Knowledge Center
Read and watch the latest insights from Marcio.
Knowledge Center
Read and watch the latest insights from Marcio.

Three smart strategies for a confident retirement

Three smart strategies for a confident retirement

Are you worried about all the things that can go wrong in retirement? Feeling confident about your retirement today is more complex than ever. Let's look at four areas of concern about retirement: longevity, markets, inflation, and uncertainty.

Longevity – What if you live longer than your money lasts? Educated people with access to health care are living longer than ever. This trend is likely to intensify with medical advances. The fastest-growing population is people over 100, and we all need to plan for this.

Market – What if the market crashes and wipes out your retirement savings? Today, the stock market is near an all-time high, and interest rates are historically low. If a retiree reacts to a dropping market by selling investments, they lock in their losses and damage their portfolio.

Inflation – What if costs rise so fast that your income feels smaller every year? Inflation creates the loss of purchasing power of your money. In recent decades inflation has not been high, but there are fears it will rise again with the large federal programs to resolve financial crises.

Uncertainty – What if we face new situations that we didn’t plan for? “History doesn’t repeat itself, but it often rhymes,” as Mark Twain famously said. The coronavirus pandemic brought this into focus for many of us as we realized we face risks and problems that may seem like they are out of a history book! Many foresee climate change, resource scarcity, and other global factors impacting us all in unpredictable ways.

So, are what are three useful strategies you should set up before retiring:


  1. Maximize Guarantees – Social Security, Pensions, Annuities, etc.
  2. Buckets of Money – Short term, Medium Term, Long Term.
  3. Tax Strategies – IRA distribution management, Roth Conversions, Charitable Giving, Cash Value Life Insurance, Living abroad or in a lower-tax state

Maximize Guarantees
Social Security is an essential benefit for nearly every American, and all retirees should think through their social security claiming strategy. You don’t have to start Social Security when you retire! If you delay the benefit, your income increases by 8% per year until age 70 (the maximum age you can delay). For most healthy retirees, waiting for social security is a good move, but there are individual reasons you and your advisor might make a different choice.

Also, the accumulation of social security credits should be considered carefully throughout your working years - especially for the small business owner who has a certain measure of flexibility about how much self-employment income (vs profit) to report. Reporting a consistently low income will negatively affect later Social Security benefits.

Other guaranteed income streams are the civilian federal employee (FERS) pension and the uniformed service members (Military) pension and some corporate and union pensions. Sometimes working a couple of extra years can earn substantially more pension income, so planning ahead with complete pension information is essential.

Annuities are insurance products that allow an individual to guarantee an income stream. The guarantee comes from the insurance company, ideally a highly rated and strong company with favorable terms for the annuity-holder. Annuities are a great way to supplement other guaranteed income to provide a secure base of retirement income.

Buckets of Money

The Buckets of Money strategy balances the conflicting needs for liquidity, stability, and growth in a retiree’s investment portfolio. It divides the retirement portfolio into three buckets.

The first bucket is the “Money Now” bucket (for income in the upcoming 3 years), and it is invested in stable instruments like money market funds, CDs, short-duration bonds, and the G Fund of the TSP. We set a monthly “income check” to come from this account into your checking account!

The second bucket is the “Money Soon” bucket (income 4 to 8 years from now), and it is invested in a portfolio of moderate growth/moderate risk investments like bond funds, conservative real estate funds, balanced funds, and specialty credit funds. These investments are expected to have more fluctuation than the ones in the “Money Now” bucket and be more likely to maintain real purchasing power and potentially generate a modest real return.

The third bucket is the “Money Later” bucket, for the more distant time frames. It should be invested in stocks or stock mutual funds – alone or inside a fee-based variable annuity featuring income guarantees. The existence of this higher risk bucket deals with the challenge of protecting long-term money against inflation since stocks are a natural long-term inflation hedge.

These “buckets of money” are not static but are reviewed and managed by your advisor to provide the optimum balance for long-term income: Liquidity, stability, and growth. For example, as the growth bucket increases, periodic transfers would be made to keep the other two buckets at their optimum level so that the plan never gets out of balance.

Tax Strategies

When your career is starting, taxes are not usually a huge consideration. The more successful you are, the more important tax management becomes. If you are a diligent investor in your retirement plan for many decades, you can accidentally create a worse tax situation for yourself in retirement! This comes as a real surprise to many good savers when Required Minimum Distributions start at age 72.

Retirees can employ several strategies to help prevent excessive taxation in retirement:

  • Plan ahead with a balanced tax strategy that provides tax diversification
  • Live abroad or in a low-tax state like Florida
  • Use charitable giving strategies to get the most out of your charitable dollars
  • Seek financial options that have tax-free growth like Roth IRAs, Health Savings Accounts, and Cash Value Life insurance
  • Consider Roth conversions if you retire before you take Social Security or have another low-income period in your life

The analysis of whether a Roth conversion is the right move in a given year should be made by a qualified financial planner working closely with a qualified tax CPA. This analysis is particularly appropriate now because the personal income tax cuts of 2017 were temporary, and the old (and higher) tax brackets are scheduled to return in 2026. It would be very discouraging to pay a higher tax rate on your retirement distributions ten years from now than when you were working!

There are other strategies to pursue, and a comprehensive and individualized plan needs to be created. Among these different strategies, a retiree should consider the following:
-         Liquidity – cash on hand, liquid investments, home equity line of credit
-         Pay off the mortgage, refinance, or leave it?
-         Handling Investment Real Estate in Retirement
-         Long-term care – insurance or self-pay?
-         Estate planning, beneficiaries, charitable giving
-         Life insurance in retirement

As you can see, there is no one-size-fits-all retirement guidance, and the cost of professional advice is a lot less than the cost of mistakes!

Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.