Differences in Finances: Pre-retirement and Retirement

I am sometimes asked how our work differs as clients move from a period in which they are accumulating assets (pre-retirement savings) to a period in which they withdraw/distribute from their assets (retirement or financial independence). This becomes a critical question as individuals transition out of earning years and begin to implement their retirement plan. As a matter of fact, our tasks are very different in each case though our role remains the same. Our role is to provide financial guidance to help make the most of available assets given current realities and future goals.

To help you understand the various financial tasks that occur in these two distinct financial planning periods, I’ve outlined some of the major tasks that we perform in pre-retirement (accumulation phase) and in retirement (distribution phase).

During the accumulation period, our focus is to encourage you to integrate finances with all major decisions. We work with you to save as much as possible using tools or techniques that we know will likely be successful in your situation and come up with ways that work better for you. We also support you to define spending that is meaningful because we want spending to be sustainable and satisfying later in life. Annually, we help set spending and savings goals and ask you to hold yourself accountable because with accountability comes financial self-confidence. We also want you to experience the ups and downs of portfolio behavior over a significant period so that overtime you will learn to relinquish unproductive human emotions that are associated with daily monitoring and fretting over your portfolio total (which feeds fear and greed). We want you to internalize that what really matters is that the portfolio delivers as expected to meet your goals. It is therefore important that during accumulation (when you are not dependent on the portfolio), you can confirm that the returns used to create your financial plan are attainable by the average return of your own portfolio (not a model or generic return). Overall, we want you to identify how you can best work with finances and gain confidence in your own ability to make financial decisions regardless of the obstacles.

During retirement we are more involved with your cash flow management as we help you transition to financial independence by implementing your financial plan. This requires providing the needed cash flow from your accumulated portfolio. In retirement we annually setup monthly cash-flow distributions (or an annual lump sum distribution) from the portfolio and we internally estimate the tax liability so that we have the best after tax result for each distribution. We find that tax planning also helps prevent unexpected increases in future Medicare premiums, helps make Roth conversion decisions, and helps decide on the best timing for Social Security benefits. RMD (Required Minimum Distributions which begin at age 72) are also calculated and implemented based on what is best for your overall finances. We may recommend QCD (Qualified Charitable Distributions, only for those at age 70.5) or DAF (Donor Advised Funds which are available to anyone who wants to make significant or regular charitable donations) in some cases. Finally, we serve as your financial resource or partner to support you during major financial decisions.

Let us know if you have different questions or want more details on what is currently most important in your life, regardless of whether you are in pre-retirement or already enjoying your well-earned financial independence.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

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