If you are a senior executive, you probably know all too well that the hours you spend fulfilling your corporate responsibilities don’t leave much time for personal financial planning. With the help of your financial advisor and some advance planning, you could set the stage for a financially secure rest-of-your-life.
A key issue? Deciding when to retire. Ask your financial advisor about a comprehensive cash flow analysis that incorporates all of your assets, including retirement income and projected expenses like medical insurance costs, charitable gifts, vacations, etc. “The information contained in this spread sheet helps provide the foundation for all of your retirement planning,” says Colleen Betzler, principal, chief operating officer, and senior financial advisor at Brinton Eaton, an SEC-registered investment advisory firm in Madison, New Jersey. “It’s your financial advisor’s job is to review the cash flow and let you know whether you are in good shape to retire when you want to.” Below are some of the issues the two of you should discuss:
· Determine a realistic spending plan for when you are no longer working. What are you spending now versus what you expect to spend in retirement? Initially, many people actually spend more after they retire. You may have a lot of extra time to travel and indulge in leisurely pursuits, some of which may be quite expensive or perhaps previously paid for by the company, e.g., country club membership. It should all be documented as part of the cash flow analysis.
· Plan for future health care costs. If you are retiring before age 65, you may have to foot the bill for additional insurance costs. Although Medicare kicks in at 65, executives still need a supplemental plan. “Sometimes companies will pay for it; it usually depends on the executive’s tenure,” explains Betzler. “Some firms grant a set amount toward an executive’s benefits and when that is exhausted, he or she can participate in the plan at their own expense.” Whatever your company’s policy, factor it in to your plan.
· Assess your children’s needs before you retire. Discuss education expenses, including any post-graduate costs that you may be assuming. ”Generally, it’s a good idea to retire after all of your children’s educational expenses are met, but that depends on your particular situation,” says Betzler.
· Review your pension plan and understand all of its options. Different plans have different features. If yours has a lump sum or annuity, for example, your financial advisor can run several different scenarios in order to help you decide how to choose. Says Betzler, “A pension is not going to increase with inflation and if you die an untimely death and have a single life annuity, your family could wind up with zero. Conversely, if you elect a lump sum, it could grow to a significant sum, market conditions permitting. It all depends on your risk tolerance, tax profile, and other personal factors.”
· Pay attention to your annual compensation deferral. A deferred compensation plan is a non-qualified plan under which you can elect to defer the receipt –and therefore the taxability – of a portion of your current salary and/or bonus to a future period, such as the start of retirement. In comparing the overall benefit of deferred compensation to receiving the income as you earn it, consider the stability of the company and your tax brackets now and in the future. For example, do you anticipate that your income tax rate will decrease in later years? Also, be sure to weigh the risks of deferral against the tax benefits as you determine when and how much to defer and the optimal timing of the payout.
· Contribute the maximum to your 401(k) plan. The income tax deferral, the tax-sheltered growth, and the ability to obtain matching contributions from your employer combine to make 401(k) plans typically one of the most attractive retirement savings strategies for executives. Employees may also be able to make after-tax contributions (subject to IRS limits) to a 401(k) plan – your financial advisor can provide counsel.
About Brinton Eaton
Based in Madison, NJ, Brinton Eaton is an SEC-registered investment advisory firm with a long history of serving individuals and their families across multiple generations. The firm helps its clients protect, grow, administer, and ultimately transfer their legacy of wealth through a full range of integrated services, including financial/tax/estate/