Financial Planning For Leaders Nearing Retirement


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A significant percentage of university executives and senior faculty members are set to retire within the next 10 years. If you are among them, deciding when to retire can be difficult. It can involve a mix of emotions associated with leaving colleagues and your chosen profession that make it all too easy to delay making a decision. But the prudent course is to start your retirement planning process months —or even better, a year— in advance of your retirement date. This will give you the time you need to prioritize and make smart decisions in a methodical, well-reasoned way.

Consider the fact that most senior college and university academic and administrative officers have been employed over the course of their careers in senior-level positions at more than one institution. They typically have accumulated assets within qualified and non-qualified retirement plans with both their current and former institutions. And some have participated on outside boards. These individuals, their accountants, and financial planners often need time to fully understand the differences in plan rules and to evaluate the array of possible retirement income strategies and the resulting income tax implications.

This article suggests a retirement planning process for academic and administrative officers to follow as they move toward retirement.

Key Issues to Consider as You Approach Retirement

Consideration 1: Determine Your Retirement Income Needs
When you choose to retire will determine available payout options and will impact the amount of income you can receive during your retirement years. Determining a retirement date that is right for you also entails grappling with a series of financial considerations and issues such as personal health, longer life expectancies, asset accumulations, inflation and other income sources.

An appropriate first step is to perform a retirement needs analysis. This will allow you to track your annual savings rate and determine whether you can live within your means to and through retirement. This analysis should include:

Projected Monthly Income:

  • Social Security
  • Pension income/Annuity income
  • Retirement plan and IRA distributions
  • Interest and dividend payouts
  • Rental income
  • Other: royalties, consulting fees

Projected Fixed Expenses:

  • Food
  • Mortgage, housing, other installments
  • Utilities, gas, transportation
  • Insurance
  • Health care
  • Taxes
  • Other

Projected Discretionary Expenses:

  • Dining out, entertainment
  • Travel, recreation
  • Gifting, charity
  • Other

Projected Monthly Surplus or Gap

For many leaders, projecting monthly income in retirement is the most complicated part of the analysis. Determining when and how to take Social Security income or distributions from retirement plan and IRA assets is not as simple as it may once have been. For instance, Americans are living longer today than they did a generation ago. In fact, if you turn 65 today there’s an 82% probability you will live to reach age 80 and a 30% probability you will reach 95. That means your strategy for retirement income may need to provide for you and your loved ones for decades after you retire.

For a more thorough assessment of your year-to-year retirement income needs, consider working with a financial professional who can prepare a financial assessment and cash-flow analysis projecting such amounts through your life expectancy.

Understanding qualified plan and IRA rules and payout options. With the mobility of many in higher education, many executives and senior faculty members have retirement plan accumulations in both the current employer’s plan(s) and in their previous employers’ plans. The rules that pertain to each plan type can vary. As you approach retirement, a primary planning goal should be to better understand your specific plan rules and, in particular, your payout options under each plan.
Affected plans include your IRA, 401(a), 401(k), 403(b) and 457(b) plans (traditional and Roth). With the exception of Roth IRAs, all these plans are typically income tax-deferred retirement accounts funded with pre-tax dollars. Funds in traditional accounts will compound tax-deferred until distribution. Distributions are typically taxed as ordinary income, and withdrawals made before age 59½ are generally subject to an additional 10% penalty tax.

Once you retire, these plan types typically offer one or more of the following distribution options:

  • Income only for ages 55 to 69½
  • Fixed period payout over a term of years
  • Lump-sum benefit
  • One-life annuity option
  • Two-life annuity option
  • Minimum distribution option

Your response to the following questions can help you assess your options and their impact.

