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3-2-1 Newsletter (6-4-2020)  Thumbnail

3-2-1 Newsletter (6-4-2020)

10-Minute Read

I can't believe it's already June! As we approach the midpoint of the year, we just wanted to thank you for your time. As a show of gratitude, here are three insights, two findings, and one action to help you gain insights to quell any uncertainty regarding your retirement.


 I. Habits, time, and patience 

If you have good habits, things that seem out of reach become reachable. Daily smart diet choices lead to improved health, weekly trips to the gym lead to increased fitness, and years of study lead to academic success. And in a retirement context, methodically planning, consistently saving, and prudently allocating resources is key to achieving retirement satisfaction. 

Whether seeking improved health, increased fitness, expanded knowledge, or retirement satisfaction-- habits are an essential piece of the retirement success puzzle. Habits make time your ally; from there, you need patience. 

Commitment to productive habits consistently leads to success no matter the goal.

II. Retirement satisfaction and market dependence

Many retirees plan to fund retirement through systematic withdrawals from an investment portfolio. This strategy can be beneficial when financial markets perform well; however, it has drawbacks that can undermine retirement security and satisfaction. 

The drawbacks take the form of poor market returns (market risk), outliving savings (longevity risk), and ordering of investment returns (sequence of returns risk). Poor market returns reduce portfolio values, decrease the ability to maintain a desired standard of living, and shorten the lifespan of assets available to last through retirement. Amplifying these risks are distributions taken early in retirement during a down market, which can deplete wealth rapidly and leave a much smaller remainder of the portfolio to benefit from any subsequent market recovery. These risks underscore the perils of a market-dependent retirement funding strategy and have many retirees searching for ways to increase security and boost satisfaction. 

Research affirms (see chart below) that retirees can increase security, boost satisfaction, and reduce risks by using more reliable sources of income such as annuities, pensions, and reverse mortgages. Those who annuitize (create a stream of reliable income) a portion of income experience higher levels of satisfaction across varying levels of health and wealth. 

Retirement isn’t just about having enough money. It’s also about feeling secure and satisfied. A market-dependent funding strategy comes with upside along with many downsides that could threaten security and erode satisfaction in retirement. No funding strategy is free of risks, but one based on more reliable income sources compared to one not can increase retirement satisfaction. And isn’t that what retirement is all about? 

III. Legal and tax issues that can derail your retirement

Unfortunately, legal and tax issues don’t stop at retirement. In most cases, they take on more importance. And if not properly handled, they can undermine the most secure retirements. In retirement, legal concerns around estate planning move front and center. From a tax standpoint, there are a slew of considerations, from creating tax-optimized distributions to subjecting other assets to additional tax and benefit costs. Knowing more about these issues can help prepare you for what you can face later in retirement. Here are a few legal and tax issues that can disrupt your retirement.

Tax issues

  • failing to satisfy the required minimum distribution rules from qualified plans and IRAs can result in a 50 percent excise tax

  • failing to convert taxable income to tax-free income can increase the tax burden later in retirement

  • ignoring tax bracket management can subject Social Security benefits to unnecessary tax and trigger increases to Medicare Part B and Part D premiums

Legal issues

  • Incompetency—planning for the possibility that you will not be able to make financial or healthcare decisions

  • Estate planning—putting the appropriate estate planning tools (trusts, wills, gifts, etc.) to use to meet legacy objectives, such as:

    • protecting a spouse

    • leaving assets to other heirs

    • meeting charitable goals



Professor, researcher, and author, Wade Pfau on the efficiency of annuities in retirement:

"We use insurance to protect against low-probability but costly events. In this case, an income annuity provides insurance against outliving assets and insufficient spending power later in life. Nonetheless, there is still an important benefit from income annuities, even for those who don’t make it long into retirement, especially those who are worried about outliving their assets. The benefit can be seen by comparing it to the alternative of basing retirement spending strictly on a systematic withdrawal strategy from an investment portfolio. To self-annuitize, a retiree must spend more conservatively to account for the small possibility of living to age ninety-five or beyond while also being hit with a poor sequence of market returns in early retirement. The income annuity supports a higher spending rate and standard of living than this from the outset. All income annuity participants, both the short-lived and long-lived, can enjoy a higher standard of living while they are alive than they would have otherwise felt comfortable with by taking equivalent amounts of distributions from their investments.”

Takeaway: Transferring versus self-insuring retirement risks to an insurance provider can reduce retirement costs because a provider can manage the associated risks more efficiently than you.

Source: Safety-First Retirement Planning

II. [Video] Planning for Retirement as a Small Business Owner

As a small business owner, you’re focused on the success of your business. But when it comes to retirement, it’s important to set yourself up for success. When you retire for good, you’ll need a solid income strategy in place. Here are four steps you should be taking to prepare for your retirement as a small business owner.


I. Know your retirement trade-offs.

Prudent retirement income planning begins with identifying and implementing the actions necessary to support the goals while protecting against risks that stand in the way of those goals. Undertaking the right actions consistently before and during retirement is crucial to your golden years. 

We’ll look at one action item to take and reveal a new one each week.

This week’s smart habit 

Retirement, like everything else, has trade-offs that require difficult choices. Thinking them through ahead of retirement can afford the time to prepare and explore alternatives properly. While each person will have specific trade-offs unique to their situation, here are a few common ones most retirees face. 

  1. Goal priority: income security vs. wealth accumulation

  2. Income strategy: investments vs. insurance + investments

  3. Spending flexibility: early retirement vs. late retirement

  4. Retirement life expectancy: average vs. extended

  5. Risk management: self-insure vs. insure


Have a Question? Want to chat about it?

Get In Touch

Until next week,

Mark Sharp, CFP® RICP® EA

Mark Sharp Retirement