What’s the Role of Financial Planning in Retirement?

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

Financial planning is essential at every stage of life. During your working years, it’s about balancing tax-efficient retirement savings with budgeting and other financial goals. Protecting your wealth is equally important to living the life you want. Things shift when you head into retirement. You transition from building your nest egg to generating income from your savings.

This phase can be difficult because it requires more strategic income and tax planning. At Northwestern Mutual, we believe the right financial professional can help ensure that your savings will last through your life. He or she can also help you leave a legacy that’s in line with your values.

The role of financial planning in retirement

Tuning your income machine

If you’re still working, your main income source is likely your job. Receiving regular paychecks makes it easier to budget and plan for the future. When you retire, your income will come from multiple sources. That often includes:

• Retirement accounts like 401(k)s and IRAs
• Social Security
• Annuities
• Pensions
• Accumulated cash value in a life insurance policy¹
• Other investments like real estate and brokerage accounts

If you’re retired, you have to think about where your money is coming from, how much money you have, and the right pace to spend. Every source of income comes with different rules and tax treatment. Some of your retirement income may be tax-free, while other sources are taxed as ordinary income. And while some income may be guaranteed, other income streams can fluctuate with the markets.

Beginning at age 73, you’ll also have to take required minimum distributions (RMDs) from tax-deferred retirement accounts. There are a lot of moving parts to consider. Without professional guidance, you could end up paying more in taxes, drawing down your nest egg too quickly, or being more conservative than necessary.

Living for today while protecting your legacy

Every dollar spent, or unspent, in retirement can affect your legacy plan. Some people like to see their legacy in action during their lifetime, a concept popularly known as “giving while living.” For example, by spending less now, you could give money to a grandchild to go to college. This may feel more meaningful to you than leaving a pile of money to your loved ones after you’re gone.

Your legacy will be unique to you, but at Northwestern Mutual, we believe an experienced financial advisor can help you make a personalized plan that maximizes your income. He or she may suggest a donor-advised fund or other tax-friendly ways to approach charitable giving.

Navigating economic uncertainties

You want to enjoy your retirement—not worry over market dips and your portfolio. A financial professional can take those concerns off your shoulders and modify your income plan accordingly. Economic conditions will likely come into play when deciding which accounts to draw on for income.

Lots of retirees assume they’ll get a 6 percent or 7 percent return on their investments over time, so they rely on the 4 percent rule to calculate income withdrawals from their portfolio. But returns may be higher or lower than that target in any given year. If you don't plan well, you could quickly and easily end up overspending.

A strong financial advisor can help you get the most out of your money so you can spend more in retirement than you thought was possible—not less. Staying invested during retirement can also help you keep pace with inflation over the decades.

Accounting for other retirement income risks

Even the best retirement plan has its vulnerabilities. Below are other income risks that a financial advisor can help you navigate:

• Taxes: Being strategic about your retirement income plan can help reduce your tax liability in retirement.
• Health care: Medicare premiums, prescriptions, doctor’s visits and other health care expenses can add up fast in retirement.
• Long-term care: While not everyone will purchase long-term care insurance—or can afford it—everyone should have a plan for how you would handle arranging to get the care you need. Requiring care puts an emotional strain on the caregiver and creates stress for others. It’s important to identify who would help if needed (your spouse, children, friends) and know how to spend down assets to qualify for Medicaid, or where the money will come from to pay for care. This is often a potentially stressful conversation to have with loved ones so it can really help to take the time to research your options and prepare this discussion.
• Longevity: Living a long, happy life is the ultimate goal—and you want to make sure your finances can go the distance.

Whether you’re still working or approaching retirement, a big part of financial planning is figuring out ways to give yourself more control. Having a financial professional by your side can make all the difference—and allow you to enjoy your retirement with less stress.

¹ The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy.

CFP disclosure: Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER® and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.