  • Should I annuitize non-Roth accounts? Most university executives can annuitize a portion (or even all) of their existing employer plan accumulations. This payment option is offered through most university plans at low cost, and can be free of expenses such as sales loads and surrender charges. The annuity (either fixed or variable) can provide tax-deferred accumulation and can guarantee a stream of income for as long as you live. A common strategy is to annuitize enough plan assets to ensure that you meet your family’s fixed expenses on a regular basis.
  • From a cash-flow perspective, what is the best strategy for withdrawing remaining non-Roth plan accumulations? While you need to decide how and when to receive payouts from your traditional and Roth retirement plans and IRAs, this is not an all-or-nothing decision. It is possible to make partial elections or even to make different elections on a plan-by-plan basis. For example, you might delay taking Social Security payments and instead take periodic withdrawals from retirement plans and IRAs to supplement your income while under age 70. This allows your Social Security retirement benefit amount to continue to grow and may also make good sense from an income tax-planning perspective.
  • Are there benefits to qualified plan and IRA consolidation? As you contemplate taking required minimum distributions, consider if consolidating plan assets into a single plan (or fewer plans) can help you efficiently monitor asset allocation and investment risks and returns during your retirement years. Consolidating can simplify recordkeeping and may even allow you to avoid duplicative expenses. Before consolidating, consider three factors: (1.) Will your 403(b) grandfathered amounts lose their special status? (2.) Will rolling IRA assets into a retirement plan provide state income tax relief? (3.) If you plan to work beyond age 70 ½ , will consolidating to your current employer’s plan enable you to further defer required minimum distributions on all accumulations inside your current plan until you retire? Before consolidating, you should also consider other factors such as fees, expenses and other costs, as well as differences among your accounts.

Consideration 2: Determine Your Retirement Income Strategy
Once you determine that you can reasonably expect a retirement surplus or gap, you can begin to think about the implications. If in a surplus position, your retirement income decisions become less of a concern in terms of meeting your current lifestyle needs, and your focus may turn to investment planning considerations. However, if you have an anticipated gap between your guaranteed retirement income sources and your desired fixed and discretionary expenses, you must determine how you will meet that gap.

Consideration 3: Implement Your Retirement Income Strategy
Deciding how best to distribute your assets requires analyzing your overall financial condition, your health and your tolerance for risk. Your financial, tax and legal advisors can help you identify gaps in your financial plan and equip you with the information needed to implement an appropriate plan for you and your family.

Consideration 4: Evaluate Your Insurance Coverage
As you prepare for the financial changes of retirement, it’s a good time to work with your insurance specialists to evaluate the strength of your existing policies and to explore how insurance fits into your longer-term plans.

For existing health insurance plans, it might be possible to achieve cost savings by increasing deductibles or by converting the coverage to another type. You might also need to consider the purchase of a supplemental policy for coverage until Medicare begins. For life insurance, this is a good time to review how your policies may provide liquidity to your estate, provide for loved ones, or simply serve as a vehicle for tax-deferred build-up of the cash value.

Consideration 5: Consider What Happens Upon Your Incapacity or Death
A growing number of people now consider estate planning an essential part of their financial plans. It is easy to forget that the contractual provisions relating to your retirement plans and IRAs are as important as your Will or trust. If you are incapacitated, your loved ones do not have an automatic right to make plan decisions. You need to formally appoint a loved one to act as your agent under a Durable Power of Attorney so that the agent can make plan withdrawals, investment decisions, and can rebalance the accounts on your behalf. And if you die, it is important that your retirement plan, IRA and life insurance beneficiary designation forms be precisely coordinated with your Will or trust provisions. Otherwise, the assets might be distributed in a manner that is contrary to your wishes.

Consideration 6: Monitor Your Progress
Because your financial situation and income needs will likely change over time as well, you may need to adjust your goals, reassess your risk tolerance, rebalance your assets, or implement a new income strategy. Be sure to review your plan regularly to determine any material changes in your situation and whether your plan is still on track to meet your retirement goals.

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Provided with permission from HR Horizons, an online publication by the National Association of College and University Business Officers. Copyright 2011

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