Steele Financial Solutions in Cherry Hill, NJ.