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Stay Happy Together With A Retirement Plan

Consider this statistic: A third of all couples retire within a year of each of other.

Though there are a number of explanations regarding age and money, the answer that researchers keep coming back to is that couples really do enjoy spending time together, says Courtney Coile, an economics professor at Wellesley College in Massachusetts.

It doesn’t matter if you want a house full of grandchildren, or quiet walks on the beach with your partner, to make the most of your golden years, set lifestyle goals, understand your cash flow, and create a plan for asset allocation, longevity risk and wealth transfer.

The first thing you should do is sit down and decide, as a couple, what you want, says Tim Johnson, Chief Investment Strategist at Lincoln Financial Advisors in Nashville, Tennessee.

Lee Woolley, SVP and Managing Director of Advisory Services at Northern Trust agrees. “Most folks begin with cash flow needs or asset allocation and that skips an important first step. You are usually not retiring to achieve a rate of return, but to attain some goals that are life style related.”

Before making decisions about whether you want a larger or smaller house, sit down with a financial advisor and figure out how much money you have. The housing question, which is a big one, should be answered not only by the kind of life you want, but also by your budget. One or both people may have a 401(k), they could also have a pension plan or an IRA rollover from a previous job.

After you see your total financial picture, you can calculate a reasonable withdrawal rate based on your age when you retire and how long you expect the money to last.

“Generally, we say 4 percent annually” says Johnson. Then, you can add in social security and any pension income to make that number larger.

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Your entitlement to social security benefits also needs to be looked at.

“They are one of the biggest things that you have accumulated,” says Coile, “so be thoughtful about when to claim them because it is an economically significant decision.”

A typical benefit is $1000 a month, if claimed at age 66. However, should you claim at 62, when benefits are first available, that number would be reduced by 25 percent, and you’d receive $750 a month instead. On the other hand, if you wait to 70, your monthly payment goes up. Although no one knows for sure how long they’ll live, it may be prudent to wait on this.

Woolley suggests looking at your cash flow, and classifying revenue into stable sources like social security, pensions, and annuities, and volatile ones like the capital portion of your portfolio. In an ideal world, he says, you’ll meet 75 to 100 percent of your expenses from stable sources.

For example, say your after-tax, cash-flow objective is $80,000, and your pension and social security total $20,000. From the portfolio, you’ll still need $60,000. One way to achieve this, Woolley says, is to invest in municipal bonds. To get $60,000 at the rate of 4 percent, you’d have to have $1.5 million in munis. If your total portfolio is $3 million, the math works out well because that’s a fifty-fifty split.

Life Changes - A CNBC Special Report
Life Changes - A CNBC Special Report

The problem is when your investment portfolio is only $2 million. Then, you need 75 percent in fixed income securities, and that may not be right for you. That’s when you need to talk with a financial advisor because there are different options for generating stable cash flow from the more risk-oriented portion of the portfolio.

Once you have asset allocation mix, then you need to take a look at asset location. Asset location deals with placing the investment vehicles into to the right entities.

For example, you might not want to place your large cap domestic stocks in your IRA. If you do, you might be taking equities that may otherwise have been generating qualified dividends and that are taxed at a lower rate, and putting them into a vehicle that is going to kick out cash flow at a higher tax rate. You’ll also want to look at the title or the beneficiary designation of those entities.

Trusts are other multi-purpose tools that can be used to provide for children, grandchildren, a spouse, or second spouse and protect them from potential creditors. They are also used to get estate taxes down to a manageable level, and that will benefit your family generations to come.

Though we may be concerned with dying young, it would be better to protect yourself against living too long. For the right people, says Johnson, an annuity can lay some of the longevity risk onto an insurance company. The basic idea: you pay for a guaranteed stream of income as long as you live.

Long-term care insurance is another way of laying risk off on a third party. Again, you pay a premium, and if a situation arises where one of the partners needs long term care, it will kick in and pay those expenses while allowing the other spouse to live their life as expected.

“In my own financial planning," says Johnson, “I’m not doing this so that I can accumulate the largest pile of money I can have, though that’s not a bad thing. I’m doing this so I can protect the people I love.”