Four questions your retirement plan should answer
Creating a retirement plan can be a daunting task. At Peterson Wealth Advisors, we use our propriety process, the Perennial Income Model™, which outlines three ‘building blocks’ to a retirement plan. Whether you use the Perennial Income Model or another type of retirement plan, these building blocks will make sure you are on the right track to a successful retirement.
The three building blocks to a retirement plan are income and investments, taxes, and legacy. If your plan is built on these three blocks you should have the necessary information to answer these crucial questions:
Do I have enough money to satisfy my income needs in retirement?
How do I invest my money to ensure this income lasts throughout retirement?
What can I do to protect my income from taxes?
How can I make sure my money goes to who I want it to go to when I want it to go to them?
If your retirement plan doesn’t give you the necessary information to answer those four questions, then it’s a poor plan and you should find something better. If it does, then you’re on the right track.
Block 1: Income and Investments
The income and investment block is the foundation to a retirement plan. Income and investments go hand in hand because how much income you can expect to have in retirement is determined in large part on how you invest your money.
The income portion of the block is where your different sources of retirement income – investments, social security, pensions, rentals, etc. – are gathered to create a consistent single stream of income throughout your retirement. To maximize your income, you must look at each source in the context of your entire plan, not in a vacuum. For example, the goal is not to maximize your Social Security income, but the goal is to maximize your retirement income.
The investment portion of the block determines how to invest your money while balancing risk and return. The money you need to live off in the early years of retirement needs to be invested conservatively to limit volatility, where the money you don’t need for decades needs to be invested aggressively to keep pace with inflation.
The Perennial Income Model achieves both these objectives, letting you know how much income you can expect to have in retirement and how to invest your money to ensure your income lasts throughout retirement. It’s up to you to determine if this amount of income will satisfy your income needs in retirement.
Block 2: Taxes
The goal of tax planning is to pay the least amount of income tax, not just in the first year of retirement but throughout all of retirement. Knowing what your income will be over the next 30 years allows you to build a long-term tax plan. This is exactly what the Perennial Income Model does, allowing you to build an efficient tax plan throughout your retirement.
The different tax strategies that can be used are beyond the scope of this post, you can learn more about them here, but they include using tax-efficient investment funds, minimizing Required Minimum Distributions, utilizing Roth conversion, and charitable giving strategies.
Block 3: Legacy
Once your income is secure throughout retirement you move on to the Legacy building block.
The goal of the Legacy building block is to effectively and efficiently transfer your assets to who you want them to go to when you die.
Knowing how much you will have at the end of your retirement plan gives you the insight needed to make those decisions and to know if you should be concerned about estate taxes. People typically fall into one of three groups:
- Simple: This group wants their money split evenly between their heirs when they die, and their estate isn’t large enough to be affected by estate taxes (an individual’s estate needs to be over $12.06 million, in 2022, before estate taxes affect it).
- Minor Complexity: This group wants more control, outlining when the money goes to their heirs and what they can use it for, and their estate still isn’t large enough to be affected by estate taxes.
- Complex: This group has a large enough estate where estate taxes will be a concern – they need to not only think about who will receive their money and when they will receive it, but also how they will avoid paying estate tax on their money.
The different estate tax strategies that can be used are more than can be covered here but they include creating a gifting plan, knowing which accounts should be donated to charity, and moving money out of your estate to avoid estate taxes.
The Perennial Income Model lets you know how much you will have at the end of your plan, giving you the necessary insight into how much you’d like your heirs to have and when they receive their money. It also allows you to know if you need an estate tax plan.
When presented with a retirement plan, whether it be by Peterson Wealth Advisors or someone else, you need to first ask yourself “will the income from this plan be enough for my retirement needs?” If the answer is yes, then ask your advisor these three crucial follow up questions to make sure your retirement plan will succeed:
- How do I invest my money to ensure this income lasts throughout retirement?
- What can I do to protect my income from taxes?
- How can I make sure my money goes to who I want it to go to when I want it to go to them?
The Perennial Income Model is based upon the three building blocks of a retirement plan – income and investments, taxes, and legacy – giving you the necessary information to answer these retirement questions.
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