Retirement and Investment Advice For People Without Children

By Raymond D. Mignone, CFP®  |  Copyright 2006 by Ray Mignone

The book is available for purchase on Authorhouse & Amazon.com

Table of Contents

1) RINKs Retired, Independent, No Kids
2) Preparation For Retirement
3) Pre-Retirement Planning
4) Retirement Planning Process
5) Know Your Investing Personality
6) Investing Basics
7) Portfolio Construction
8) Smart Retirement Portfolio Distributions
9) Finding & Working With A Trusted Financial Advisor
10) Charitable Giving
11) Estate Planning
12) Health Care & Incapacity Planning
13) Planning For Your Pet

1) Chapter Summary

My definition of a RINK is someone who is Retired, Independent, with No Kids. By financially independent, I mean owning your home free and clear with at least $500,000 in a retirement nest egg.

You should establish an experienced $Team. The captain should be a trusted financial advisor and the team members should be other professionals such as an elder law attorney and tax preparer. This team could make or break your financial success in retirement.

You should also establish an ETeam or emotional team. The ETeam will consist of a network of friends and/or family members who will assist you as you age. The team captain may be a paid, caring geriatric care manager, if no friend or relative is available.

Having enough money to pay for extra services is the cornerstone of a long successful retirement.

2) Chapter Summary

You worked hard all of your life, you sacrificed and saved so you would arrive at retirement with significant investments. You will need a larger retirement nest egg than people with children, since you will likely need to pay for additional services when you get older. You also have to get yourself mentally prepared to leave the work environment. Many people have a hard time doing this, since they are afraid they will be unimportant once retired.

You have to get used to the idea that you are now starting to reverse the process with your money: in your working years, you earned and saved: now you will be drawing down your investments to support your lifestyle. As many others are doing, you should consider working part time for a few years so you can adjust to a full time retirement. The objective is for your money to last as long as your life.

3) Chapter Summary

In this chapter I discussed that the Pre-retirement planning occurs prior to retirement and usually helps determine when you should retire and what pension options you should choose. Post-retirement planning is general financial planning that should continue to monitor your financial life all during retirement.

Should you attempt to do your own retirement planning or hire a CERTIFIED FINANCIAL PLANNER™ professional? When doing your own planning you can get assistance from the Internet and retirement planning books and you should have someone review your work prior to making decisions. However, in doing your own planning, you lose the objectivity and wisdom of a professional who has much experience doing what you are attempting to do on your own. He also will have access to much more sophisticated financial planning software.

We covered the effects inflation has on a long retirement plan and that inflation is enemy #1 of the retiree. There is usually some initial decision that has to be made which will prompt someone to start thinking of doing retirement planning. It is best to do a complete financial analysis in order to make important decisions.

In an effort to help you understand some aspects of retirement you should be concerned with when doing planning, in the next chapter I will take you through a typical retirement planning engagement I follow with my new clients.

4) Chapter Summary

In this chapter I described some of the issues that I would cover with my own clients during the retirement planning process in order for you to understand the issues you must consider when you work with a financial planner or you do your own planning.

If you decide to work with a planner, you should be prepared to bring all of your financial documentation and be willing to share the information with the planner. In addition, the planner needs to get to understand you, your goals and financial anxieties in order to make good recommendations for you.

I illustrated that by using a good cash-flow driven financial planning software program, you can model many different scenarios accurately, taking into consideration the effects of taxes. In planning, you must assume an average rate of return on your investments as a starting point. In choosing this return rate, I suggested this be a combination of understanding your own investment personality, past historical market returns data, the current economic environment, future expectations from current valuations, and putting that all together with SWAG to arrive at your initial return rate.

You must continue to monitor your plan, comparing your assumptions with your actual results each year. This is important since investment performance is a key ingredient to the RINK’s successful retirement. If your investment returns are not keeping up with the plan’s initial projections, you must make adjustments to either your portfolio or spending in order to keep your retirement on a sound financial track.

5) Chapter Summary

Retiring without children means you have to rely more on your money to provide for your needs in retirement. Proper management of your investments is critical if the money is to last during your long retirement. Knowing your investment personality and how you behaved in past bull and bear markets is a good indicator of your future investment behavior.

