1Q2018  |  All Ages

Three Steps not to miss on the Final Approach to Retirement

Approaching retirement can bring forth bittersweet feelings for some, and pure elation for others. The freedom to pursue hobbies or projects that have been on hold, spend time with family, and disconnect from constant email and communication associated with the modern workplace are among the top highlights that we hear about from recent retirees. Others miss the rhythm of the workplace, and the feeling of value they received from a rewarding career, so they ultimately end up filling their days with consulting work, volunteering, or some combination of the two. Regardless of how a person plans to spend their golden years, the following three steps are critical in securing the financial flexibility needed for a worry-free retirement.

Get a handle on expenses.

Walking away from a dependable income can be an intimidating proposition. However, retirement is really a simple game of matching required expenses with income; either from Social Security, pensions, or investment portfolios. Without an inheritance or other sudden windfall, it isn’t easy to suddenly generate substantial increases in possible monthly income from investments late in the game. On the other hand, with proper planning and budgeting, expenses can be brought under control. Eliminating mortgage and auto payments can make an enormous impact for retirees, and for those with sufficient time still in the workforce, this should be a top priority. While property taxes, insurance, and maintenance will still be required, monthly cash outflows will be dramatically reduced, relieving some of the pressure on investment portfolios and other assets to perform. Discretionary expenses such as dining out, clothing purchases, premium cable subscriptions, and vacations can often go under-estimated during the planning process. It’s best to give retirement a test-drive by tracking these expenses over 6-12 months, and coming to an average monthly outflow. Once an accurate measure of monthly expenses is taken, decisions can be made regarding when to claim social security, how a portfolio should be allocated, and what type of withdrawals are needed.

Don’t underestimate inflation.

Arriving at a comfortable monthly income in retirement is an ongoing process, not something that can be configured once and forgotten. Even at a meager 2.0% inflation rate, $5,000 in monthly expenses today could grow to over $7,400 per month 20 years from now. Also bear in mind that historically the costs of health care and health insurance, two of the largest expenses for many retirees, have risen at substantially higher rates than general inflation. Investors should certainly be protective of their portfolios nearing and during retirement, but generally need to maintain at least a modest exposure to market-based investments to avoid the erosion of purchasing power over time. Annuity products that lock in fixed payments for life may be attractive on the surface, and can be a valuable part of a broader portfolio. However, retirees would be wise to avoid over-allocation to this type of investment which may limit flexibility and opportunity for income increases in the future.

Have a plan for health insurance.

For those that aspire to retire early, understanding health insurance options is a critical piece of the puzzle. Many of us grow accustomed to a substantial employer contribution to offset some of these costs each year. But if an individual separates from employment, and is not yet eligible for Medicare, they will be forced to bear the full costs of insurance coverage for their family in the open marketplace. This is far from a retirement “deal-killer,” but does indeed require careful consideration prior to pulling the trigger on an early exit from the workforce.

Eric Krause is a CFA® Charterholder, and Portfolio Manager with Qualified Plan Advisors.
Portions of this article originally featured in the August 2016 issue of Ingram’s Magazine, Kansas City.

Eric Krause, CFA®

Eric Krause, CFA®

Portfolio Manager

[email protected]

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).

This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service.

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