Map Out Your Retirement Plan to Prevent Costly Mistakes
Kim Ciccarelli Kantor, CFP®, CAP® | Naples Daily News |
March 2018
Throughout your lifetime, you worked hard to save for your golden years. As you climbed the ladder of success, you likely accumulated several sources of deferred income to sustain your desired retirement lifestyle.
The most common forms of retirement savings plans are IRAs and defined contribution plans – 401(k)s, 403(b)s, etc.
While these plans are designed for effective retirement savings, often times these assets are scattered across numerous custodians from multiple employers. It may seem tempting to consolidate all your accounts for the sake of convenience.
However, before you merge your retirement accounts, you should map out the full picture of your qualified plans to avoid negating any of your benefits. Simply merging all of these accounts might eliminate the potential for any efficiencies that could be achieved through proper planning for lifetime distributions and legacy considerations.
Flowcharts serve as an especially effective tool for mapping out your full financial picture – empowering you to simplify your financial life in a way that prevents costly fees and accentuates the potential for tax savings.
An organized, well-designed flowchart allows you to delve into the nuts and bolts of each specific IRA or retirement program.
Figure 1. A sample financial planning flowchart for a hypothetical client scenario (Click the image to view full size).
Two of the most critical areas of your retirement plan to address are:
Distributions (lifestyle considerations): Qualified plans require you to take certain distributions once you or your beneficiaries hit a certain age (e.g. RMDs at age 70 ½ and older). Failing to adhere to the particular regulations and timelines associated with each plan can result in costly penalties and fees.
These programs add an additional layer of consideration in comparison to other assets, due to the income tax consequences that result from distributions and the fact that ownership may not transfer during your lifetime. You can make the most of any tax-deferred opportunities by executing a well-thought-out financial plan.
Beneficiaries (legacy considerations): Ensuring you have up-to-date beneficiaries listed that reflect your wishes may be more complex than you think. The most effective means for protecting your IRA and other qualified assets for your heirs is to understand what your custodian agreement will and won’t allow for at the time of death, as well as maintaining a time-stamped, up-to-date beneficiary designation form in your files.
If your beneficiary forms are not in good order, you may forfeit control of where your assets will end up after your death. In contrast, accurate beneficiary forms enhance the potential for your IRAs and other retirement programs to provide steady income for your heirs in the event of your passing.
In comparison to 401(k)s and 403(b)s, IRAs provide you with more flexibility when distributing your assets to beneficiaries: a lump-sum payment, consolidation into a qualified trust, merging or segregating various IRAs, use of disclaimers to pass wealth to contingent beneficiaries, and so on.
While you have discretion in incorporating some of these various approaches during your lifetime, most of these arrangements need to be in place prior to your death – or within a pre-defined period after your death – in order to take effect.
Pensions and deferred compensation plans generally have more restrictive clauses and stipulations for beneficiaries, which can vary widely depending on the administrator of the plan.
Lastly, you should review your entire retirement savings plan every 2-3 years. By doing so, you can address any ambiguity you may feel about your plan and identify new opportunities.
By mapping out your full financial picture and regularly updating your plan to reflect current circumstances, you will be well-positioned to protect and optimize your assets throughout retirement and impart a lasting legacy to future generations.
