In today’s podcast, I want to share a brand-new tool we’ve created to help you evaluate whether you’re on track for retirement. Many people think retirement planning comes down to a single number: How much have I saved? But that’s only part of the picture.
There are actually four key areas you need to understand as you prepare for retirement. In today’s episode, we’re going to explore each of them and explain why they matter.
Try our new retirement assessment tool at SoundRetirementScore.com
We’re also hosting a special webinar on Social Security and how to integrate it into your retirement plan. If you’d like to attend and see how we help our clients determine the right time to claim Social Security benefits, simply visit the show notes and click the webinar registration link.
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477 – Sound Retirement Score
Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement Now, here is your host, Jason Parker
Jason Parker: America, welcome back to another round of Sound Retirement Radio.
You’re listening to episode number four hundred and seventy-seven. The title is Sound Retirement Score. In today’s podcast, I wanna share with you a brand-new tool that we’ve created to help you evaluate whether you’re on track for retirement. Many people think retirement planning comes down to a single number: how much have I saved?
But that’s only part of the picture. There are actually four key areas you need to understand as you prepare for retirement, and in today’s episode, we’re gonna explore each of them, and I’m gonna explain why they matter. But before we get started, let’s start out by renewing our minds. This verse comes to us from Ephesians chapter two, verse six.
“And God raised us up with Christ and seated us with him in the heavenly realms in Christ Jesus.” I’ve been spending a lot of time reflecting on what it means to be raised up with Christ and to be in Christ. I’d encourage you to spend some time thinking about it as well, and once you’ve had an opportunity to reflect on it, I’d love to hear your thoughts.
Send me an email and let me know what this verse means to you. Now, here’s something fun to share with your family and grandkids. Just remember, if you share these jokes, I take no responsibility for the response. Why is the ice cream truck driver always so calm? Because they know how to chill out. Why can elephants swim whenever they want?
Because they always have their trunks with them.
As we get into today’s episode, I’m excited to introduce a brand-new free assessment that we’ve created. If you’re within five years of retirement, you’ve probably asked yourself, “Am I really on track?” When our retirement budget calculator was available to the public, one piece of feedback that I received consistently was that it was very comprehensive.
It allowed people to build an incredibly detailed retirement plan, but it also required a significant amount of time and financial information and financial acumen to complete. Today, we make that software available exclusively through our advisors as part of our planning process, but this new assessment’s different.
It’s free, simple to use, and designed to be intuitive. The original idea I had was to create something that felt like a report card. Most of us remember getting report cards in school, so the concept would be familiar and easy to understand. Initially, we started out assigning a traditional letter grade.
Afterwards, I decided to use a five-star rating system. I just wasn’t comfortable giving somebody a D or an F simply because they hadn’t yet had the opportunity to build a retirement plan. So instead, a one-star rating highlights an area that may deserve more attention, while a five-star rating indicates an area where you’re doing really well based on the information you provide.
One of the things I’m most excited about is this assessment is powered by artificial intelligence, so rather than asking everyone the same exact questions, it creates a conversation that adapts as you go, asking follow-up questions designed to better understand your unique retirement situation. The goal isn’t to provide personalized financial advice or replace a comprehensive retirement plan.
Instead, it’s designed to help you think through some of the most important issues and identify areas that may deserve a closer look. The name of this new tool is soundretirementscore.com. I’ll include a link in the show notes. The assessment will grade you in the four areas that I’m about to discuss.
After you’ve had a chance to give it a try, be sure to email me. I’d like to hear what you think. Okay, so the first area that you need to think about as you prepare for retirement is income. You hear me say all the time that retirement is all about cash flow. Knowing where your retirement income will come from is one of the most important steps in building a successful retirement plan.
For many people, that begins with identifying sources of guaranteed income, such as pensions and Social Security benefits. From there, the next step is developing a strategy for when and how to claim Social Security. One of the biggest misconceptions about Social Security is that there’s a single best claiming strategy.
In reality, the right strategy depends on your goals and your personal circumstances. Are you trying to maximize the total amount of Social Security benefits your family receives over two lifetimes? Is your goal to maximize the amount of wealth you leave behind? Or are you more focused on creating the most tax-efficient retirement income strategy?
Depending on what’s most important to you is going to drive which strategy we recommend. Your health matters, your family history of longevity matters, whether leaving an inheritance is important to you matters. All of these factors can influence the strategy that’s most appropriate for your situation.
