6 Retirement Tax and Investment Planning Topics To Consider.
Are you nearing retirement age and feeling overwhelmed by all the nuances of managing your finances during these years? Don't worry, you're not alone! Planning for retirement can be a big task, we strive to help navigate this stage of life with confidence and peace of mind.
As a CERTIFIED FINANCIAL PLANNER™ (CFP®), our team has helped many individuals like yourself prepare for retirement and pursue their financial goals. In this article, I'll break down some of the essential steps you should consider to help improve the transition into your retirement years.
Step 1: Tax Withdrawal Strategy - One of the key considerations in retirement planning is how to withdraw funds from your various accounts in a tax-efficient manner. Every dollar you pay less in taxes can be a dollar you get to spend. By strategically withdrawing certain amounts from different account types (such as traditional IRAs, Roth IRAs, and non-retirement accounts) you can help mitigate your tax liability and increase your take home retirement income.
Step 2: Asset Location – Many have heard of asset allocation but we often see location is forgotten, and it’s necessary! Craft a plan for what investments you want to own in different accounts. For example; how much stocks, bonds, real estate, and cash should you have in each of your accounts? Managing this wisely can help reduce taxes, risks, and possibly enhance returns over the long term.
Step 3: Retirement Asset Allocation - When planning for retirement, it's important to adjust your asset allocation to reflect your changing financial needs and goals. As you transition from the accumulation phase to the distribution phase, it’s important to consider updating your investment approach to help protect your nest egg and generate a more reliable stream of income in retirement.
Step 4: Tax Bracket Considerations - As the laws are written, for many programs you pay more if you show more taxable income in certain years. For example; health insurance, Medicare, Social Security, capital gains. Be mindful and look at your estimated incomes for each item to see if you can lower the cost or taxes involved. Be mindful that distributions impact your tax bracket.
Pro Tip: This one especially can have many moving parts. It’s wise for many to seek help from a team that is in the know of these programs.
Step 5: Emergency Fund Planning - Life is full of unexpected twists and turns, and retirement is no exception. That's why it's crucial to set have a plan ahead of time for market downturns or unforeseen expenses. Depending on the current economic environment it could change how much you want to hold in a safer bucket of money for this.
Step 6: Spending Goals - Last but not least, we encourage creating a spending goal. You’ve worked hard to accumulate this money and you should make a plan to use it for your goals! You may want to look at projections and analysis to see how much you may be able to spend and what you are comfortable taking out of your investments each year to live on. Based on your spending goal, are you projected to have enough money to live on forever or will you eventually run out? If so, at what age? Are there changes that should be made? If you can lower your tax liability could you spend more?
We hope this article helps you with a few key topics to consider as you navigate retirement planning. Remember, everyone's situation is unique, and should be accordingly based on your situation!
Disclosures:
Stock investing includes risks, including fluctuating prices and loss of principal
Asset allocation does not ensure a profit or protect against a loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price