by Stephen Reed | Accounting News, News, Retirement, Retirement Savings
Retirees routinely withdraw cash from retirement accounts to cover basic living expenses, but selling low could negatively affect your retirement portfolio. If the economy experiences a downturn during your retirement years, you can use the strategies discussed below to minimize the impact to your long-term financial plan.
Before Making Any Withdrawals
While younger investors are generally advised to leave their cash invested and wait for the market to rebound, retirees typically rely on market withdrawals to create cash flow. In an effort to avoid or postpone withdrawals during tricky market conditions, try to find assets unlinked to the market that you can tap into until the market normalizes. Market downturns and steep inflation can be considered financial emergencies if you’re struggling to make ends meet, so you can certainly dip into emergency funds without feeling guilty. Just be sure to prepare a plan to replenish the funds as soon as possible. If you must withdraw from your investment accounts, it’s important to be strategic in your withdrawals.
Begin with Interest and Dividends
Before selling low, try to leave your original investment intact by only withdrawing the interest and dividends from your taxable accounts. This move could allow you to conceivably grow your income when the market rebounds in the future.
Sell Lower Volatility Investments
Short-term bonds and bond funds generally aren’t as affected by market unpredictability, and their values are ordinarily stable. Selling them in a down market can supply necessary cash and not cause too much damage to your retirement savings. They also favor smaller price fluctuations than stocks during stretches of market volatility.
Rebalance Your Portfolio
If your investment portfolio is out of alignment with your asset allocation goals due to market volatility, it’s an opportune time to look for opportunities to raise needed cash by rebalancing. In order to return your allocation to its original goal, sell assets where values have increased disproportionately in value relative to your desired allocation, and buy assets that may have dropped in value.
Make Tax-Smart Choices
If you’re forced to sell assets from taxable accounts for needed cash flow, be sure to make tax-smart choices. You can minimize your taxes owed by selling investments that you’ve held longer than one year. Those gains are taxed at the long-term capital gains tax rate of 20% and not at the federal ordinary income tax rate. Keep in mind that some gains may also be subject to state and local taxes.
by Jean Miller | Accounting News, News, Retirement, Retirement Savings, Uncategorized
Approaching retirement planning when you’re late in the game can be a daunting task, but with the right strategies, you can get on track to build a nest egg that will provide some support by the time you reach retirement. Read on for proven catch-up options for late starters.
Identify How Much Savings You’ll Need
You might tell yourself that you won’t need much in retirement, but you might be surprised to learn that even a life of simplicity could require $1 million in the bank once you step away from the workforce. Given that most financial experts agree on an annual withdrawal of 3% to 4% of your retirement portfolio, that’s $30,000-$40,000 per year with a $1 million portfolio. This scenario excludes Social Security income as well as pensions, rental properties, or other sources of income.
Thinking through how much money you’ll need to live comfortably with the lifestyle you plan to lead in retirement will help you determine how aggressively you’ll need to save.
Pay Down Debt
While it’s important to pay down debt, you don’t want to surrender retirement goals to do so. You’ll need to come up with a plan to pay off credit card debt, car loans, and other high-interest or non-mortgage debt while also saving for retirement.
As for your mortgage, how you handle this debt as you approach retirement depends on where you are in your repayment journey. If you’re closer to the early stages of your mortgage and most of your monthly payment is assigned to interest, it might make sense to pay down some of the principle. However, if you are closer to the later stages of your mortgage and your payments are generally assigned to the principal, you might think about investing that money for retirement rather than putting any additional funds toward mortgage payments.
Invest Your Age
You might think that in order to make up for lost time, you should take on more investment risk. But with more risk comes the potential for more loss to your principal. Your risk should correlate with your age. While investors in their 20s and 30s can afford more risk because they have more time to recover any losses, investors in their 50s or older don’t have that luxury. As you near retirement you might consider one of the following blueprints for asset distribution, depending on your personal level of risk aversion:
- High (but acceptable) risk: Invest in stock funds a percentage of 120 minus your age. Put the rest into bond funds.
- Moderate risk: Invest in stock funds a percentage of 110 minus your age. Put the rest into bond funds.
- Conservative risk: Invest in bond funds a percentage equivalent to your age. Put the rest in stock funds.
Fund a Roth IRA
If you are able to max out your 401(k), consider opening a Roth IRA and fully funding that as well. Roth IRAs are an opportune way to save and grow investments. Contributions to a Roth IRA grow tax-free, and qualified withdrawals are tax-free. The yearly contribution limit for both traditional and Roth IRAs is $6,000 for 2022. The catch-up contribution for those 50 years and older is $1,000.
Be Sure You Have Sufficient Insurance
Fact: Unforeseen hardship is the cause of most personal bankruptcies. You have a greater chance of avoiding bankruptcy when you have adequate health, disability, home and car insurance in place. Further, if you have dependents, think about term life insurance. Note that, in general, term life insurance is recommended over whole life insurance. Be sure to look for insurance agents who have a fiduciary duty to you, meaning the agent must legally and ethically act in your best interest.