That’s why income planning isn’t just about knowing how much you’ll receive. It’s about understanding how all these pieces fit together so that your income strategy aligns with what’s most important to you. The second number that we need to understand is your net worth. Your net worth is simply the value of everything you own minus everything you owe.
Once we know your net worth, the next step is to identify how much of it is liquid. These are the assets that can help support your retirement spending, such as IRAs and 401s and brokerage accounts and money market funds, bank accounts, and other investments. These liquid assets are what you use to supplement your guaranteed sources of income, such as Social Security and pensions.
Once we know what resources you have available, that’s when you discover retirement planning isn’t just about how much you’ve saved. It’s about making hundreds of decisions over the course of your retirement, and many of those decisions can have a meaningful impact on your long-term success. Which account should you withdraw from first?
Taxable accounts, IRAs, Roth IRAs? Or should you withdraw proportionally from several of the accounts at the same time? How might that affect your taxes over your lifetime? How much investment risk are you comfortable taking? More importantly, how much risk does your retirement plan actually require? What rate of return does your plan assume?
Are those assumptions realistic given the amount of risk you’re willing to take? What investment philosophy is gonna guide your decisions? Will you invest only in US companies, or will you diversify internationally? Will you include emerging markets? Will you own bonds? If so, what types of bonds and in what proportions?
Will you invest in individual stocks or broadly diversified funds? How will you know if you’re truly diversified? Are you gonna be comfortable just owning the S&P 500 index fund, knowing that a significant portion of that index is concentrated in just a relatively small number of companies? Or will you diversify across large, mid, and small cap companies as well as international markets?
Will you tilt your portfolio towards factors such as small cap, value, or profitability, which academic research has associated with higher expected returns over long periods, but also recognizing that they can underperform for extended periods of time? How much are you paying in investment expenses and advisory fees?
Are those fees reasonable for the value you’re receiving? Low fees are important, but they aren’t the only consideration. The real objective is maximizing the value you receive after costs while staying disciplined with a sound investment strategy. How often should you rebalance your portfolio? Will you rebalance on a schedule such as quarterly or annually?
Or will you rebalance only after your portfolio drifts beyond predetermined thresholds? When markets decline by twenty, thirty, or even forty percent, will you have the discipline to follow your plan? Rebalancing almost never feels good because it requires selling investments that have recently done well and buying those that haven’t, and there’s always a reason to delay.
And that’s just scratching the surface. Every one of those decisions affects every other decision, which is why retirement planning is about so much more than simply picking investments. Finally, think about who’s gonna manage all of this. If you’re married, who’s responsible for overseeing the investments?
If that person experiences a serious health event or cognitive decline, does the other spouse know what to do? Would they know where the accounts are held? Would they know who to call? One of the greatest gifts that you can give your family isn’t just a well-built portfolio, it’s a well-understood plan.
You don’t want your surviving spouse trying to find a financial advisor while they’re grieving or navigating a difficult season of life. You want trusted relationships already in place and a plan that everyone understands long before it’s ever needed. The third number that you need to understand is your spending.
How much do you actually spend each month? More importantly, how much do you expect to spend in retirement? It’s not just about your regular monthly expenses. What about one-time expenses you’re gonna face along the way, like putting on a new roof or replacing windows or remodeling the kitchen or bathroom or buying another car, helping with a grandchild’s education?
These are all expenses that should be part of your retirement plan. Which expenses are essential and which ones are discretionary? Which expenses will eventually disappear, like your mortgage payment? Recognizing that things like property taxes and homeowners insurance are going to continue for the rest of your life.
How should you account for inflation? Will every expense increase at the same rate? Probably not. Healthcare costs, Medicare premiums, long-term care expenses may increase differently than your everyday living expenses. What inflation assumptions should you use? Should you focus on the recent years of higher inflation or the longer-term historical averages?
Will your spending change throughout retirement? Will you travel more during your early years of retirement when you’re healthy and active, and then naturally spend less as you get older? Or do you expect your spending to remain relatively consistent? Will you follow a more traditional spending pattern, a front-loaded spending strategy, or something like the retirement spending smile, where spending is typically higher in the early years, lower in the middle years, and then increases again later in life because of healthcare and long-term care costs?
What’s your ultimate goal? What’s the purpose of the money? Are you trying to spend your assets throughout your lifetime so that there’s little or none remaining? Or is leaving an inheritance to your children, grandchildren, your church, or favorite charity an important part of your plan? The answer to that question can dramatically change how much you can safely spend each year.
