Whether you’re considering an upcoming retirement or already have made your transition and want to cover your proverbial bases, a few ideas will help you make plans and decisions.

First, have a will in place. If you haven’t reviewed yours in the last 10 years, it may be helpful to revisit it to ensure you have things going where and how you’d like them to go. If you’ve remarried since your will was created, be sure to check your beneficiaries—both in the will and your retirement plans. Many people aren’t aware that beneficiaries designated in an insurance contract, annuity, or retirement plans have precedence over whomever you place in your will. 

You should also consider a living will so that your health care issues aren’t subject to family votes or hospital regulations.

Your five biggest expenses in retirement typically are housing, health care, taxes, transportation, and travel. Create a budget based on your planned cash flow after retirement. After factoring in your fixed, nondiscretionary expenses—mortgage/rent, food, utilities, gas, and insurance, among others—make sure to include your discretionary things, such as trips and entertainment. Have one version that’s “all in,” as in including discretionary spending, as well as one that’s just the necessities that must be covered if funds are tight. 

And one reminder. It’s probably better to plan any major travel earlier in your retirement while everything is still in best working order. As you age, your lifestyle and budget can each change due to spending more—or less—on items you either had minimized or hadn’t considered at the time.

Integral to that budget is where and in what manner will you be living. Will you downsize? Will you have a second home? Your home of record is important from a tax consideration as each state’s rules for estate taxation, as well as annual income taxes, are different. For those living in Washington as a community property state, what effect would moving have on your collective ownership of assets? 

A larger chunk of your funds in the future likely will be dedicated to your health care. A recent study by Fidelity showed that the average out-of-pocket expense over a 20-year retirement for a couple would be about $260,000 in today’s money, not including any consideration for long-term care.

One other item that applies to your investment earnings as well as expenses going forward is inflation. According to FactSet, from 1925 to 2014, U.S. average annual inflation has been right at 3 percent. With your investments, you need to factor inflation and taxes into your stated returns in order to know how or if your assets are growing enough to maintain your buying power in the future. Using this example, if your net returns are less than 3 percent, it’s likely that you are sliding backward. You need to structure your investments to provide some appreciation over your entire retired life.

According to Social Security, the average lifespan in the U.S. in 1952 was 68.6 years. In 2006, it was 77.8 years. And, for a married couple who are 65 now, the odds of at least one living to 90 and later is continuing to rise. When in doubt, plan on being here for some time.

Cash considerations

If you have a large estate, it could be advantageous to consider making annual monetary gifts. By doing this, you can remove the assets from your estate and hopefully reduce the tax burden accordingly.  Consult a tax professional about that strategy.

If you have a low-rate mortgage, don’t be too fast to pay down or off your mortgage. You give up a chunk of liquidity that can’t be used in the future. Maybe consider selling and then renting, placing the sale proceeds into your portfolio. 

Once you approach 70 ½ years old, ensure that you are set up to begin taking required minimum distributions. If you fail to take your RMD, the penalty is large—50 percent of the scheduled minimum distribution amount. Be sure and get with your financial adviser to process this as there are a number of considerations in determining how best to take those distributions, especially if you have multiple retirement accounts.

This next one is a biggie. 

Many investors—and even some advisers—still use a rule of thumb that says, in terms of determining your asset allocation, to use your age as the percentage of your funds that should be invested in bonds. That’s a really bad idea.

Bonds are entering a different cycle than where they were the past 30-plus years. After peaking in 1982 and dropping until today, the bond market provided capital gains and nice levels of income. It’s my belief that we’re in a “lower-for-longer” phase for rates. The returns that were the norm for the last 30 years are unlikely to be seen anytime soon. 

Further, while bonds are great for asset allocation and to provide a reliable income source, growth isn’t what they do. So, if you’re planning gifts and bequests, or just wanting to potentially stay ahead of inflation and taxes, you might need to consider allocating some portion of your investments to quality stocks. That assumes you aren’t relying on these assets for income and you can afford to lose money if there is a downturn in the market. 

In this regard, most investors are confused by income—which is what you get from bond interest and stock dividends—and cash flow. Cash flow is available from long-term capital gains. That’s especially important for your later years so you can build up assets to be drawn upon instead of regularly depleting your asset base with bond withdrawals.

In closing, be sure to keep three to six months—depending on your own comfort level—of budgeted expenses in an accessible account. That way, if the markets get a little rocky, you won’t have to liquidate your holdings to provide the needed funds.

Michael Maehl is a financial adviser and Spokane-based senior vice president of Opus 111 Group LLC,
a Seattle-based financial services company. He can be reached at 509.747.3323.