By Scott Bishop and Tom Mountain
After years of working with Boeing employees, we’re starting to see some patterns, certain financial planning challenges that pop up time and time again. We have grown adept at understanding how these challenges affect Boeing employees and how to best address them. Take a minute to look through this list and see if you can relate to any of them.
1. Sequence Of Returns Risk
The five years right before you retire and the five years right after retirement are crucial. What the market is doing when you begin to take withdrawals will have consequences that last throughout your retirement. Sequence of returns risk is simply the danger that the timing of withdrawals from your retirement accounts will have a negative impact on your overall long-term returns. To mitigate this risk, it is good to have some flexibility so that you don’t have to start drawing on your accounts in a down market. It is like dollar-cost averaging in reverse. If the market is down, you will need to sell more of the lower-priced shares to cover the distribution.
2. Mismatched Risk Levels
How much risk is in your 401(k)? How much risk are you comfortable taking, and which risk is appropriate for your season of life? If the answers to those two questions are different, then you have a problem. We have found that with many Boeing employees, the risk level of the investment mix of their 401(k) does not match their comfort level, and is therefore inappropriate for them. Too conservative and you risk outliving your money; too aggressive and market volatility scares you out and you end up buying high and selling low.
3. Social Security Timing
You can start collecting Social Security retirement benefits as young as age 62 and as old as age 70. The age at which you start to collect them will determine the benefit you receive; your benefit will be lower if you start younger and higher if you start later. Married couples also have an added complexity of spousal benefits and coordinating timing between the two of them. When you choose to start collecting Social Security benefits also affects how much you will need to withdraw from your retirement accounts at different times. A full analysis of your retirement income situation is necessary to determine the optimal time to start collecting Social Security benefits.
4. Distribution Options
Is it better to take your pension as an income stream from the company or as a lump sum? We have found that employees sometimes incorrectly assume that a monthly payout is automatically more attractive due to guaranteed lifetime income. However, there are two important factors that deserve serious consideration before making this decision.
With the standard single-life payout option, the pension payments stop as soon as you pass away. You can elect the surviving spouse option (which continues making reduced payments to your spouse until his/her death) or the 10-year certain option (which guarantees continued payments to a beneficiary for 10 years if you die sooner), but both options come at the cost of reducing your monthly benefit. There is a bigger issue: loss of control to the taxable income.
Taxes can be highly problematic if you elect a monthly stream of payments. You must begin taking required minimum distributions (RMDs) on tax-deferred retirement plans (typically IRAs and 401(k) plans) when you reach age 72 (70½ if you were born before July 1, 1949). You can easily end up paying taxes on your pension, your Social Security benefits, and your RMDs all at the same time, and consequently shouldering a heavy tax burden that could have been avoided with proper planning. Keep in mind that the election of a lifetime pension payment is irreversible.
None of the above should be taken to imply that a lump sum is always the better option, but rather to emphasize the need to consider the full picture when evaluating your post-retirement income strategy.
You may also want to consider an in-service non-hardship distribution if you plan to continue working until age 70. This option, exercisable at age 60, allows you to move your retirement funds into a vehicle with more investment choices and access to better advice. The key takeaway here is that your strategy for taking distributions is critical and requires putting the right measures in place at the right times.
5. Inflation & Long-Term Care Risk
The Boeing Pension is not indexed for inflation. Let’s look at a quick example to show the impact. For instance, suppose that you expect to receive $50,000 per year in retirement benefits and an additional $30,000 in Social Security benefits. That sounds great until you consider that after 18 years (assuming a 4% inflation rate), your $50,000 pension will have its purchasing power reduced to $25,000 in today’s dollars (you can use The Rule of 72 to estimate the compounding effect of inflation over different time periods).
It may seem safer to seek out investments that are safe from the volatility of the stock market, but the stability comes at the price of allowing inflation to eat away at your money. Also, the chances of needing expensive long-term care increase with age. Do you have a plan for managing inflation risk and long-term care risk? It is an unfortunate but common situation when retirees only begin to realize the impact of their choices after it is too late.
How We Can Help
If any of the above challenges resonated with you, our team at Mountain-Bishop Private Wealth Management may be able to help. These are challenges that we have seen over and over again with our Boeing employee clients, so we have spent a lot of time researching and resolving them. To talk through these challenges or any others you may be facing, reach out to us at 562-432-3783 or [email protected] to schedule a free introductory meeting.
About Us
Mountain-Bishop Private Wealth Management is a full-service independent financial services and investment services firm that has been providing retirement and investment guidance to high-net-worth individuals, business owners, and Boeing employees for more than 25 years. Through our long-term guidance, we strive to help our clients build, protect, distribute, and transfer their wealth, tailoring our services and strategies to address each client’s unique needs so they can bridge the gap between their current financial situation and their long-term goals.
Scott and Tom built their practice on trust and excellence. They focus individually on each client, delivering the personalized touch that is missing with many other firms.
The Financial Consultants of Mountain-Bishop Private Wealth Management are registered representatives with, and securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: (AK, AZ, CA, CO, FL, GA, ID, IL, MI, MO, NC, NJ, NM, NV, OR, PA, SC, UT, VA, WA) SCOTT E. BISHOP CA LICENSE OB55872 THOMAS P. MOUNTAIN CA LICENSE OB55827