The transition to retirement can be an exhilarating but also potentially stressful time for many individuals and their families. The newfound freedom to pursue those “someday” dreams is accompanied by anxieties of whether or not there are sufficient financial means to make them a reality. For this reason, a primary key to a successful retirement is thoughtful preparation and planning.
Before jumping off the work treadmill too hastily, it makes sense to carefully look before you leap. Pre-retirees have a myriad of resources available to help evaluate preparedness, although working with a financial professional during this transition is always recommended.
Creating a budget and plan. As a first order of business, drafting a financial plan will bring up a few questions that can help provide some reassurance or guidance on whether or not you’re financially ready for retirement. Could you maximize your retirement contributions and company match for a few more years (including catch-up contributions)? Should you extend your employer’s health insurance plan a bit longer? What about your liabilities? Itemizing a thorough expense inventory and determining what you can reduce or even eliminate before retirement can greatly help your future cash flows. Can you consolidate high interest debt into one lower rate account? There are often more attractive borrowing and refinancing options available while you are still working than once you are retired.
[See: 7 Things That Can Derail Your Retirement Investing.]
Further, do you know all of your available retirement benefits? In addition to your company’s plans, other organizations and resources like AARP, the Department of Veterans Affairs, your parish and trade unions may offer valuable retirement benefits which you should investigate ahead of time. This can include anything from health insurance to discounts with a variety of companies.
Developing a realistic retirement budget is a critical part of this planning process. During working years, many families sidestep this exercise because the regular inflow of paychecks seemingly dulls its urgency. However, when paychecks are no longer flowing, the importance increases. Are your withdrawal assumptions reasonable? Is your portfolio asset allocation suitable to your needs and goals? Sensitivity to your taxable and non-taxable withdrawals, staggering income streams and optimizing Social Security are all critical components to stretching your retirement dollars and making sure you don’t outlive your nest egg.
Take advantage of the new tax plan. For the first time in 30 years, the U.S. has a new tax plan starting in 2018. While there are numerous changes and nuances to the law, the good news is that for scores of middle income families throughout the country, the marginal tax rate most likely has been reduced, meaning more discretionary spending (and savings) money.
Additionally, the final tax law did not include a mandatory first-in-first-out (FIFO) rule, which had been under consideration in earlier versions.This means that you retain the potential for tax sensitivity and flexibility when selling investments during your retirement years.
One more potential positive of the final law for retirees is that there was not a change to the home sale capital gains exclusion.This means that retirees who may need or choose to downsize their home in retirement retain a meaningful tax benefit.
[See: Warren Buffett’s 8 Favorite Stocks.]
Elimination of personal and dependent exemptions, new caps on state and local tax (SALT) deductions, revisions to home mortgage interest deductions, changed medical expense deductions, etc. all impact individuals and families differently. Recruiting a tax professional to guide you through the twists and turns can help you stretch your valuable retirement dollars by keeping more of what you earn.
Implement a blended approach to investments. Conventional wisdom used to say that you should own stocks during your accumulation (working) years to maximize your nest egg’s growth potential and gradually shift more toward bonds as retirement approaches in order to reduce risk. However, since breakthroughs in medicine are allowing us to live longer, it may actually be riskiest for you to be overly conservative too early. During this period of historically low interest rates, locking in low yields may actually result in reduced future purchasing power as inflation rears its head and possibly causes you to even outlive your savings.
A well-crafted asset allocation plan balances risks and tax impacts, optimizes income streams and maintains a stable foundation during the unexpected events of retirement.
Optimize your retirement income sources. Where will your paycheck come from in retirement? For most, the answer is a variety of sources, including: 401(k)s, Social Security, pensions, benefit plans and annuities. Optimizing these resources in the most tax-advantaged way possible is invaluable. Not all retirement accounts are created equal in this regard. For example, Roth IRAs and 401(k)s do not have required minimum distributions the way traditional pre-tax IRAs and 401(k)s do, and further, qualified distributions from them are tax-free. This means that these instruments can grow longer and distribute in a more tax-advantaged way than other retirement income sources.
Social Security optimization is also a critical retirement income strategy. While individual situations vary, as a general rule, delaying the receipt of your Social Security income can result in larger total payments to you.
Additionally, some retirees seek to reduce uncertainties and risk in retirement through “guaranteed” products like insurance and annuities. While these can be appropriate in many circumstances, it is important to know that these products come in many shapes and sizes so careful comparison shopping and review of the fine print can help avoid unexpected surprises like abnormally high fees, long “lock-in” surrender periods, and adverse tax treatment.
[See: 7 Blended ETFs to Own for a Diversified Portfolio.]
Simply knowing what your retirement income sources are is only step one of proper retirement planning. Optimizing those sources with the help of a financial professional can ensure you maximize those precious funds and stretch them for as long as possible. After all, most individuals only make the transition to retirement once during their life, but professionals have been assisting retirees for years.
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4 Tips to Stretch Income in Retirement originally appeared on usnews.com
