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.
by Daniel Kittell | Accounting News, CPA, IRS, News, Resources, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual
Whether you’re working with a robust tax refund, a work bonus, or an inheritance of some kind, here’s a list of positive moves to make with that windfall.
Evaluate Your Debt
There’s “bad” debt and “good” debt. Good debt is an investment that will grow in value or generate long-term income, such as student loans or home equity loans. Bad debt is anything that quickly loses value, doesn’t generate income, and/or has a high interest rate, such as credit cards and cash advance loans. Whenever you come into extra funds, it’s recommended to pay down or pay off bad debt as a top priority.
Consider Your Emergency Fund
Your rainy-day fund should be stocked with at least three months’ worth of living expenses. If yours isn’t there yet, think about boosting it with your refund. If you are a business owner or your income fluctuates, consider shooting for six months’ worth of living expenses.
Fund Your 401(k)
This is a good time to open or boost contributions to your 401(k) or individual retirement account. The 401(k) contribution limit for 2020 is $19,500 for those under age 50, and taxpayers over age 50 are allowed an additional “catch-up” contribution of $6,500.
Open a Roth IRA
If you’re married filing jointly and have a combined adjusted growth income of less than $196,000, you can contribute up to $6,000 to a Roth IRA. The adjusted growth income cap for single filers is $124,000. This is meant to be a long-term money management move, but if you need to withdraw sooner, you can do so tax-free and penalty-fee, though you may owe taxes and penalties on any earnings (not regular contributions) you withdraw.
Invest in Stocks
Assuming you’ve paid off debt, built up your emergency savings fund to three to six months’ worth of living expenses, and boosted your retirement fund, you could think about consulting a financial professional to build a stock portfolio that aligns with your financial goals and personal risk tolerance. Or, if you’re stock market savvy, you can open a brokerage account on your own and start investing in a stock you believe has the potential for growth.
Additional money moves you could make with your refund (again, assuming debt, emergency savings, and retirement funds are taken care of) include making home improvements; opening up a savings account for something big, like saving for a down payment on a house; or donating to charity.
by Stephen Reed | Accounting News, News, Retirement, Tax Planning - Individual
From Millennials who seem to never save for retirement to Boomers who are now wondering if what they’ve saved will be enough, retirement seems to be a never ending topic of worry and anxiety for most. Below are five of the top misconceptions regarding retirement and how to be more prepared when your time comes.
- I will just continue to work when I’m “retired”
Many Americans believe that even when they “retire” from their full-time roles, they will continue to work at least part-time, whether for financial reasons or simply to stay active and social. However, the reality of that idea is actually somewhat slim. In fact, about 79% of workers polled by the Employee Benefit Research Institute said their plan is to work for pay during retirement. The actual percentage of those who work in retirement? Around 29%. Although many plan to work, life and the workforce may look drastically different when retirement comes, so it’s better to be prepared rather than assume the money will continue to flow.
- Social Security is going bankrupt, so I cannot count on the system
While it’s safe to say there is plenty that could be done to improve the Social Security system, it seems many in the workforce believe the future of our government retirement system is significantly worse than it is. Even if the government takes no steps to repair the financial situation of Social Security, the system will continue collecting payroll-tax income and other revenue to pay beneficiaries most of their benefits for decades. According to a report by Social Security trustees, after the year 2034, the system would only have enough funding to pay 77% of scheduled benefits. So, while most beneficiaries would need to adjust their spending, they would only need to calculate a 23% differential, not a complete loss.
- My Social Security benefits won’t be taxed
Unfortunately, this is not entirely true since the Social Security Administration does in fact levy taxes on those receiving benefits, namely those who are bringing in other income. For retired singles who make more than $25,000 annually (outside of their SS benefits) and couples who make more than $32,000, they could be taxed up to 50% of their benefits. Singles making more than $34,000 annually and married couples making more than $44,000 could see up to 85% of their benefits taxed. Thus, you may want to consider the financial value of working during retirement, as limiting your income could actually be more profitable.
- I’ll invest more in cash than stocks for my long-term strategy
When surveyed about the best assets to invest in for 10-plus years, most Americans responded with cash or real estate rather than stocks, bonds or gold/precious metals. While real estate is certainly not a poor long-term investment, cash holdings, like money-market accounts, only yield dividends that are on pace with inflation at the time, which is anything but reliable. Stocks statistically offer higher, more significant dividends, but many individuals avoid them out of sheer lack of knowledge of the market. Therefore, consider doing your homework, or working with a reliable financial advisor before you assume that cash holdings are your best bet.
- I can make up for my lack of retirement planning early on by saving more in the final years
When questioned about which strategy would be most effective in “making up time” for retirement planning, most Americans answered they would save 3% more of their salary in the last five years leading up to retirement, over working for two more years or delaying Social Security benefits for two years. Unfortunately, this is actually the least effective method when comparing the three, so you may want to consider a few extra years in the workforce if you are able, or at least considering holding off on those benefits.
Although it is virtually impossible to prepare for everything that may come up during retirement, it is possible to be educated and avoid common pitfalls. So before you jump right into that part-time role, or you hold off on saving now in lieu of saving more later, or you start right in on receiving Social Security benefits, consider speaking with a financial advisor to determine a plan that makes the most sense for you and will help you feel secure when the big “R” rolls around.
