Preserving Capital in Retirement

The transition from working to retirement can be a difficult one for individuals to navigate. After having spent so much of your life working, moving to a mindset of retirement can create a whirlwind of emotions. In the midst of dealing with those emotions comes a more practical matter. How can you make sure that your retirement savings last for your entire lifetime?

As you progress through retirement you will encounter a number of questions. After spending years with a mindset of accumulating assets, how should your retirement portfolio be positioned now that you’re distributing assets? Preparing yourself for potentially high healthcare costs as well as deciding whether you’re the sort of person who needs to have a strictly enforced limit on how much you can spend (now that you’re no longer accumulating wealth) also come into consideration. And if all goes well and you find yourself financially secure, how can you go about blessing others with your money while avoiding tax traps

Retirement can last for three decades or more, meaning your portfolio will still need to grow in order to support you. Exposure to stocks should remain an important part of your allocation target, even in retirement. However, a possible need to access these assets in the near term means you are more susceptible to short-term risks. That’s why it’s important to position your portfolio (across all your accounts) to add more exposure to bonds and cash.

There is no one-size-fits-all retirement asset allocation recommendation. Everyone’s situation is different. Some people have significant assets in non-retirement accounts, so they can be invested differently than someone whose entire savings are in retirement accounts. Some retirees should have 50% (or even less) of their portfolios in stocks, while others should hold portfolios that are much more aggressive.

Why such large variations? Different retirees will make different cash flow demands on their portfolios. A retiree who has a pension that supplies most of her living expenses can reasonably park a hefty share of her portfolio in stocks, holding just enough in liquid assets to cover unanticipated expenses or periodic splurges. A retiree with a shorter time horizon who is forecasting spending his portfolio during his lifetime, meanwhile, should maintain more in liquid assets and less-volatile asset classes like bonds or cash equivalents. Family history can also play a part. If your family has a history of longevity, you may need to plan for your retirement portfolio to last longer than for the average person.

You should evaluate your individual situation and ask yourself a few questions. Do you need your retirement accounts to meet all of your financials needs? Do you currently have a long enough time horizon that you will be able to weather the storm of the market having a couple years of negative returns? Your answers to those questions will help determine how aggressive your retirement portfolio should be positioned.

Annuities

One of the common goals for most Americans is to live comfortably in retirement. Two important risks to the security of retirement income are superannuation (outliving one’s money) and inflation. Annuities can help mitigate the risk of superannuation.

An annuity is a contract that is designed to provide a specified income that is payable at stated intervals for a specified period of time. In their simplest form, you give up a large sum of money up front, and in return you are guaranteed income for a certain number of years. Some of the advantages of annuity contracts include reducing the risk of outliving retirement savings, earnings are tax-deferred, investment options allowing for fixed or variable earnings, and possible protection from creditors.

However, there are disadvantages to annuities as well. Their complexity, as well as the costs and fees associated with them that reduce their returns, are just a couple of considerations when deciding whether they are appropriate for you. In addition, taxable benefits consist entirely of ordinary income as opposed to capital gains and/or qualifying dividends, and once funds are exchanged for the annuity, they are no longer available for bequests or other needs.

When might an annuity be appropriate? If you’re a person who has a large sum of money but have a tendency to overspend, an annuity can help instill some discipline by taking away that large sum and forcing you to only spend that which you receive each year. You’re giving up some of your freedom, but with the idea that you are receiving some certainty and security in the process.

One particular annuity of note is called a Longevity Annuity. While regular annuities usually begin paying an income stream right away, a Longevity Annuity only begins paying income for life beginning at a later age, such as 80 or 85. This type of annuity is typically used to provide protection against superannuation or for long-term care needs.

