Contributed by: Lewis J. Walker, CFP®
A popular investment magazine offered a number of age related planning tips. In general the advice made sense, but some of it was deficient in its simplicities. While not naming the magazine to protect the well-meaning, some thoughts.
One point was that peak earnings years occur somewhere around age 39 for women and 48 for men. (Source: PayScale). MarketWatch, 6/18/15, reported data from the New York Fed indicating that pay peaks for males in their early to mid-50s and declines in inflation-adjusted terms in the decade before retirement. Data on women may be complicated by breaks in paid employment to care for children or aging parents. Like any generality, there are exceptions. Those in physically taxing professions may need to slow down out of necessity post-50. Executives may cash in options or reap other rewards based on accomplishment well into their 50s or 60s. Entrepreneurs who built valuable businesses may cash out, handsomely in some cases, in their 60s or even 70s.
New graduates can boost earnings prospects through diagnostics and coaching. Those who wish to recalibrate careers in their 50s or 60s can employ coaches to improve work satisfaction scores and earning potential. Maria C. Forbes, a coach in Norcross, GA, says that whether you are starting out as a recent graduate or are well along, “the last thing you need as you search for a new career position is a complicated process for validating your professional firepower. By identifying and putting to work your instinctive modalities and strengths you can aim your career search in the right direction so you can meet career and financial goals.” See www.firepowerteams.com
Couples in their early 50s, the Bank of Mom and Dad, may be entering some of their most expensive cash-draining years—kids still in the nest in high school or younger, college educations to fund, cars to provide, weddings at some point. Planning should start in earnest in one’s 20s and 30s lest you clutch at some point short of goals with time fleeting. For those turning 50 this year, full retirement age under Social Security is only 17 short years away. What’s the plan? Financial planners can help identify a number of tax-wise strategies to perhaps cut taxes (more money for your nest egg) and to accelerate tax-deferred or tax-free retirement savings. Strategies go beyond the 50 or over “catch up contributions” applied to IRAs, 401(K) plans, and other retirement plans.
The magazine advised a conservative portfolio as one approaches retirement, noting that many advisors recommend a 50/50 stock/bond mix. Again, a simplicity difficult in execution. Suppose you want to follow the often quoted bromide about not taking more than 4% plus inflation out of your portfolio each year lest you increase the odds of running out of money. In this time of persistently low interest rates on guaranteed or low risk alternatives like high quality shorter maturity bonds, that’s hard to do.
Say you want to spend 4% of your portfolio. If we add 2% for inflation, you must make 6% to cover spending plus inflation. What about taxes? Suppose you are in a 20% average (not “marginal”) federal and state tax bracket. Now you must generate a return of (6/.80=) 7.5% to cover spending, inflation, and taxes.
Suppose you have a $1 million portfolio and you want to withdraw 4% plus 2% for inflation, or $60,000 per year, $5,000 per month, before taxes. (We use $1,000,000 to make math easy but you can apply the formula to any amount). If you assume that a high quality taxable bond portfolio at best will net 3% before taxes, the 50% in bonds, $500,000, will produce $15,000 per year. The other $500,000 in the stock portfolio has to generate $45,000 to meet your goal, a return target of 9% before taxes. Taxes, especially ordinary income on retirement plan distributions, throw total return targets higher, up to 12% or so on the equity portion. That is not realistic year-in, year-out. (All return numbers are for illustration only and not projections of any specific investment). A 50/50 mix of stocks to bonds seems simple, but is it workable given your goals? What else needs to be brought into the mix?
With the daily round and demands on your time, talent, and treasure, contemplating the future and money worries can give you a headache. But planning now may save you from a financial migraine and panic attack later as “over 50” or pending retirement pressures set in. Simplicity is comforting, but in complex world it rarely works!
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group.