Choose a planner that put his/her attention on tax planning

Remember my beliefs.  The first one is that retirement savings and planning depends on you, you, and you (as opposed to the government, your employer, and you).  The second one is that you’ve got to keep your eye on market volatility, inflation/deflation (even if only medical expenses inflation), and TAXES.  Taxes could potentially be your biggest expense in retirement.  If you’re not diversifying your investments to provide tax-free income in retirement, you’re missing out on an opportunity to save on that expense and therefore have more money to spend in retirement.

Here are the Cliff Notes (remember Cliff Notes?):

1. As investors accumulate retirement assets, they should put money in three buckets: one that’s tax-deferred, one that is tax-free, and one that is taxable for savings and investments outside tax-advantaged accounts.
    
2. Investors often can stretch their retirement dollars further if they have the flexibility to manage distributions in a tax-efficient way.  This is a process that must begin in the accumulation phase.
    
3. Directing money to tax-free accounts can be the most challenging and needs to start early.
    
4. In the example given, because the couple was able to draw money from a variety of sources, the couple had $120K in retirement income and was able to keep an effective 7.7% tax rate and also realized these potential benefits: they will qualify for lower Medicare Part B premiums, potentially qualify for the lower capital gains tax, and improve their ability to deduct health insurance and/or long-term care premiums.
    
5. If cash is king, flexibility is queen:  A tax-diversified retirement portfolio gives investors more flexibility to deal with unknowns like changing tax rates and the potential means testing for Social Security and Medicare benefits. 

See, I’m not the only one who says these things.

Finding the right retirement income sources

What about the government?  Will Social Security income go away?  Hard to say.  Social Security income is a huge political football that no one wants to drop or be accused of ending.  As workers (a large electorate), we pay into the system and would like to see money out of the system.  Yet, the Social Security statement itself discloses that it predicts to pay on 78% of benefits in 2037 (http://www.ssa.gov/mystatement/currentstatement.pdf).  Even my clients in their late 50s don’t think they’ll get a dime of Social Security.  Here’s my take:  If it’s there, I want my clients to get their share and have that share be taxed as little as possible.  That takes some planning now.

What about employers?  Will employer pensions ever come back into vogue?  Unlikely.  They’re expensive and complicated to manage.  Employers faced with rising costs (medical insurance being high on that list) are looking to give retirement income benefits as cheaply as possible.  In years past that has meant the 401k, which for most highly compensated employees and business owners is inadequate.  The 401k was never intended to be the sole retirement benefit. It was designed to supplement the pension offered.  Even if my clients fund a 401k, we have to find alternate investment vehicles.

What about personal savings?  No one feels they’re saving enough.  That might be true.  Only to make it worse, no one feels like they made any money with their investments in the last 10 years.  There are many solutions here besides winning the lottery (and, by the way, if this is your solution, remember that you have to play to win – it’s always about the follow-through).  One of the tricks, I believe, is to find retirement income sources that provide tax-free income.  No, not the Roth IRA which most Bay Area families don’t quality to fund, and even if they did, they’d only be able to put away $5K.  Business owners (especially of C corporations), in particular, have potentially one of the best strategies to make this happen.  The other trick is to find non-stock market related investments.

The government might create a universal retirement funding plan.  You might win the lottery.  Or, you might just explore some of your personal savings options.