Long Term Care (LTC) Insurance

As people live longer, they find that health care costs can eat up a larger and larger portion of their income. Thankfully, there are ways to prepare for the eventuality of such a situation. Long-term care insurance is designed to assist individuals with some or all of the costs of medical and personal care provided in the home, an assisted living facility, a nursing home, or through a community program such as adult day-care. LTC insurance often provides coverage for costs associated with personal care when the covered individual is unable to perform activities of daily living such as bathing, eating, or dressing. It may also assist people in need of skilled care because of a prolonged medical condition, a disability, or a cognitive impairment such as Alzheimer’s disease.

Some long-term care insurance policies provide more coverage than others. Before you buy LTC insurance, decide what coverage you need and can afford. Long-term care insurance can help to safeguard your assets and protect your financial independence, but it can be expensive. Depending on your level of income and the value of your assets, LTC insurance may or may not be the most appropriate option for your long-term care financing. It is also important to consider the rising costs of health care when purchasing long-term care insurance. Most plans will have an option for benefits to increase annually in order to keep up with inflation.

Gifting Strategies

Perhaps you’re in a situation where you have enough saved for retirement and are financially set. There may come a time when you want to give away some of your assets to loved ones. While most people know that gifts to charities are tax deductible, there are also ways to give assets to individuals without incurring any tax penalties (although you don’t receive a tax deduction for them).

Federal law allows you to gift up to $19,000 in cash or assets to someone in 2025 without having to worry about paying a gift tax. That limit is per person, not the sum total of your gifts, so you can gift up to $19,000 to as many people as you want. That’s one way that you can begin the orderly distribution of your estate while you are still alive and reduce your taxable estate. In addition, if you are married, you and your spouse can elect to split a gift, which means that the two of you together can give $38,000 to one recipient. While you don’t need to pay gift tax on the sum, if you choose to split a gift you do have to file a gift tax return.

In addition to the annual gift tax exclusion, the lifetime gift tax exemption in 2025 of $13.99 million allows you to give beyond $19,000 to an individual without paying gift tax. What that means is that, when done properly, you could gift someone $14.009 million in 2025 and not have to pay any gift taxes on the transfer. You do need to file a gift tax return, though, and the amount above the annual gift tax exclusion reduces the value of your estate tax exemption (both are the same amount), dollar for dollar.

If the lifetime gift tax exemption and the estate tax exemption are the same amount, does it matter whether you gift when you’re alive as opposed to passing on assets after death? Yes! At the end of 2025, the estate tax exemption is slated to drop back to what it was prior to 2018. However, even if the exemption drops, the IRS has decided there will be no claw back on lifetime gifts. You could use your entire $13.99 million lifetime gift tax exemption in 2025, and if that exemption dropped to $6 million in 2026, you wouldn’t owe any gift tax on the amount you had already given. If you waited until 2026 to begin transferring assets (whether through giving or death), the threshold before paying gift or estate taxes (barring any change to the law) would be much lower than it currently is.

Sometimes the question arises about what type of assets you should gift to someone. The best method is to gift appreciating assets (those expected to go up in value). By gifting an asset (such as property or stock) expected to increase in value, you are able to remove future appreciation from your estate while taking advantage of the asset’s current lower value. This can be particularly helpful if you begin your estate planning early.

How to Get Started

Any time you’re facing a mountain of financial decisions, it’s important to have someone who can help you cut through the jungle and set up a clear path. A professional financial adviser can help keep track of your financial situation and give you clear, objective advice to ensure that your financial goals are met. Find someone that you’re comfortable with and let them help guide you on your financial journey.

Chase Investment Counsel is a family and employee-owned boutique wealth management firm that offers personalized investment services. Our clients include career professionals, those nearing or in retirement, and families experiencing financial transitions such as generational wealth transfer, widowhood, divorce, or sale of a business. Chase’s active, disciplined investment management team is focused on selecting individual stocks and bonds targeted at each investor’s specific financial goals and risk tolerance. Established in 1957 in Charlottesville, VA, Chase Investment Counsel manages more than $400 million in assets.