Getting Your Head Out of the Sand

Issues to Consider When Planning for Retirement

Magazine Issue
November/December 2007
Getting Your Head Out of the Sand

Q: I’m a 50-year-old, self-employed therapist in private practice, and I’m really worried about having enough money for retirement! What should I do?

A: You’re not alone! Concerns about the sufficiency of retirement income are a constant worry of the baby-boomer generation, to which you and I belong. What are these concerns about a financially comfortable retirement? The obvious one is sufficient cash flow to maintain your accustomed standard of living, but other significant things are general inflation, rapidly rising health care costs (including health insurance), increasing federal, state, and local taxes, and financial pressures from family members, such as aging parents or college-age children or grandchildren. Many of your clients are facing these same concerns, and their angst is fueled daily by the financial press and media. Let’s take a look at some proactive things you can do.

To begin with, consider what retirement means to you and to your spouse or partner, if applicable. Does it include continuing to work? Perhaps it does, but that might mean work at a second career that you’ve dreamed of for years. Perhaps retirement for you is a combination of work, service to others, and leisure. Or it might be pure leisure and travel. When I began my training in financial planning some 30 years ago, we talked about the “three-legged stool” of retirement income: employee benefit plans, Social Security, and personal savings. Now the stool has become a chair, as we must add the fourth leg, of continuing to earn income. For some, continuing to work will be an economic necessity; for others, it’ll be the enjoyment of a second, third, or fourth career. Whatever the case, one thing is absolutely certain: those who stay mentally and physically active live longer and have richer lives.

Another idea from the ’70s era of retirement planning is that you’ll need about 75 percent of your preretirement income in your postretirement years. My experience in working with clients has shown that this is no longer true. Today, most people need fully as much income in retirement as they did when they were working. Why? Retirement gives one the freedom to travel, pursue hobbies, and enjoy doing the things dreamed of in earlier years. As one ages, increasing health care costs are a significant factor. Surprisingly, one of the greatest financial pressures that retirees face is that of financially subsidizing and assisting adult children and grandchildren.

Let’s now deal with a small word that has huge implications for your financial well-being in retirement: risk. The dictionary defines risk in the financial sense as “the degree of probability of loss.” It’s absolutely impossible to avoid risk in life, but it can be managed. We manage risk everyday when we insure our home against fire, take a flu shot, buckle our seat belts, etc. Let’s look at ways in which risk management can be applied to retirement planning.

Have you identified your personal risk tolerance? A proper risk-tolerance analysis, or RTA, will factor in your age, timeline for use of your money, comfort level with market volatility, and short- and long-term attitudes and goals. An example of an RTA may be found at Once completed, the RTA will indicate a diversified mix of assets, such as stocks, bonds, cash, real estate, etc., that’s appropriate for your indicated risk-tolerance level—preservationist, conservative, moderate, growth oriented, or aggressive. Your tolerance for risk may change over time, and most of us get more conservative as we get older. The important part of risk management is to diversify your retirement and other accounts to spread your risk over different asset classes and categories.

You should make a list of all the assets and sources of income that’ll be available to you in retirement, including those of your spouse or partner. Review your interests in employee benefit plans of your former employers. Do you regularly keep up with how that portion of your wealth is handled? If allowable, you should consider rolling over your vested interests into a self-directed IRA, so that those funds are under your control. Consider your current IRAs, Simplified Employee Pension (SEP) plans, Simple IRAs, and 401Ks, if you’re self-employed, along with your retirement plans, nonretirement plans, and annuities. Are those funds allocated according to your RTA? If not, it’s time to make changes! Are your beneficiary designations current? Are you contributing the maximum allowable to your present retirement plan? Are you saving regularly and making catch-up contributions? Have you considered converting your IRAs, to Roth IRAs?

Now review your other assets, such as real property. Do you have adequate liability insurance? Can you convert nonincome-producing property into income-producing property? Don’t overlook potential inheritances! Would professional estate planning help reduce inheritance taxes that might apply to the estates of your parents or other relatives?

We all know how nursing-home care can rapidly deplete a family’s assets. Do your parents have long-term care insurance? Have they made wills and signed durable powers of attorney and advance health care directives? Have you projected the cash flow from Social Security, retirement plans, IRAs, annuities, nonretirement assets, and earned income, etc.? Finally, have you made a plan to be debt free by retirement? You should think about these things!

Now that you have a good handle on your assets and income streams and have identified your tolerance for risk, its time to find your number. If you think about it, your greatest risk may not be losing money in the stock market, but outliving your assets. Remember, financial risk, while unavoidable, can be managed. Your number determines how long you want your retirement money to last. It’s your spending rate. It’s the percentage that you can safely withdraw from your asset base each year and still have your money last for the remainder of your life. Your number is a function of the annual rate of return on your assets. The greatest threat to it is inflation—the hidden tax that everyone pays. Inflation destroys value. Most financial advisors agree that four percent is realistic. While this may seem very low, its selection is driven by a reality of our times: people are living longer than ever before in history.

One of the greatest economic threats that people of all ages face is the ever-increasing cost of health care. A major illness can wipe out a family financially. Risk management for health care is definitely a significant part of a coordinated retirement plan. Become familiar with your health insurance plan. Do you have disability insurance to protect your stream of income at the present time? Other considerations are critical: illness insurance, cancer policies, and long-term care insurance. Protecting your stream of income in retirement is every bit as important as creating the stream, and the costs of illness constitute a major risk to the income stream.

A final consideration is that of providing assets and income for your spouse’s retirement years in the event of your death. One of the best ways to do this is with life insurance. Is your coverage adequate? Are your beneficiary designations in order? Have you arranged your life insurance so as to minimize inheritance and income taxes?

The above express just a few of the concerns that baby boomers have about retirement. It may well be to your benefit to seek counsel from a professional financial advisor. Look for someone who listens—really listens—to you, and who asks you lots of questions. Retirement planning isn’t just about allocating dollars and making wise investments—it’s all about hopes, dreams, plans, and people. It’s about insuring that you and your loved ones can enjoy life for a long time.

Robert Caldwell

Robert Caldwell, CPA, works with families and individuals on the money issues that affect their lives.