Land Navigation Isn’t Much Different Than Retirement Income Planning

Land Navigation Isn’t Much Different Than Retirement Income Planning

When I was a young Army officer candidate in Reserve Officer Training Corp (ROTC) we had to learn to navigate across the terrain. I could read a map and use a compass but taking those skills and applying them to the natural terrain did not come easily for me.   Even during the daylight, it was easy to get on the wrong path, and drift to undesired outcomes.   Then, they had us do the same thing at night.   The added complexity of working at night magnified the opportunity for bad results.   Whether I was at Fort Knox, KY, Fort Riley, KS, or in the Shawnee National Forest in southern Illinois, the same thing happened…I would struggle to stay on the course that I desired. I sometimes even wondered if I would leave the darkness of the forest.   Fortunately, I learned a level of navigation proficiency and did not have to spend the rest of my life fighting the darkness, poison ivy and ticks.

 

Over the years of working with clients on financial plans, I hear accounts of a similar darkness of knowing what direction to take with the transition from work to retirement.   The choice of where to draw income can be like what heading to follow while reading a compass.   If you are slightly off course, you might run out money.   This falls into an area of planning called Distribution Order.   In a previous blog post, we talked about having the right tools in your financial toolbox.   If you only have pre-tax IRAs or 401ks that will make choosing the path easy.   However, that limited option will not afford you any choices to save on taxes. On the other hand, if your toolbox is full, the order of distribution will be an area that will provide you many possible routes to your income need.   Making those choices can be like the strolls at night I took with the Army.  

 

My Army trainers taught us to not just think about the endpoint.   Instead, there are many points along our path that we would see before arriving to our destination.   When planning your retirement, you will also go through phases (think of them as waypoints).   During periods of increasing taxes, it might make more sense to draw from tax-free investments.   During lower tax periods, like we are experiencing now, it could make sense to use tax-deferred accounts like your pre-tax iRAs and 401ks.   In some cases, it might make sense to use Social Security with a combination of Roth and pre-tax IRA distributions to satisfy your income need.   In our planning practice, we use advanced technology to run models to optimize the best blend of withdrawals to increase your likelihood of success.   That’s a bit like using GPS systems to navigate across the land.   These technology tools lead us to outcomes more closely aligned with your desired objective.   When you have many tools in your toolbox, it does add to the complexity.   That complexity is worth it because of the better outcomes, especially if we enter a high tax system in the future.

 

Just like navigating across terrain, you won’t always be exactly on your intended course.   The planning process help you determine your destination, and by doing periodic checkups, you can make small course corrections to avoid obstacles and arrive to your goal.   Take the time to plan your destination, know the tools in your toolbox, set a course with the right blend of tools, and you will be on your way to a great retirement.