In an unpredictable world economy exacerbated by a pandemic and war, achieving certainty in retirement is becoming increasingly difficult at a time when it is most critical.

Pre-retirees and retirees are more concerned than in recent history about how to ensure their best financial positions and grappling with a fundamental question: How can they obtain the clarity and confidence they need as they transition into this phase of life? Based on our experience assisting people across all stages of their lives, following is some practical guidance.

There are three key elements within our control which can provide greater financial predictability:

1.) Tax strategies to lower or eliminate taxes in retirement

2.) Asset positioning to mitigate the effects of market volatility on portfolios

3.) Strategies to ensure you never run out of money in retirement

Minimizing our taxes in retirement can enable us to increase cash flow. One of the best ways to lower taxes in retirement is by using tax-free products and services during this phase of life. A great program available for tax-free distributions is the Roth IRA. Not only does the Roth provide tax-free income, it also does not count as provisional income (the determining factor in assessing if our social security income will be taxed).

By ensuring the income in retirement comes from Roth IRAs as opposed to traditional IRAs, they can increase the likelihood of not exceeding the thresholds that cause their social security to be taxed. This could save hundreds of thousands dollars over a 25-plus year retirement.

The concept of distribution planning in retirement has become more popular over the past 10 years while millions of baby boomers entered this phase of life. It is important to note that the rules of accumulating money are very different from the rules for distributing money. When money is being accumulated, it’s possible to absorb the volatility of the markets. This is because during market declines, there is time to allow the markets to rebound.

However, in the distribution phase of life (when the nest egg is being used) an early decline in the markets can destroy portfolios. Many people who retired in 2007 or 2008 experienced this. They were "forced" to liquidate portions of their retirement savings to live, but they were selling out of positions that were down 30% or more. This put an overwhelming strain on portfolios which prevented many people from recovering and caused them to run out of money.

If these retirees had incorporated a financial strategy called a volatility buffer, they could have significantly reduced their chances of running out of money in retirement. In essence, this strategy involves holding three or four years of annual living expenses in an asset class that is guaranteed to never drop in value (even if the stock and bond markets are in a decline). Tapping into the volatility buffer enables retirees to give their "investment buckets" the necessary time to rebound. Without a doubt, every retiree should incorporate a volatility buffer for part of their portfolio.

Research confirms that one of the greatest fears among retirees is running out of money. This concern has become more and more prevalent as corporations have shifted the burden of providing guaranteed income to employees.

In the 1980's, 60% of corporations offered defined benefit pension plans (meaning that income for employees is guaranteed for life by their employers). However, in 2022, only 4% of employers offer such plans as they have become much more expensive because life expectancy has increased. This phenomenon is the same reason the social security trust fund is under such pressure.

One such strategy to consider to eliminate this risk is a lifetime income annuity. Unfortunately, annuities have become unfairly attacked by certain media personalities and many people are missing out on a great opportunity to benefit from the advantages annuities could provide them.

The fact is, annuities serve a great purpose and many astute people are using them as part of an overall retirement strategy to eliminate longevity risk (living too long and running out of money).

Every case is different, and customized approaches are key. There is no question that having proper financial education can make a significant difference in ensuring a successful retirement. Unfortunately, many people wait too long to begin the proper planning and have financial pressure during the later phases of their life.

Taking the initiative to become financially aware and find the right professional to provide the necessary guidance and support through every stage of life can be a game-changer that can make all the difference. Those who take the right steps now can help ensure their best financial positions and “get there” in retirement.

_______________
Erik Sussman, CEO of the Institute of Financial Wellness, may be reached at erik@the-ifw.com