Financial planning today requires agility, open communication with advisors

Flexibility is key when it comes to one’s retirement income options, says Maureen Pilato, vice president and senior financial advisor at High Probability Advisors LLC, an affiliate of The Bonadio Group.  

“Don’t get too tied to one strategy,” Pilato says. “You could be setting yourself up for disappointment if things change.”   

Pilato says there are several things that people who are approaching retirement need to know about their retirement income options, with no one size fits all approach.  

“There’s not one simple answer for everyone,” she says.  

Those nearing retirement do need to look at their portfolio and know the tax consequences for withdrawals among the different accounts.  

“You want to maximize the tax bracket you are in without going too much outside of it,” she says.  

Pilato is seeing clients who are changing their long-term goals because of the COVID-19 pandemic. Some are opting to retire earlier than planned, while others are deciding they want to work longer than anticipated.  

She has worked with clients who are rethinking their options to make sure they stay on-track with their financial goals and make changes accordingly.  

“It’s interesting to see some people who had a set goal before, now open to thinking about things in a different way,” she says. “Their priorities have changed a bit.”  

Matthew Newman, vice president and senior financial advisor at High Probability Advisors, says that given the low interest rates it is a challenging time to use money accumulated through investments as an income generator. 

“It can be difficult to do now because the yields are so low,” he says.  

What one can do is focus on asset allocations that provide growth and offer the risk mitigation needed to get through market fluctuations, he explains, adding client education is an important tool when it comes to financial planning.  

Having a diversified portfolio is also important, he says, as is not straying too far from one’s investment strategy.  

“It’s important to pinpoint what type of investor you are and stick to your plan,” Newman says.  

Ethan McKenney, a senior financial consultant with Manning & Napier Advisors LLC, says it is important in his role to understand the long-term needs of each client. These needs fall into two categories: what is needed and what is desired.  

“Both need to be planned around,” he says.  

Income sources come in different buckets, from checking accounts and non-qualifying investment accounts to IRA’s and work retirement plans.  

Since each source is taxed differently, McKenney can advise clients in which order to draw.  

With income yields at all time lows, he also says there are risks locking into some investments because they may yield a low rate for an extended period.  

Having a diversified portfolio with different asset classes that are actively managed is important, he says. That could include having a mix of dividend paying stocks, corporate bonds and higher yield bonds.  

“Having all your ducks in a row is crucial,” he says.  

He recommends people plan for their retirements several years in advance, noting one must consider the unknowns and have an emergency fund set aside in case for when unexpected situations arise.  

“Financial planning, including planning ahead for the unknown, is so important,” McKenney says, noting that the pandemic, which continues to bring regular changes, illustrates this.  

The pandemic also gave people an opportunity to step back and consider what matters most to them, McKenney says.  

Some people who had two homes, for example, decided they did not need both and took advantage of the seller’s market during the pandemic to unload one.  

Others, in contrast, decided they wanted a second home where they could retreat and were able to finance one at an attractive rate, given the low interest rates at the time.  

The pandemic has also resulted in deeper client relationships, McKenney says, noting that clients have been more open with their financial needs and wants. 

Such open and honest communication creates an optimal condition when it comes to financial planning, he says.  

Myles Fischer, senior counsel with Harris Beach PLLC, says the passage of the SECURE Act — which became law in January 2020 — has impacted retirement account withdrawal options.  

“It changed the landscape for retirement accounts,” he says, adding there are benefits and challenges under the law when it comes to retirement savings and taxes.  

One benefit of the law is the postponement of required minimum distributions from a traditional IRA from the age of 70 1/2 to 72, Fischer says. The change allows IRA owners to defer withdrawals longer, which could lead to additional growth of their IRA assets.  

Other changes under the law are not as tax friendly to retirees, especially wealthy individuals, he says, but adds there are ways to lessen the tax hit on retirement account withdrawals.  

One popular option is converting one’s traditional IRA or 401 (k) to a Roth account, Fischer says.  

While the conversion requires the individual to pay taxes on the money that is put into the account up front, it often means tax-free withdrawals in retirement.  

Doing the Roth conversion also allows one’s money to grow tax-free for a longer period since there are no required minimum distributions over the participant’s lifetime, he explains.  

Another option, especially for individuals who are philanthropically inclined, is a qualified charitable distribution, which is a withdrawal from an individual IRA that is made directly to an eligible charity. The QCD is excluded from one’s taxable income, which is more beneficial than obtaining a charitable deduction, he says.  

A charitable remainder trust is another way to defer required minimum distributions and the associated income taxes for beneficiaries, Fischer says.  

A CRT is a tax-exempt entity designed to make distributions to individual beneficiaries with the remainder passing to charitable beneficiaries. Interposing the CRT in between the retirement account and the individual beneficiaries allows the continued tax-free growth for a longer period than the 10 years otherwise required by the SECURE Act, he explains.  

The estate planning tool providers some flexibility and can mean longer tax deferral periods and more control over the annual income stream, Fischer says.   

Andrea Deckert is a Rochester-area freelance writer.