Now is the time to nurture your nest egg

by Melissa Martin

There are a few life skills that aren’t taught in school and one of the biggest is undoubtedly how to plan for retirement. How much to invest in savings, when to think about downsizing and what age is best to start withdrawing Social Security income are among the most frequently asked questions. However, none of them ever seem to have any definitive answers.

While a one-size-fits-all plan that suits all lifestyles simply doesn’t exist, financial specialist Aaron Seil advises aging individuals to take steps immediately to avoid a series of the five most common pitfalls when planning for and launching their retirement.

Playing it safe

According Seil, partner and senior wealth advisor for True Wealth Design, the first mistake many aspiring retirees make is getting too conservative with their investments in the years leading up to retirement.

“You may want to transition your investment allocation to all fixed income to provide the income you will require in retirement [but] not realizing the portfolio returns and diversification you are giving up,” Seil said. “Your portfolio must last 20-30 years into the future, and stocks will provide the best inflation-protected returns over these longer time periods.”

Not understanding needs

Another mistake, Seil said, is not aligning your investments to your lifestyle spending. Even worse, he added, is not having a retirement plan in place at all.

“If your portfolio is chosen arbitrarily not taking into account monthly cash flow needs, this can have [the] disastrous consequences of not being able to adequately fund retirement goals, and, at best, it requires you to have substantially more in savings compared to that of a matched strategy,” he said.

Seil explained that cash-matched strategies typically use short-term assets to meet short-term spending needs and longer-term assets to meet longer-term spending needs.

“Pension plans have used this strategy to meet their monthly payment promises to their workers and you should do the same,” he said. “Though more complicated to implement, sound retirement planning advice should use matching strategies as well.

Taking Social Security too early

Likewise, Seil said claiming Social Security too early can also have a detrimental effect on retirement funds.

“Claiming Social Security early locks in a lifetime of reduced benefits – up to 35% less for a married couple utilizing a spousal benefit,” he said.

To delay claiming benefits, Seil recommended individuals rely on investment savings before the federal entitlements begin.

“Delaying Social Security doesn’t mean you have to spend less early in retirement and more later on,” he said. “If you employ a well-designed strategy, you can afford to spend more over the entirety of your retirement from day one.”

Failing to tax plan properly

Not adequately tax planning is another pitfall that can impact your retirement lifestyle. Taxes are complex, but proper planning, Seil argued, may add tens or even hundreds of thousands of dollars to your family’s net worth over time.

CPAs, he added, are generally in the business of solely looking at minimizing the current year tax liability without any regard for the long term, while financial advisors might not fully understand various marginal tax rates. Their firm might also preclude them from providing any tax advice.

Finding a competent advisor who can look at your long-term tax projection, plan for your social security benefits, recommend Roth conversions when appropriate and use asset location when allocating your investments can add a meaningful amount to your net worth over time, he said.

Ignoring mental safeguards

The final blunder, according to Seil, is not taking into consideration the effects of an aging brain. Evidence shows cognitive decline is natural, inevitable and not slowed by education or solving crossword puzzles.

“Planning for this is critical,” he said. “While studies indicate financial literacy generally peaks sometime in the mid- to late-50s, confidence in one’s ability to make financial decisions does not.”

Seil said that, on average, respondents in their 80s believe their financial knowledge is higher than respondents in their 60s.

Documents such as a durable power of attorney, medical power of attorney, will, trust and advanced medical directives should be implemented well before any capacity concerns arise.

Again, Seil stressed that “working with a trustworthy and competent financial advisor can help. He encourages his clients to have signed documentation in place that allow their financial advisor to contact their power of attorney to discuss financial matters when the first signs of diminished capacity are observed. ∞