When it comes to baking, the recipe can make or break a sweet treat.
While professional bakers are able to whip up a delicious cookie without referencing a single recipe card, the rest of us often need step-by-step directions to ensure we successfully create a delicious, melt-in-your-mouth dessert.
Retirement planning works the same way: Your financial plan must have five key ingredients for a successful retirement.
The flour: An income plan
An income plan plays a huge role in your retirement readiness and success. It’s a major ingredient that simply can’t be ignored.
As you approach retirement, you may have accumulated quite a few different retirement savings vehicles. It’s crucial that you eventually consolidate these accounts and implement a single strategic plan for how to use them.
It’s also important to understand if any of your retirement plans are subject to required minimum distributions (RMDs) and, if they are, determine when you must make those withdrawals. Failing to do this can result in costly and unnecessary penalties.
Another factor you should take into account is your Social Security income. For many retirees, one of the biggest questions to answer is when to begin taking your benefits. For some people, retirement accounts may provide enough of an income stream that delaying benefits is a strategic decision that ensures larger payouts later in life.
Others may find it beneficial to begin taking their benefits as soon as they’re eligible. Making these decisions in advance can help you make the most of all your assets and have a reliable stream of income.
The sugar: Investments
Investments, like sugar, are a key ingredient in a successful financial plan, but too much of a good thing can quickly ruin your financial future.
That’s why it’s good to evaluate and update your investment approach as you near retirement. For many people, this means reevaluating risk tolerance and updating investment allocations accordingly.
Typically, as you approach retirement, you’ll want to reduce your investment risk. However, it’s also important that your investment plan takes inflation into account and provides you with the opportunity to keep up with the rising cost of living as you age.
The eggs: An estate plan
In baking, eggs play an essential role in helping keep your finished product together. In financial planning, your estate plan plays a similar role, ensuring that your hard-earned money is distributed among your beneficiaries properly and efficiently.
Without an estate plan, your heirs can see their inheritance quickly evaporate due to taxes, legal fees or even poor decisions on how to handle newfound wealth.
An estate plan can not only ensure your wishes are executed properly, but it can also protect and prevent things like costly estate taxes, probate and even bad decisions by beneficiaries.
The salt: Taxes
Often an overlooked part of a financial plan, a tax plan may not seem important, but with the right strategy, it can go a long way in protecting your savings from Uncle Sam. From considering a transition to a Roth IRA to understanding how your RMDs impact your tax bill, proactive tax planning can help you avoid unnecessarily high tax bills in retirement.
The chocolate chips: Insurance
Whether it’s chocolate chips, oatmeal, raisins or peanut butter, the varying ingredients in your cookie baking can make all the difference in your final product.
Insurance products can do the same thing. With an endless amount of insurance products available, there are a number of different options you can add to your financial plan based on your individual needs.
From life insurance to long-term care policies to annuities, many products can help fill any gaps after accounting for all of the other ingredients in your financial plan.
By mixing these five key ingredients, you’re on your way to creating a sound retirement plan. But just like any recipe, it may need some adjusting to perfect it. Working with a financial professional can ensure you create a retirement plan that best fits your unique needs.
Skip Johnson is an advisor and partner at Great Waters Financial, a financial-planning firm and insurance agency with locations in the Twin Cities and Duluth. Learn more at greatwatersfinancial.com.