How to Combine Retirement Planning with Legacy Planning

Our topic on this episode of the Ready for Retirement podcast is about combining retirement planning with legacy planning.

Questions answered: How do I combine retirement planning goals with my legacy planning goals? What are the best strategies when it comes to exploring retirement planning and legacy planning together? What is the best approach for my individual situation? 

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• Rebalancing
  • How often should we rebalance?
    • It’s common for people to set up rebalancing of a portfolio on a consistent basis (semi-annually, annually, etc.).
      • This isn’t a terrible approach, but I also don’t feel it’s the most effective approach.
    • Here’s an example:
      • Let’s assume you have a 60% Stocks / 40% Bonds portfolio and you rebalance once per year.
      • Let’s assume both stocks and bonds are +5% at the end of the year.
        • If you were to rebalance, there would be no change in portfolio allocation since both stocks and bonds increased by the same amount.
        • The total value of the portfolio changed, but not the relative value in each asset class.
  • When is rebalancing effective?
    • Rebalancing is effective when you have different investments performing differently.
    • Let’s assume (with the previous example) that six months into the year stocks are up 50% and bonds are down 20%.
      • You no longer have a 60% Stocks / 40% Bonds portfolio because stocks have increased significantly and bonds have decreased.
        • Now let’s assume by the end of the year both stocks and bonds were positive 5%. 
      • If you had waited a year to rebalance, there isn’t much of a benefit you would be receiving.
      • The benefit would have occurred if you had rebalanced when the 60% Stocks / 40% Bonds portfolio turned into 70% Stocks / 30% Bonds or 80% Stocks / 20% Bonds.
    • Rebalancing with a timeframe isn’t the most effective. 
      • As opposed to choosing a specific date to rebalance, set up parameters in your portfolio for when a rebalance may be most effective.
      • You may be rebalancing too frequently when there isn’t enough relative variation between your various investments.
    • On the other hand, you may not be rebalancing enough.
• Assign a drift in either direction that’s tailored to your asset allocation goals.
  • Example: Rebalancing is most effective when you have various asset classes and you assign a variance threshold to each.
    • If the stock market or bond market moves in 20% either direction, that may cue it’s time for a rebalance. 
• Rebalancing Check-In
  • I have software that allows me to determine when it’s most appropriate to rebalance for each of my clients, but I fully recognize you may not be in that position.
    • Because of that, rebalancing on a set date each year may still be a good option, it just may not be the most effective option.
• Benefits of Rebalancing
  • Rebalancing can help to increase returns over time.
  • Rebalancing can also help to manage risk.
    • If you never rebalance, stocks tend to outperform bonds and your portfolio allocation won’t be aligned with your goals.
• Asset Allocation Drift
  • The listener has $2.8M and 40% of bonds is ~$1.1M, which means 60% of her portfolio is stocks (~$1.7M).
    • The listener mentioned that between Social Security Pension & Survivor’s Pension, she has all of her needs met.
    • The listener also mentioned that one of the mother’s main goals is to leave a legacy for her family.
  • It may make sense to intentionally not rebalance to allow for intentional drift and enhance return potential.
    • If your mother doesn’t need these funds for day-to-day living expenses, allowing an asset allocation to drift towards stocks can enhance growth and allow her to do more giving in conjunction with her other legacy goals.
• Tax Planning
  • The next consideration is about understanding your mother’s tax-bracket today to determine when it makes sense to begin Roth Conversions.
    • Roth Conversions help expand after-tax benefits and allows her to compare her tax bracket today to the tax bracket of her beneficiaries.
  • Once there is a plan in place to ensure the listener’s mother can achieve her living expenses throughout her lifetime, the next goal is to begin shifting funds into after-tax accounts to avoid beneficiaries from paying taxes in the future.
  • Comparing your mother’s tax brackets today to beneficiaries in the future is very difficult, if not impossible.
    • I would recommend viewing Roth Conversions as tax insurance.
• Beneficiary IRAs
  • Since the SECURE Act was passed, instead of the beneficiary being able to start taking a small amount each year after the year the original account holder passed away throughout the course of your lifetime; you now have 10 years to fully liquidate the account.
  • Example:
    • Let’s assume your mother passes away and her $2.8M grows by 6%/year and if you were the sole beneficiary, you would have to take out ~$380,000/year to withdraw the account over 10 years.
    • If you’re in a high tax bracket and live in a state with a high tax bracket, that’s $380,000 on top of your wages, which may be a significant tax impact.
• IRAs
  • You must take out funds at age 72 and this increases until you pass away.
• Charitable Remainder Trust
  • If you have a significant amount of pre-tax dollars and don’t want to 
  • Name the charitable remainder trust of the beneficiary of your IRA.
    • The Charitable Remainder Trust must distribute income each year the beneficiaries are living.
    • You’re not giving money directly to children, but to the Charitable Remainder Trust. 
    • The children would be listed as beneficiaries to the Charitable Remainder Trust.
    • Any remaining assets are distributed directly to a charity.
    • It allows you to stretch out distributions as opposed to having to take out all of the funds within 10 years.
    • It can often make sense if you have a significant amount in pre-tax dollars and beneficiaries are in a high tax bracket.
  • Note: There are many more details that go along with utilizing a Charitable Remainder Trust, but it may make sense when it comes to your overall financial strategy. 
• Annuities
  • Annuities allow you to shift risk to an insurance company for guaranteed income, but there’s an opportunity cost with doing so (growth).
  • Annuities can make sense for investors in retirement who are risk-averse and are comfortable giving up returns over the long-term for guaranteed income.
    • Annuities can get in the way of compounding, which is the last thing we want to own if we want to maximize our returns over time.
    • I don’t think an annuity makes the most sense based on what the details provided, but it’s worth discussing with a financial planner who can evaluate this in relation to your overall financial strategy.

Timestamps

1:00 – We’re on YouTube!

2:10 – Listener Question

2:58 – Rebalance Overview

4:41 – When Does It Make Most Sense To Rebalance?

7:33 – Various Rebalance Options

9:01 – Legacy Planning

11:49 – Asset Allocation

15:36 – RMDs (Required Minimum Distributions)

18:44 – Tax Planning

20:04 – Charitable Remainder Trust

21:08 – Annuities

22:18 – Aligning Your Investments With Your Financial Goals

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