Now is not the time to be overconfident in your investment abilities since a successful outcome is too critical. If you feel you can continue to manage your investments and have done a good job in the past, then by all means continue. If not, consider working with a good professional advisor. I will explain how to evaluate financial advisors in another chapter. For now, let’s move on to discuss investments.

6) Chapter Summary

Hopefully this chapter gave you a little refresher course on some investment building blocks. Your investment portfolio should be composed of equity and fixed-income investments. The equities provide you with long-term growth and the fixed income investments provide safety and lessen portfolio volatility.

When you own equities you are an owner in the company and when you own fixed income (bonds) you are a lender and receive interest payments. Bonds are not as simple as they appear to understand since their prices change due to interest rates and other factors. I believe you would be best served by buying stocks and bonds through low-cost mutual funds.

When purchasing mutual funds understand the sales charges and internal expenses of the funds before purchasing. You should avoid funds with high expenses and sales charges unless your advisor is providing other value to you.

ETFs are a good way to participate in the equity markets since they have low costs and are very tax-efficient. Next, we’ll discuss putting together an investment portfolio to take you through retirement.

7) Chapter Summary

You need a properly managed, well-diversified portfolio in order to ensure you have enough money during your long retirement. When creating your portfolio, you first must understand your risk tolerance since this will dictate your Investment Policy or your mix between equities and fixed income. You should also ignore “rules of thumb” when investing and instead, take into account your own unique situation.

Two main styles of investing are active and passive management. While active management tries to beat the market each year, passive management tries to capture the market’s overall return. I believe that your portfolio should primarily be invested in passively managed investments since they have low expenses and are very tax-efficient.

You should view all of your brokerage accounts as one large portfolio. When managing your portfolio you have to be aware of taxes. By realizing tax loss harvesting and proper placement of your investments, you can gain additional wealth from tax savings.

The main reason for having a diversified portfolio of non-correlated assets is to lower your portfolio’s overall volatility. Lower portfolio volatility leads to higher long-term compounded returns. You must regularly rebalance your portfolio in order to keep your investments in balance and reduce the risk to your portfolio. There are many reasons to rebalance your portfolio during the year, and you should try to be tax smart when you perform your rebalancing.

8) Chapter Summary

First, you need to determine your required portfolio monthly withdrawals using the projections and assumptions from your retirement planning. Next, it would be a good idea to set up a

buffer amount of money in your checking account from which you will pay your normal bills, using the checking account as your fuel gauge.

The checking account should be fed each month with automatic withdrawals from your long-term investment portfolio. These withdrawals should be taken from the brokerage accounts that will generate the least amount of taxes as possible. You should tap your taxable accounts first and your tax deferred accounts such as IRAs last so you can continue to defer taxes as long as possible.

For most people, the benefits of rolling your 401k or 403b plan into an IRA are overwhelming, but there might be certain situations where it would be better to leave your money in the company plan or take your company stock out using the NUA, (net unrealized appreciation).

You also might consider taking some of your money from your IRA early and paying the taxes on it if you expect to be in a higher tax bracket once you turn 70.5. A smart variation of this strategy is to convert part of your traditional IRA each year into a Roth IRA.

9) Chapter Summary

In this chapter I suggest that it isn’t easy finding a good trusted financial advisor and so you should start your search early. Since the advisor should be the lead person on your $Team, you need to be sure you have the right person before you enter the later stages of your retirement.

Since anyone can call himself a financial advisor, it will take a little work on your part to find a good one. One way to evaluate different advisors is to find out how they are paid: Commissions, Fee-based or Fee-Only. While no form of compensation is without potential abuse, the Fee-Only model seems to have the least amount of conflicts since you pay the advisor directly.

A good starting point to finding a Fee-Only advisor would be to contact NAPFA (800-366-2732) or go to their website www.napfa.org. Be sure to also request some of their consumer materials on how to interview an advisor.

You will find many designations when evaluating advisors. While these are important, I believe experience and personality may be more important to a successful relationship.

Independent RIAs have a fiduciary responsibility to put their client’s interests first. Stockbrokers working for a large firm do not have the same responsibility, since they are sales agents for their firm.

It is hard to find someone who will just do financial planning for you, since the planner has difficulty making money just doing true planning. Most of the large firms just concentrate on investments, since that is the most profitable area of the business.

