The 3 Pillars of Retirement Planning
Retirement Planning is Scary. Where Do I Start?
Fear of retiring is a very real thing that we see in our office all of the time. We reference “The 3 Pillars” which are Income Planning, Asset Allocation and Tax Planning to help you feel prepared for this next phase of your life. Listen to Josh discuss these 3 important topics in the video below.
Video Transcript
About three years ago, I was going for my annual physical and I had to get a blood test beforehand. And when I walked in real early in the morning, the lady who was drawing my blood was very happy and chipper. And, she says to me today is my birthday and I wished her happy birthday. And she says, I’m going to be 65 today.
And I wished her happy Medicare age. And we all laughed about that. And, uh, as we’re making small talkers, she’s getting ready to draw my blood, she asked what I do for a living. And I tell her I’m a, a financial advisor who specializes in retirees and I’ll look at her face changes drastically from that happy chipper feeling to one of, of fear and trepidation, um, which is not the look you want when someone’s about to stick a needle in your arm.
And I asked her, is everything okay? Is there is something wrong? And she says to me, very flat out. I am too afraid to ever retire. And I said to her, I’m sorry to hear that, but what makes you say that? And she says, I lost my husband about 15 years ago and I’ve raised two boys to be successful young men who don’t need my help.
I’m very proud of that, but I knew that every day, as long as I went to work, I could provide for my kids. As long as I had a paycheck coming in the door, I could provide for my two boys. I’ve been a good saver. No one has ever taught me how to not work, how to not have a paycheck come in the door. She goes, I’m too afraid to rely on anybody other than myself.
And that fear is a very real thing. We see this all the time in our office. And what we always tell people is when you think about retirement, there are three big things that you have to be concerned about. Three major, major avenues. And if you can cover these three you’re, you’re a set, as you were, as if you had those paychecks coming in the door.
Now, what are those three big things? We refer to this as the three pillars of financial planning or retirement planning. And of those three pillars the first and foremost is income. Now. I’m an accountant and, uh, income to me is a two way street. There’s money coming in your house and there’s money leaving your house.
So there’s inflows and outflows as cash flow, if you will. So you have to have money coming in your house. And when you’re working, it’s pretty simple. You’ve got a paycheck. Don’t spend more than, you know, don’t spend more than your paycheck is coming in the door and you’re better off than most your neighbors. In your retirement, you don’t have that paycheck coming in the door or it isn’t as big as it used to be. So you need to know where every dollar you’re going to spend is going to come from. And I think that’s what, what had this, uh, lady who was drawing my blood so nervous. She didn’t know where the money was going to come from.
I always like to tell people you have all sorts of pockets in your pants and you could put money in every one of those pockets. And the person who you’re going to give the money to the person who you’re going to pay money to, they don’t care which pocket you take your money out of. But it does matter to you.
It will impact how long your money will last. So in this category of income planning, you need to know what you’re gonna do with social security. Do you have any other guaranteed income? What about pensions? If you have a pension, how do you plan for that? If you have maxed those things out, what assets are you going to spend, and in which order are you going to spend them?
Those are the things that you have to think about. All of those decisions, will impact how long your money will last or will impact how much you can leave to the next generation. So an income plan ,or a cashflow plan, is the first big pillar that you have to have. The second pillar, and it’s equally as important, is you have to have an asset allocation strategy.
So, if you have money coming in and money going out, and if you have money left over, it has to sit somewhere. And where it sits is your asset allocation strategy. And this is the one thing, this is the one part of retirement planning that most people and most financial advisors have focused on throughout the majority of your life.
And they talk about risk a lot, how much risk do you want to take? And, you know, are you conservative, are you moderate, are you aggressive? And that’s all important, risk is important, but in your retirement years, there’s a second variable that comes into play. That’s equally as important as risk. And that variable is time.
Not time from how long you’re going to live, but time from how long until you’re going to spend an asset. Because in your working years, if you’re just putting money in that 401k and you’re saving it for a long period of time, that time is long-term, always. But in your retirement years, if you have money that you’re going to spend, now, what I refer to is now as the next one to two years, you take a heck of a lot less risk with that money than you do with money that you might not spend for the next 10, 15 years.
So having a plan for time is extremely important. Now, that’s the asset allocation section. We talked about the income section. The third pillar is the one that nobody addresses, and I will argue is probably far and away the most important, and that is you need to have a tax plan. We as Americans are very good at doing what we’re told.
And we have been told from the 1980s on to shove money in your 401k shove money in your IRAs, you’re going to be in a lower tax bracket when you retire. Well, guess what? You’re here. You’re at that retirement place. And we can’t control if you’re in a lower tax bracket or not. But what we’ve done is we’ve built up this giant pile of money that has to be taxed some way, somehow.
And we need to have a plan for how we’re going to spend that money down in the most tax advantageous way for you. And that is different for every single person. Now here’s the really complicated part. Those three pillars of cashflow, asset allocation and taxes. They don’t work in vacuums. They all work hand in hand with each other.
Your cashflow plan has to know what your asset allocation plan is doing. They all have to know what your tax plan is doing because by making a change in one, it impacts all the others. So you have to make sure you tie them all together. And by doing that, you can truly feel the most security possible for your retirement years.
You can truly feel that you are doing the absolute best. For passing money to the next generation, if that’s important to you. But those are the three pillars that every single retiree needs to have, and they are very different from the years that you were working.
I hope you found some value out of the video you just watched. And if you know somebody else that could find value out of it, please feel free to share it with them. If you’d like to talk further, or you’d like to pick our brain a little bit more, please feel free to book a 5 to 15 minute phone call with us using the link that you’ll find right below this video here.