Retirement

Sudden Money^™ you’ve been working for all your life.

Even though you know it’s coming, the reality of retirement doesn’t sink in immediately.

It hits some people harder than others, but let’s face it, retirement is a major life change for anyone. Change, even positive, is stressful, which is why I counsel my clients to declare a ‘Decision-Free Zone’ before making irrevocable decisions about what to do with their Sudden Money^™ retirement funds.

Spending time in your Decision-Free Zone gives you the space to experience the ‘Chute of Emotions’. It’s time you can use to sort out your feelings as well as your priorities and goals. Your company benefits department will provide you with information about your options for receiving your benefits. Many people feel that interpreting this data is complex. A financial advisor can be very helpful in working with you to understand your options, and to help you create a timeline for decision-making. Some decisions are time sensitive. If you have stock options, for instance, they must be exercised within three months of retirement.

Your retirement package may include pension benefits, stock options, deferred compensation plans, 401(k) plans, profit-sharing, employee stock option plans (ESOPs), continued fringe benefits, or unused vacation and sick pay.

Some pension plans, 401(k) plans and profit-sharing plans allow you to choose whether you would like to take the benefits in one lump sum or as monthly income. This decision has to be made by a specific deadline, and it is irreversible. Work with your financial advisor and tax advisor to make sure you fully understand the pros and cons of each approach before making your decision.

If you take the monthly income option, it is important to know whether this payout is adjusted annually for inflation. Usually it is not, so the purchasing power shrinks over the years. If you are married, survivors’ benefits will be another important choice. Most plans have several options.The lower the benefit for the surviving spouse, the greater the current payout will be. Many retirees choose the larger single life benefit, or the 50% joint and survivor benefit, without fully understanding the future impact on the surviving spouse. The single life benefit leaves the surviving spouse with no pension. The 50% joint and survivor benefit leaves the surviving spouse with only 50% of the pension. This undoubtedly contributes to the alarming fact that elderly women living alone are five times more likely to be living in poverty than married older women. I usually suggest that my clients select the 100% joint and survivor option. However, pointing you in the right direction is best accomplished after a review of your unique needs and circumstances.

If you have the lump sum option, this will give you more control of your income, and the opportunity to make investments that are likely to outpace inflation over time. In addition, any portion of the lump sum the retiree does not spend can be passed to heirs at death. This can be a significant advantage over the monthly income option. Lump sum payouts can be rolled over into IRA plans to continue tax-deferred growth, but there are several different ways to take a lump sum rollover, which need to be carefully analyzed with the retiree’s tax situation in mind.

In addition to the choices surrounding retirement itself, this is a good time to review your insurance needs and your estate plan. You may or may not want to replace insurance that was provided as a company benefit. You will want to update your will and consider other estate planning techniques that can shelter assets from probate expenses and estate taxes. You also want to make sure you have powers of attorney and living wills in place. Once you have made these important decisions, the next step in the Sudden Money^™ process is to look at your dreams and goals. What do you want your life to look like now? Prepare a ‘Bliss List’ of all the things you want to do. Prioritize the list by importance to you, not practicality. Then, work with your financial advisor to do a 'Reality Check' to find out what you really can afford. Together you can decide upon an investment plan with which you are comfortable, and the income level you can expect given that plan. The plan will be impacted both by your goals and by your risk tolerance. With more people living to be 100, retirement portfolios need to be constructed to provide income and beat inflation for as long as 40 years! Careful planning at this critical point is essential, as retirement assets usually cannot be replaced.