Your spending plan is one of the most important numbers in retirement because it influences almost every other decision you’re going to make. It affects how much money you need to save, when you can retire, how much investment risk you can take, when to claim Social Security, and ultimately, whether you can retire with confidence.
Finally, how will you prepare for the unexpected? What if one of your children loses their job and needs financial help? Or, or what if you want to help pay for a grandchild’s education? What if a major health event affects you or someone you love? Retirement rarely unfolds exactly as planned. It’s not going to unfold like the spreadsheet, so building flexibility into your spending plan is just as important as building the plan itself.
And the fourth and final number that you really need to understand is taxes. Many people have accumulated a significant portion of their retirement savings in tax-deferred accounts such as traditional IRAs and 401s. Those contributions and their earnings have generally not been taxed. Some accounts may include after-tax contributions.
As you withdraw money from those accounts in retirement, those withdrawals are generally subject to ordinary income tax. But retirement tax planning is about so much more than simply paying income taxes. How much of your Social Security benefits will be taxable? Will your withdrawals affect your Medicare Part B or Part D premiums because of IRMAA rules?
Could they impact your eligibility for tax deductions or credits that are available under the current law? Could they cause your long-term capital gains to be taxed at a higher rate or trigger the net investment income tax? Could larger withdrawals push you into a higher marginal tax bracket? When tax rates are relatively low, should you consider Roth conversions?
How will your tax picture change once the required minimum distributions begin? What happens when one spouse passes away and a married filing jointly tax return becomes a single tax return? Understanding how taxes change over time can have a significant impact on the amount of after-tax income you have available throughout retirement.
Taxes also play an important role in the legacy you leave behind The types of accounts you leave to your beneficiaries matter. Roth IRAs are amazing. They can be extremely tax efficient because qualified distributions remain tax-free. And just remember that non-spouse beneficiaries are generally required to distribute inherited Roth assets within ten years under current tax law.
Traditional IRAs are also generally subject to the ten-year distribution rule for many beneficiaries, but those distributions are typically taxable as ordinary income. Taxable brokerage accounts often receive a step-up in basis at death under current law, which can make them a tax-efficient asset to pass on to heirs.
Health savings accounts are different. While a surviving spouse can generally inherit an HSA without immediate tax consequences, non-spouse beneficiaries generally recognize the account’s value as taxable income in the year of inheritance. For families with charitable goals or larger estates, tax planning may also include qualified charitable distributions, annual gifting strategies, education savings accounts such as five twenty-nine plans, maybe UTMA or UGMA funding, or other techniques designed to transfer wealth efficiently to future generations and help you reduce the amount of money you’re gonna pay in estate taxes, either federal or state estate taxes.
The right strategy depends on your goals, your family, and the tax laws in effect at the time. Taxes influence almost every financial decision you’re gonna make in retirement. They affect your income strategy, your withdrawal strategy, your investment strategy, your spending strategy, and even the legacy you leave behind.
And that’s why tax planning is different than tax preparation. Tax preparation is something you do once a year, and it’s looking backwards. Tax planning is about looking forwards to say, “What changes can I make today that are gonna help me pay less money in taxes over my lifetime?” When you step back and you look at those four areas, income, net worth, spending, and taxes, you start to see that retirement planning is about so much more than asking, “Have I saved enough?”
Or, “Am I diversified?” Or, “What’s my asset allocation?” Or, “Which mutual fund should I buy?” Or, “Which stock should I own?” Those four numbers are all interconnected. A decision you make in one area can have a ripple effect across the other three areas. That’s exactly why I created the Sound Retirement Score.
It’s designed to help you evaluate these four areas and identify topics or planning areas that may warrant further discussion. It’s not intended to replace a comprehensive retirement plan or personalized financial advice. Instead, it’s designed to help you ask better questions, gain greater clarity, and a better understanding of where you stand today as you prepare for retirement.
Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links, and resources from today’s show, visit soundretirementplanning.com. If you enjoy the podcast, share it with a friend and give us a five-star review. Ready to kickstart your retirement planning? Head over to retirementbudgetcalculator.com.
Need assistance with investment management? Explore our services at parker-financial.net. Information and opinions expressed here are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products.
Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance-related discussions are subject to the claims-paying ability of the company.
Investing involves risk. Jason Parker is the president of Parker Financial, LLC, an independent fee-based wealth management firm located at 9230 Bayshore Drive Northwest, Suite 201, Silverdale, Washington. For additional information, call 360-337-2701 or visit us online at soundretirementplanning.com.
