Pre-retirement, couples have plenty to consider

February 01, 2013|By Janet Kidd Stewart

Bruce and Loretto Cowhig began their retirement journey last year, when Bruce, 65, concluded a 30-year career in nonprofit advocacy work.

Loretto, 64, is working, but the Kankakee, Ill., couple are thinking hard about their financial strategy for the years ahead.

They've saved diligently through the years, but like a lot of retirees, they're wondering what their best strategy will be for timing the start of their Social Security benefits and for drawing annual income off their portfolio for living expenses.

They also know they haven't updated their wills in years and wonder how to streamline their financial affairs so their adult children can manage the estate.

"I don't want to set up our kids with a confusing or arduous situation," Bruce wrote in a letter to this column. "They are each raising families (out of state) and resolving this at a distance could be difficult."

The couple are actually in good shape compared with many of their baby boom counterparts, said Kathleen Longo, senior principal with Accredited Investors in Edina, Minn.

Social Security benefits will cover two-thirds of their projected annual retirement expenses, and withdrawals from their nest egg can cover the rest, Longo said after reviewing the couple's financial picture.

There isn't a lot of room for error, so they'll need to keep a close eye on their expenses and their portfolio, Longo said.

Her firm often recommends that retired clients keep a two-year cash reserve to help manage volatility, taking living expenses from that pool and replenishing it when markets are strong.

As for a withdrawal strategy, the firm typically takes a percentage — often about 5 percent — of a portfolio's three-year average values.

This strategy is a little different than the rule-of-thumb process of starting with a 4 percent withdrawal the first year of retirement and adjusting that figure for inflation in subsequent years. Longo says the three-year average helps keep withdrawals in check if market returns are subpar. That, plus the two-year cash reserve, makes the slightly higher 5 percent withdrawal sustainable, she said.

As for those Social Security benefits, she said, the couple might consider having Bruce, the higher earner, delay collecting benefits on his work record until age 70, which will boost his benefits with delayed retirement credits. Loretto, meanwhile, can file for benefits on her own work record at full retirement age, with Bruce taking spousal benefits while he delays his own benefits to age 70, Longo said.

To simplify their financial life for retirement and eventually for estate-planning purposes, Bruce can roll his workplace savings account into his individual retirement account, and Loretto can do the same when she retires, the planner said.

The couple can most likely handle their estate-planning goals with updated wills, health care directives and powers of attorney instead of more complex trusts, she said, but they should revisit those documents annually to make sure they stay current.

As for dividing assets among heirs, Longo said, consolidating the workplace plans into IRAs and keeping them and all their other accounts at one or two institutions will help streamline the process.

Your will can spell out that your heirs will share equally in your estate, for example, or whether the spouse or children of those heirs can inherit their share if the heir is deceased, Longo said.

"Usually, couples want everything split evenly among heirs," she said, noting that parents who try to help one sibling more than another (for whatever reason) often end up regretting that move or sparking bitter feelings that live on. "Where the fights typically start is over silly personal property issues."

So, when in doubt, she said, overcommunicate your wishes about those family heirlooms in your legal documents and directly with loved ones.

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