7-Step Checklist if You Haven't Begun Your Retirement Planning

In our comprehensive financial planning work, we meet with professors, administrators and physicians nationwide who might be good candidates for our services.

When the conversation turns to retirement, university professionals often reveal to us that they have done very little financial planning to prepare for it. In this report, we at Filbrandt share strategies for professors who have done very little retirement planning. This checklist will help you get the process started, or prompt questions for you to ask your adviser.

There is both good news and bad news for professors who have done very little retirement planning. The good news is that they have been contributing to their retirement, even if they don’t realize it. Most universities have a required retirement plan contribution that the employee is making, and in most cases, a matching or even larger contribution that the university will make on their behalf.

The bad news is that many professors have no plan to convert retirement plan accounts to a reliable income stream for retirement. They have never tried to mitigate risk in their portfolio or understand the tax implications of taking distributions. There are many aspects of this process they need to understand before they get to retirement, starting with:

1. Estimate future expenses

One way to estimate future expenses is to compile your list of current expenses (monthly or yearly) for a baseline, and add 3.2 percent annually to account for inflation for each year until you intend to become financially independent or retire.

This will give you an estimate for monthly or annual expenses at current levels, adjusted for inflation. (This is an estimate based on the historical annual inflation rate, and will likely vary based on actual inflation rates in the coming years.) To establish a retirement budget specific to your situation, meet with a financial adviser. An experienced adviser will have a detailed list of expenses that should be considered for effective planning in this step of the process. Expenses you can’t accurately predict make this more difficult. These can include changes in tax laws, health care expenses, the possible need for long-term care and the expenses associated with it.

2. Understand future goals

Many tenured professors have specific goals for their retirement years. These objectives can include extensive travel, buying a new or second home, or may include helping to pay their grandchildren’s education expenses. These are expenses that are likely not included in your current budget, but they’ll need to be accounted for in your plan if you want to live the lifestyle you desire in retirement. Make a monthly calculation based on the data you have available. Another important aspect of this step is to understand how you want to focus your energy in the future. Examples might include giving up teaching to focus on research, non-profit work, or spending more time with family. Changes like this may affect your income level, as well.

3. Evaluate portfolio risk

Part of the process of planning for retirement is reducing the risk in your  portfolio. Generally speaking, this means moving a portion of assets out of investments with high volatility, such as equities, and into assets with less volatility. Risk can also occur by having a high concentration in one stock, investment, or account.

For larger portfolios, it is strongly recommended that professional portfolio management services are utilized. Professional financial planners screen for additional risk factors that are beyond the scope of this report.

4. Understand the changing landscape

Many professors’ parents received pensions, and didn’t have to think about retirement planning issues because they were handled for them. Circumstances are very different now, with 401(k)s and 403(b)s and optional retirement plans outside of a pension. The responsibility for managing your retirement plan is now on you, and no longer on the employer.

As part of that change, many universities offer several vendor options, and sometimes hundreds of choices within each vendor. This was not the case 15 to 20 years ago. These changes make effective planning more important than ever.

5 Assess your tax balance

Planning for tax balance is a crucial aspect of retirement planning. The lack of tax balance is a major pitfall for people without professional retirement planning help. The three primary tax “buckets” into which retirement savings  fall into are tax-deferred (your retirement account), capital gains (investments outside your retirement account) and tax-free (such as a Roth account).

The lack of tax balance can result in much more of your retirement account balance going to pay taxes than if a plan for retirement was in place.  If you don’t achieve tax balance and all of your retirement assets are in a tax-deferred retirement plan account, you could deplete that account very quickly if you have extensive health care costs or other unexpected expenses.

Unexpected expenses can be problematic in any case, but if all of your retirement assets are in a tax-deferred account, the tax consequences of withdrawing all of the needed money from that account would be far more substantial than if the funds were balanced across the capital gains and tax-free “buckets.”

6 Understand all retirement plan options

In many cases, retirement plan vendors have unique strengths or investment options. Some people inadvertently utilize one custodian while not realizing they have other custodian options that offer unique strengths. Our firm believes in what we call custodial maximization, which means each retirement plan vendor at your university will often have investment plan strengths unique to them. If you allocate all of your assets into one vendor without learning about what the others have to offer, you could be missing an opportunity that may strengthen your retirement portfolio.

7 Beware the “Rollover Trap”

Rollover is a term for taking money out your retirement plan and putting it into an IRA. It could be a university retirement account, or it could be any employer’s retirement account. Very often, faculty members roll money out of their retirement accounts for someone else’s reasons or purposes. We recommend considering the motivation of someone who knocks on your door and suggests a rollover.

Why? Because oftentimes that person wants to move the money from the university retirement account (where they can't earn commissions) to an IRA at their bank or brokerage firm. They put it into products in which they have control. That's not necessarily bad, but make sure it’s what’s best for you. There's no university we're aware of that forces professors to take money out of a retirement account when they retire. The university retirement plan will hold those assets. Investments in a university plan typically have lower fees than those in retail accounts from brokerage firms.

How close are you to financial independence?

A person is financially independent when he or she no longer needs to work to maintain their desired lifestyle. Instead, their money will do the work to provide the lifestyle they want.

Financial independence is the level of savings, assets and income required to make a tenured professor feel secure about leaving the university due to:

• Dissatisfaction with changes in the department
• Illness
• The desire to control what he or she spends time doing
• Any other reason

Filbrandt & Company believes this is important because it gives professors the control to do what they want when they want to do it. It removes the reliance on a predetermined retirement date as the time to step away from the university. We use the term “financial independence” separately from the term “retirement” because you can achieve financial independence before you retire, if you wish.

Being financially independent gives you options while you are still working at the university that you may not have otherwise. It’s important to have the discussion about your “financial independence number” with your financial adviser. Knowing it and planning for it is a great way to plan for unforeseen contingencies in your personal and professional life.

For the do-it-yourselfer

Some professors opt for the do-it-yourself approach to retirement planning, perhaps because they believe the money they save by doing so more than offsets the cost of a professional adviser.

The question you need to ask yourself: Is this what I want to spend my time doing? One of the goals of retirement and financial independence is doing the things that you want to do. If you don’t enjoy managing your financial plan, you may wish to delegate that task to someone who does.

The other consideration is the value proposition. What does the expertise in taxes, distribution planning, estate planning, administration – all of the skills you’re going to need during retirement – mean? What will you lose if you make a mistake?

We’ve worked with people who have made financial mistakes. Many times, the mistake was because they made an emotional decision -- instead of a good financial decision -- without knowing the possible consequences. Sometimes financial mistakes are made when people don’t consider the big picture.

Professors who have a retirement date in mind that is five to ten years away should begin planning for it now, and make sure their portfolio is set up properly. You don’t want to go into retirement with more risk than you believed and then have to adjust after the fact.

A key point for professors to consider: Do you know how to manage all of your different accounts in a way to create one deposit coming in per month to replace your paycheck from the university?

If you don’t, and if you don’t have a good idea how far away you are from achieving financial independence, Filbrandt & Company is ready to assist you. Call 800-431-9740 for a no-obligation discussion, or visit our website to schedule one.