When you get referrals from your friends for an advisor, be sure the advisor has the services that you need, which may be different from your friends’ needs.

It is a good idea to spend time reviewing an advisor’s website and speaking on the phone with the advisor prior to setting up the first meeting to ensure he is a good fit for you.

Be prepared to ask questions at the initial interview meeting such as; How do you get paid? Who will work with me?

When starting to work with the advisor, allow him to implement his strategy and try to concentrate on the big picture, not the individual details. Don’t be afraid to ask your advisor questions not directly related to your money. He will try to help if possible.

Hiring a financial advisor is not for everyone. If you do find a good, experienced, trusted advisor, you will have to pay well for his services, but, in return, you should receive very good value for your money.

10) Chapter Summary

As a RINK, charitable giving should be a part of your wealth distribution strategy. There are many ways to give, including volunteering, which has the added benefit of involving you with likeminded people who you may form strong bonds with and enlist as part of your ETeam.

When you do make donations you should do so in the most tax advantageous way. This usually means giving low cost-basis appreciated assets instead of just cash.

There are many vehicles available to you to allow different ways to donate, including donor- advised funds which are cost effective and simple, family foundations which make sense for $1,000,000 or more. Different variations of charitable remainder trusts which give you a lot of control, charitable lead trusts which make sense for the very rich only, pooled income funds, and gift annuities which have less flexibility and limited income streams.

While all of these strategies can save on taxes, they don’t make economic sense unless you have a charitable intention. If you are like many other RINKs and do intend to pass on some of your wealth to charities, you should look for the smartest strategy possible.

11) Chapter Summary

Estate planning strategies are different for you since you don’t have children to worry about, but you still want to be sure your assets go to your desired heirs with the least amount of expenses and estate taxes. The current estate tax laws are in flux, so you need to be sure any estate planning you do is with a good estate attorney, preferably one who is also familiar with elder law.

For you, a Will alone may not be the best vehicle because of probate. While you can eliminate most of probate by titling your assets so they flow directly to a beneficiary this raises other issues for the RINK. I think you should consider having a living trust drawn up. In addition to avoiding probate, this makes it much easier for someone to help you if you become incapacitated due to illness.

A bypass or credit shelter trust for married couples can help your heirs save on estate taxes but will complicate the surviving spouse’s financial life.

Lastly, be very careful about giving away too much of your money while you are alive. Be sure you have enough so that you are well cared for in your later golden years. Your gifting strategy should be done in conjunction with careful monitoring of your overall financial situation, updating your retirement projections as you go along to ensure you maintain good financial health.

12) Chapter Summary

In this chapter we discussed the necessary legal documents to use to plan for your person in addition to the estate-planning documents we discussed previously for the planning of your property.

Some of these documents include the Living Will, Health Care Proxy, Durable Power of Attorney, and Living Trust. We also discussed how you should prepare these documents ahead of time to avoid the loss of control, expense and embarrassment of having a court-appointed Guardian and to ensure that your wishes are carried out more easily.

To handle your long term care needs you have to decide whether you should self-fund your long term care needs, make yourself impoverished and go on Medicaid, or purchase a long-term care insurance policy. A good review of your financial situation and your retirement projections should help determine if you should self-fund.

If you decide on long-term care insurance, it is important to work with someone who can show you several different policies from different insurance companies and, if you live in NYS, you should investigate the NY Partnership Program.

You should also be aware that a good geriatric care manager can offer you a wide variety of services and may be one of your best allies as you get older and need some help. Working with the care manager and a good financial advisor should help you maintain your independence and dignity during your retirement.

13) Chapter Summary

As with all of your planning, you should also plan for the long-term care of your pet in case something happens to you. By specifically providing instructions and leaving money, you can be sure your pet will have adequate care. You can leave instructions in your will or you can create a pet trust whose sole purpose would be to provide for your pet.

In your documents you should provide specific information regarding your pet’s care, type of food, medical problems, name of vet, etc. You should also name the beneficiary who will be caretaker for your pet as well as a secondary beneficiary. In addition, you should name a successor beneficiary who will receive the balance of any money left after your pet dies. This could be a charity.

You may also want to carry a card on you and leave a document in your home for emergency workers to be aware that if something happens to you, there is a pet to be taken care of. If you love your pets, ensure you plan for their care.