Retirement Planning

Retirement is a word that conjures up a wide range of emotions.  Some desperately seek to reach this life milestone, others fear it, and many more plan to keep on working right through the traditional notion of "normal" retirement age for as long as their health will permit.

However, it is inevitable that you will stop working some day – voluntarily or otherwise – and you have to financially prepare for it.  Consider that due to longevity advances, many folks will live as many years in retirement as they did working - what a planning challenge!

The traditional retirement path was to work hard, raise kids, save and retire in your mid 60s with a comfortable pension and good health benefits; that path has now changed.  Baby Boomers are retiring from their primary careers earlier, starting second careers, traveling, volunteering and generally staying active. 

By the same token, many Baby Boomers are still paying for their children's college and have not saved nearly enough to sufficiently fund a long retirement.  This condition will likely require some trade-offs during their retirement years that financial planning can help resolve.

Designing a successful retirement plan is one of the most challenging financial planning hurdles, both emotionally and financially.  The first planning priority is to find something to retire to; in other words, have a plan to productively replace the time each day that you invested in your work.

The next priority goal is to map your financial course in retirement, developing the right spending and investing plan to maximize your standard of living while not outliving your resources.  The final goal is to design the appropriate end-of-life plan that addresses elder care concerns and maximizes the value of your future estate.

Retirement Income

Designing and executing the right income plan to support your desired standard of living in retirement is a daunting task.  The bar for income is rising as life spans continue to increase and as retirees come to realize the risk that inflation imposes on a fixed income – no more pay raises!

Retirement income planning starts with an honest assessment of what percentage of your current earned income you must be replace to create an acceptable standard of living – based on its current purchasing power.  The starting point is current earned income, subtracting employment-related expenses (contributions to retirement plans, commuting expenses, etc.).  

Your retirement income replacement ratio to your pre-retirement working income can range widely, depending on your lifestyle maintenance, other goals, life expectancy (health) and to the extent that you have delayed gratification during your working years by saving.

To set realistic expectations for a more sustainable retirement income goal, it is helpful to think of retirement in terms of two lifestyle stages:  Higher income during the first half of your retirement when you will be most active, then decreasing in the second phase when you are likely no longer able or interested in spending at the same rate.  However, be sure to earmark higher health and custodial care costs in the outlying retirement years.

Once your retirement income goal is defined, the sources to fund the goal should be prioritized.  After consuming pension, Social Security, rental or business income, spending down taxable investments would the the next best source, followed by tax-advantaged assets.  .

Probability analysis can be an effective retirement cash flow planning tool to determine if your resources will support your inflation-adjusted after-tax income goal with an acceptable level of confidence.

Social Security

Social Security is a social insurance program paying a wide range of benefits covering eligible workers, spouses, widows and children.  The most popular is the retirement benefit program, which pays inflated-adjusted income to eligible workers over their lifetimes based on their insured status, the cumulative amount of payroll taxes paid into the system and their age at time of benefit commencement. 

Full retirement benefits are available to eligible taxpayers from ages 65 to 67; a reduced benefit is available beginning at age 62.   It is an intricate program fraught with myriad number of rules and specifications that often requires professional guidance to make the best benefit decision for you and your spouse as part of a comprehensive retirement plan.

The current Social Security program faces an uncertain future over the long run as the trust funds are not keeping pace with projected benefits.  Potential benefit cuts, higher taxes on benefits, means-testing of benefits and extended benefit start dates, or a combination thereof, will impact the role that Social Security benefits may play in a balanced retirement plan and folks age 50 and under should take heed and make changes to their retirement saving goals sooner rather than later.


Medicare is the federal health insurance program for senior citizens – but not nursing home insurance. This is a common misconception because although Medicare does offer a nursing home benefit, it is strictly limited, paying for a short stay in a skilled nursing home facility following a minimum hospitalization period.  

Individuals eligible for Social Security benefits are automatically eligible to receive basic Medicare benefits once reaching age 65.  Selecting the optimal Medicare health plan, including supplemental insurances, will require the help of a health insurance professional.

