When making your retirement decision, you likely get one chance to get it right. These type of situations are where checklists can shine. Understanding all your financial opportunities pre-retirement can make life-changing differences in your retirement journey. Which is why on today’s episode, we are giving you our beautifully detailed Pre-Retirement Checklist to help you make the best of your transition. Because the decisions you make now will have a lasting impact on when and how you can retire. This checklist provides you with a detailed step by step approach to giving you the tools to prepare for your best retirement.
“Good checklists...are precise. They are efficient, to the point, and easy to use even in the most difficult situations. They do not try to spell out everything--a checklist cannot fly a plane. Instead, they provide reminders of only the most critical and important steps--the ones that even the highly skilled professional using them could miss. Good checklists are, above all, practical.”
― Atul Gawande, The Checklist Manifesto
What Will Retirement Look Like?
Answering this question brings a smile to most people, as they secretly picture the time they'll have to do all the things they've put off. But the biggest secret is some of the biggest financial opportunities occur just before and a few years after retirement. Lowering taxes in your highest earning years, and maxing low tax brackets in the first few years of retirement helps you hold on to more of your hard-earned savings. With so many things to focus on during the retirement transition, maximizing all opportunities is difficult without reminders. Enter the pre-retirement checklist. With 60 items highlighted, you're sure to find something to look in to for your own situation. With a plan this detailed, you can be assured you will feel confidence in your retirement transition.
We are not built for discipline. We are built for novelty and excitement, not for careful attention to detail. Discipline is something we have to work at.”
― Atul Gawande, The Checklist Manifesto
How Much Can You Spend?
Surveys show when planning for retirement, a major concern is knowing how much you'll have to spend in retirement. Figuring out where income will come from is a significant part of retirement planning. Retirement income can come from social security, pensions, retirement savings, part-time work, and passive income. Knowing how you spend your money informs how much income you will need. Tracking 12 months of spending prior to retirement gives you a great start, but when forecasting you'll want to understand how your priorities will change throughout retirement. Taking time to work through the pre-retirement checklist helps spur thinking how spending may change. Taking a tour through the full pre-retirement checklist will help your achieve the most successful retirement for you and your family.
The Tax Diversification of Your Net Worth
Before you retire, taking inventory of assets and debts gives you meaningful feedback. You're now planning to start taking money out of all the accounts that you have nurtured and grown for so long. This actually may be challenging to watch as your savings begin to diminish. One of the more popular (and longest) sections of the pre-retirement checklist helps you understand how you can save more in taxes. Tax diversification helps structure your assets to be as tax efficient as possible.
Insurance may be the biggest question in retirement these days, especially health insurance. Planning to retire before you are eligible for Medicare is creating a conundrum of choices for pre-retirees. For many COBRA will be your choice for up to 18 months after you leave your job. However, if you've diversified your savings effectively, you could find cheaper health insurance on the federal exchange via a subsidy. This takes specific tax planning annually. Outside of health insurance, you may not have thought about long-term care insurance, but it's something you should consider with the rising costs of long-term care. Working with a financial advisor, allows you to model potential scenarios of extended skilled nursing situations providing feedback if you can self-insure or not.
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It's easy to stick with investments that are leaving all other assets in the dust. In fact, logic tells us because they're performing so well, we should buy more of it. While you're at it, shouldn't you go ahead and dump the lousy performers in your portfolio? These emotions are what makes investing so difficult. Additionally, when you diversify your investments, mediocrity is inevitable. Given the tear U.S. Stocks have been on, it's a good time to talk through the risks and benefits of diversifying away from areas that have been the top performers. Despite how cliche it's become at this point, the phrase "past performance is no guarantee of future results" is still a truth. Memories of previous bubbles seem like the distant past. Some of us don't want to believe and others don't want to miss out on gains any longer. Whatever the reason, it's inherently difficult to diversify away from seemingly never-ending profits. So in this episode, we discuss the answer to why you even want to bother diversifying with international and emerging market stocks and what the results could be going forward.
The U.S. stock market has enjoyed outstanding results over the past ten years, earning around 10.7% per year (S&P 500 with dividends through August 2018). With numbers that consistent, it's hard to find a reason to diversify with international equities when U.S. stocks are on such a hot streak. But we live in an interconnected world, our coffee, cars, electronics, are all created across the globe. While US stocks represent just 50% of global market values, 70-75% of Americans invest solely in U.S. stocks, influenced by home country bias which is common throughout the world. Furthermore, out of the last 20 calendar years through 2016, no country had the best-performing equity market for more than two years. As Howard Marks once said, "There’s little I’m certain of, but these things are true: cycles always prevail eventually."
Having diversified investments means there's always something you'll despise in your portfolio. This amplifies the fear of missing out on a high flying tech performer. Especially the past 10 years, where U.S. stocks outpaced foreign and emerging stocks by over 6% per year during that period, which is why it's a challenge to remember the Lost Decade from the 10 years prior (2000-2009). Investing often makes us shortsighted. Creating pressure that tempts us to pick winners when markets aren't going our way. Even if diversification feels mediocre, it increases the reliability of longer-term outcomes. Allowing you to have winners in all types of market cycles.
We highlight 4 major risks when dealing with international investments in this episode. Tariffs and trade wars have dominated the news cycles of late, but so far it's more talk than action. Equity markets often react to short-term noise based on overblown fears and exuberant hopes. Currency fluctuations will affect the value of your foreign returns as well. A rising dollar against other currencies will hurt foreign stocks. We also discuss economic and geopolitical risks in many areas of the world. Yes, there's always a reason to avoid investing in poorly performing areas, but valuations should be considered. We mention and link an article below discussing the historically high correlation of valuation metrics with 10 year future returns. So despite the risks, this research raises some interesting questions about the prospects for international and emerging stocks going forward. But this requires discipline and diversification. The type of discipline that you could question for years. Likely the same way most investors were questioning U.S. stocks prospects in 2009. We've all seen how that's turned out.