Put Your Retirement Saving Plan First
It’s typically agreed that draining retirement funds to send children to college is a bad financial move. Aside from the fact that your 401(k) may not permit you to take out a loan on your retirement account balance, consider that your children have their entire working lives ahead of them, and they can begin saving for retirement much earlier than you did. At this stage in the game, protecting your own financial retirement security will help to ensure that the burden doesn’t fall to your children in the future.
by Stephen Reed | Accounting News, Financial goals, News, Retirement, Retirement Savings, Uncategorized
After working for decades to save for retirement, you’re finally ready to retire. This calls for a pivotal shift in focus from growing your investment portfolio to planning how you’re going to live off those savings, possibly for decades to come. With the right strategies in place, you can help make sure your retirement savings last.
Establish Your Budget
First, you need to determine your known expenses in retirement (both needs and wants) so you can build your budget to meet those costs. Some examples include:
- Mortgage payments
- Travel goals
- Debt repayment
- Health insurance and costs
- Any big purchases like a boat or a vacation home
Are you planning to minimize expenses in retirement? Are you able to tap into additional income sources in retirement through avenues such as passive income or a part-time job? Will your spending increase now that you’re not tied to a full-time job? These are just some examples of questions to ask yourself to be sure your assets can reach your goals. It’s important to answer them as honestly as possible. And if you start out with conservative estimates — meaning you plan for greater spending than what transpires — you’ll end up with more flexibility down the road. Of course, don’t forget to factor in extra expenses for unforeseen costs that tend to crop up
Is the 4-Percent Rule Right for You?
First, you need to figure out how many years of retirement you need to plan for. If you’re retiring at age 55, plan for at least 40 years of retirement. If you’re retiring earlier than age 55, plan to live until at least age 95 so you don’t run the risk of outliving your assets. If you’re retiring later than age 55, you won’t need to plan for quite as many decades.
Now that you know approximately how many years of retirement to plan for, you need to think about how much you should withdraw. The “4 percent rule” is typically a recommended starting point. Using this method, you would withdraw no more than 4 percent of your retirement savings. This leaves enough funds in the account to give your investments a chance to grow in future years. Growth is important to help withstand the impact of inflation on your assets.
While a 4 percent withdrawal rate will ensure that your money lasts a good while, a more current trend is to withdrawal just 3% from retirement accounts. This is due to the low returns on fixed income investments. Additionally, a more conservative withdrawal rate will give you more elbow room with your budget in the future.
Playing the conservative game is never a bad idea, and could even strengthen your financial position over time. For example, you can allow your accounts to grow by withdrawing just 3 or 4 percent if you consistently average 5 or 6 percent returns.
Balance Income and Growth
Your portfolio needs to line up with your goals, time horizon, and risk tolerance. This typically means selecting a combination of stocks, bonds, and cash investments that will work collectively to produce a steady flow of retirement income and prospective growth — while also helping to safeguard your money. For example, think about:
- Building a bond ladder: This is a fixed income strategy where investors disperse their assets across multiple bonds with varying maturity dates. This method provides for short-term liquidity to help manage cash flow and also hedge against fluctuations in interest rates.
- Adding dividend-paying stocks to your portfolio: Essentially, each share of owned stock entitles investors to a set dividend payment, which is paid in regular scheduled payments, either in cash or in the form of additional company stock. In this way, they are almost like passive income. They are tax-advantaged and provide protection against inflation, especially when they can grow over time.
- Continuing to Hold Enough in Stocks: To keep up with inflation and grow your assets, you still need to stay in the stock game. While stocks are volatile, insufficiency runs an even greater risk of depleting your nest egg too soon. Your stock allocation should align with your investment objectives and time horizon first, then modified for risk tolerance.
Withdrawal Sequencing Matters
The longer your tax-advantaged retirement accounts have to compound, the better off you’ll be in the long run. Therefore, it’s typically recommended to withdraw from taxable accounts first, followed by tax-deferred accounts, and finally tax-exempt accounts like Roth IRAs and 401(k)s. Of course, like anything with taxes, withdrawal sequencing has a number of caveats and exceptions to consider when it comes to your personal circumstances, but this is a reliable starting point.
Manage Your Money
You can help to preserve the long-term growth of your portfolio by managing your day-to-day finances. This means funding an emergency fund — ideally with at least a year’s worth of expenses. Additionally, you can adhere to the three-bucket school of thought:
- Immediate Bucket: This is where you stash quick-access funds for safekeeping. A high-yield savings account or a money market account fits the bill because the focus of this bucket is not to earn a high interest rate or return.
- Intermediate Bucket: You want the funds in this bucket to grow enough to carry you a little more into the future. You still want to avoid high risk or volatility, so opt for a low-to-moderate risk category that offers a reasonable return on your money — think bonds or CDs. Real estate investment could also fall into this bucket.
- Long-term Bucket: This bucket is for growing investments and outpacing inflation. If you’ve set up your immediate and intermediate buckets properly, you won’t need to touch your long-term bucket for at least a decade. Because the goal of these funds is to outlast you, you need to invest into this bucket more aggressively. Stocks, real estate investment trusts, annuities, etc. provide the most growth potential, so this is the bucket for those investments. It’s important to work closely with the guidance of a financial advisor on this strategy.