Creating a "bucket' for elder care health insurance expenses, to include premiums, out of pocket expenses and custodial care with an inflation factor, separate from and in addition to your lifestyle income goal, is important factor when designing your retirement income plan.


Medicaid is a federal-state government social insurance program dedicated to providing health care and full nursing home care to persons showing financial and medical need. 

The disabled person is required to spend down almost all of their available assets before Medicaid nursing home benefits are available.   Most marital assets and other sources of income must also be expended on the care of the disabled spouse before Medicaid nursing home benefits are available.

A second Medicaid nursing care benefit issue is the look-back and penalty periods for transferring assets in advance of applying for Medicaid benefits.  Medicaid will consider any asset transfer made below fair market value by the applicant for five years prior to the Medicaid application date to calculate a penalty period during which the applicant is ineligible for nursing care benefits.

There a myriad other issues associated with Medicaid nursing care planning so seek the professional counsel of a competent elder law attorney before making any elder care planning/decisions that includes Medicaid.


Established in 1974, the Individual Retirement Account ("IRA") is a popular tax-advantaged retirement savings instrument.  A traditional IRA account is distinguished by income tax deductibility for annual contributions (subject to income limitations and contribution maximums), mandatory distributions after reaching age 70.5, and taxation of distributions as ordinary income. 

The IRA is a handy instrument to allow the transfer of investments out of employer retirement plans on a tax-deferred basis after an employee changes jobs or retires.  

Certain IRA investments are prohibited – life insurance is one example.  Direct ownership in real estate and other illiquid assets is permitted, but there tax pitfalls to watch for.  Furthermore, you cannot borrow funds from an IRA and withdrawals before age 59.5, with a few exceptions, are subject to a hefty early withdrawal penalty.

Delaying distributions from an IRA for as long as possible can be good income tax planning.  To fund your retirement income goals, consider first spending down other retirement investment assets before making elective distributions from an IRA.  Note that distributions from an IRA must commence in the tax year after you turn age 70.5, but the required minimum distribution percentage rate is low during the first several years.

Careful estate planning is required with your IRA to minimize income and estate tax traps.  Your IRA beneficiary form trumps your will in terms of who inherits your IRA, so this form must accurately name your desired heirs (not your estate!) to satisfy your inheritance goals and to avoid accelerated income tax liability for your heirs.

Roth IRA

The income tax benefits of a Roth IRA are the mirror image of a traditional IRA.  There is no income tax deduction for Roth IRA contributions, but growth and earnings are never taxed (if the distribution rules are followed) and there is no required minimum distribution after age 70.5.   Like the IRA, there are contribution limits and income ceilings that restrict the amount you can add to a Roth IRA account in a given tax year. 

The Roth IRA does offer more investment flexibility than a traditional IRA.  Principal can be withdrawn from the Roth IRA without taxation or penalty at any time.  Tax-free withdrawals of earnings from a Roth IRA are generally disallowed until the later of five years or age 59.5.  A limited number of exceptions to the tax-free earnings distribution rules are permitted. 

From an estate planning standpoint, the Roth IRA is superior to an IRA.  Unlike the IRA, there is no income tax liability created at the death of the Roth IRA owner.  Beneficiaries still must take distributions from the Roth IRA account over their life expectancy, but the withdrawals are tax-free.  Note the Roth IRA assets could still be subject to federal and state death taxes, however.

Depending on the federal tax law in a given year, higher income taxpayers may be able to convert a traditional IRA account to a Roth IRA, with income tax is due on the full conservation value in the year of conversion. 

Some employers have added a Roth option to traditional 401(k) plans to allow employees to contribute much higher annual amounts than with a Roth IRA.  Like an IRA, contributions to a Roth IRA/401(k) are limited to taxable earned income. 

A balanced retirement investment plan should include an IRA and a Roth IRA (if possible) to take advantage of the complementary tax benefits they provide.