Questions to ask (and actions to take) before you set a retirement date – part two

Second of Several Installments

If you would like to try constructing a retirement budget or if you want to prepare to meet a financial professional, you can use this protocol to get started:

Inventory your Assets, Debts, and Income Sources: Include retirement accounts, savings, investment portfolios, real estate, pensions, Social Security, and other income streams. Identify debts such as credit cards, personal loans, consumer loans, and mortgages. If you operate one or more businesses, develop each business inventory separately from the others, and from your personal inventory. Bear in mind:

• To make the Inventory process most useful, determine or estimate the value of the asset or liability, its interest or dividend rate, and growth rate of its value. It is usually helpful to record the debt service for each debt as well. Most Investment Advisors have exhaustive  “cheat sheets” to ensure that all the relevant information gets captured. Ask your advisor (or Cambyses) to share theirs.

• Take some time to Understand Social Security Benefits: The Social Security Administration website offers comprehensive resources on retirement benefits, including how to apply, eligibility, and how your benefits are calculated based on your earnings history.

• Each of your pensions and IRAs probably has different administrative provisions. Ask the employer or sponsor to provide a “Summary Plan Description” so you know your options.

Estimate your post-retirement expenses and cash flows for as many scenarios as you can imagine. Include housing, food, healthcare, hobbies, and travel. Identify where you may be able to cut costs or where you might spend more in retirement.For each scenario,

• Plan to pay off debt. Aim to reduce or eliminate debt before retirement, but if that’s not possible, have a clear plan for managing any remaining obligations.

• Evaluate your health and insurance. Understand your options for health insurance and long-term care after leaving your job. Think about Medicare eligibility, COBRA, private insurance, or your spouse’s plan.Accumulate a Rainy-Day Fund.

• Keep a liquid-cash reserve for unexpected events. If you don’t think you will have any, you are probably in denial.

• Consider how inflation affects each scenario. Tomorrow’s prices will probably be higher than today’s. Prepare several iterations of each scenario using different inflation assumptions.

Develop a distribution plan. You may need help here –

Distribution plans reflect (at least)

• estimated return rates for each of your assets or asset classes,

• the variability of those returns,

• the amount and timing of dispositions and distributions, (and the effects of inflation)

• your estimated expenses (which you estimated in the last step),

• the length of time (duration) you expect distributions to continue,

• your family status,

• your tax situation,

• the tax-treatment of your assets and their dispositions and,

• the legacy you want to leave for the future.

The mathematics of budgeting and distribution analysis is straightforward – involving only basic arithmetic and an understanding of time-value-of- money concepts. If you run numerous scenarios and vary their parameters,

• interpreting the result becomes confusing. Have professionals review and interpret the results. For complex asset-debt structures, use a team – Investment Advisor and tax-literate Accountant.

• computations become tedious. Use a well-tested spreadsheet or projection software. Make sure you understand the program, process, and assumptions before you accept the program’s conclusions. Cambyses does not recommend you develop your own spreadsheet or program unless you have advanced programming skills and plenty of time to burn.

Congratulations! You will have a (well deserved) sense of accomplishment when you develop one or several contingency plans for retirement. If “the numbers said it all” you would be justified to think the issue was settled now. But there are just a few more questions Cambyses recommends you consider before you relax into retirement. We talk about those in our next installment.

Cambyses Financial Advisors happily offers our Retirement Planning, Wealth and Portfolio Management, Financial and Estate Planning, and Business Management Services to Investors, Businesses, Donors, and Potential Donors. For investors who share our charitable commitment we design, implement, and manage Lifetime Giving and Philanthropy Plans, Donor Advised Funds, Private Foundation, Trust, and Estate Planning solutions. 

These Articles are not an endorsement of any product or vendor we mention, nor an offer to buy or sell any security. Investments in sector companies may be risky or speculative. Investments may not suit your risk tolerance, investment objectives, or your existing portfolios. Consult your financial advisors or contact us at: +1 (818) 489-4228 or steven@cambysesadvisors.com