This article was written for our sponsor, Capital Financial USA.
It's estimated there are more than 49 million retirees living in the United States today. Fiduciary planner Peter J. D'Arruda said retirement isn't something that happens, it's something you plan for.
"Retirement is essentially at least 20, if not 40 years of unemployment," said D'Arruda, who is best known as Coach Pete. D'Arruda is a Master Registered Financial Consultant who works with a large client base of retired people and those getting ready to retire, and is president of Capital Financial USA, a financial advisory and consulting firm headquartered in Apex. "It is imperative that you have income streams built into your retirement plan, and those income streams need to flow for life. Your future-you will thank you for being proactive and having a proper retirement plan in place."
Here are D'Arruda's five keys to a successful retirement.
1. Shifting your financial perspective
Income planning is critical for successful wealth and retirement management.
While there is no hard and fast age at which to retire, the traditional age hovers around 60 years old. As you approach your optimal retirement age, it is important to shift your financial perspective from what it has historically been set on — accumulating wealth — to protecting that financial capital so you can have a steady stream of income once you retire.
"As we get close to retirement — I say this starts at age 52 and call it the 'Financial Red Zone' — we need to start shifting the paradigm from thinking about accumulating wealth to distributing wealth," D'Arruda said. "Start thinking about what you're going to be able to get from the money that you've been putting aside for years leading up to retirement."
2. Understanding the purpose of your investment
Once you've shifted your focus from maximum growth to protecting your assets, you need to understand where all of your investments are along the "color scheme."
- Red = financial risk. This includes investments that have maximum growth potential, but also maximum loss potential such as real estate, stocks and mutual funds.
- Yellow = liquid money that doesn't really grow, such as that in your bank account. This is "safe" money that you can access at any time that is not growing or keeping up with inflation.
- Green = income accounts. These include savings accounts that grow over time and specialized annuities.
"A lot of what we do is education. We help folks understand what investments they currently have and how much risk those investments have, and what the fees and expenses of their existing investments are," said Marty Hensley, a retirement and wealth strategist at Capital Financial USA. "We put an analysis together that clearly defines for them what the purpose of their investments are."
"You need to diversify amongst the colors. I usually suggest that whatever age you are, that's how much percentage of your wealth should be in a green account. So if you're 62, 62 percent of your net worth should be in the green," D'Arruda added. "It's all about what you want to do in the future and making sure that you have money put away that is never going to be dependent on the market."
3. Maximizing Social Security
The earliest age you can begin taking advantage of your Social Security benefits is 62. While it may be tempting to take the money as soon as you're able, there are other scenarios to consider.
"I hear from a lot of people that they want to retire as soon as possible. When I ask when they want to start getting their Social Security benefits, many say 62. If you do that, you're cheating yourself out of an 8 percent growth per year," D'Arruda said. "You're better off waiting as long as you can, up until age 70, to start using your Social Security to maximize your bang for your buck."
If you still plan to work while getting Social Security for example, you may want to consider delaying the benefits. However, if you're in poor health and think delaying the benefits wouldn't be wise given your physical condition, then taking them as soon as possible would be appropriate. It's about what's best for you, and a financial planner can help you determine the optimal route.
"We want to make sure that Social Security perfectly fits into a person's retirement plan and that the 'when' is individualized to their personal situation," Hensley said.
4. Managing health risks
We all hope to live long and healthy lives, but none of us are exempt from needing health care for a common cold or potentially even something more serious down the line.
As the cost of health care increases, it's important to plan for your retirement years when you may need more health management and intervention as you age. Saving ahead of time for this period of your life can ease the financial burden on you and your loved ones, and ensure you get what you need when you need it.
"Buy a long-term care policy. Most people won't, but I can't emphasize the importance of this enough. Retirement facilities can cost over $90,000 a year," D'Arruda said. "At the very least, everyone should have a life insurance policy. Many companies are now offering a life insurance policy that allows you to use the death benefit while you're still here to pay for long-term care. This is a Neal Armstrong-type huge step ahead in the planning world. Everyone who has a life insurance policy must have it reviewed to see if it has this benefit. If not, they should definitely look at exchanging their current policy for the new and much-improved version immediately.”
5. Mitigating financial risk
Part of income planning is, of course, saving for retirement in the first place. It's important you put enough away so you don't end up outliving your retirement fund. But along the way, it's also essential to mitigate any potential financial risks.
This includes putting money into a protected account that is not tied to the market from which money can always be drawn, and reserving "leftover" money for a market-tied account that has the potential to grow but is not protected from potential loss either.
D'Arruda advised having more than one stream of income and making sure the income increases over the years.
"Income diversification is important, as well as spousal diversification," he said. "In many families of the generation of people approaching retirement age, typically one adult has been the head of household while the other was a homemaker. The head of household may have their retirement in a 401K or an IRA, however these retirement funds are for the individual, not for the family."
D'Arruda finished, "These are individual retirement accounts for one person. The breadwinning spouse may have all this money tied up in these accounts. Historically, if this spouse passed away, a lot of that money would pass away with them. But there's a special provision now that gives couples joint income access to individual retirement accounts. Make sure you're taking advantage of this provision if this applies to you."
When it comes to retirement, making sure you have all five of these keys in place can help you feel prepared and worry-free about your upcoming golden years of unemployment.
"A second opinion or review of your accounts is recommended every five years. What worked yesterday may not be working tomorrow. It is imperative that you aim to get a review from someone other than the person who set up your retirement plan initially — it's critical for long-term success," D'Arruda said. "Remember, retirement is a lifelong vacation. It's 30 to 50 years of unemployment. It's so important to plan and save for it."
This article was written for our sponsor, Capital Financial USA.