Expert Insights for Smart Financial Planning
How to Take Control of Your Retirement
It’s human nature to be anxious about the unknown — which explains why so many people are nervous or even fearful about retirement.
Often, they’ve been working — and getting a regular paycheck — for 40 or 50 years. To let go of that is not an easy thing. It can feel as if you’re giving up complete control of your financial security.
Of course, that isn’t true. If you’re the type of person who had command of your financial life when you were working, it’s likely you still will in retirement. It just takes proper planning.
Here are three things you can control as you move into retirement:
1. Having a diversified income plan.
Many people rely on mutual funds as their only source of investment income in retirement. And that really can be scary, because if the market was to drop 20%, 30%, 40% or more — as it did in 2008 — you’d have to reduce your income by an equivalent amount.
Your retirement could last for decades, so the more diversified your investment income is, the safer you’ll be from financial hardships. If you lose one source of income, you can always fall back on another.
Of course, you can have some of your money invested in mutual funds if you like, but it’s wise to also include some fixed-income options, annuities or dividend-paying positions in your plan. That way, you won’t be relying so heavily on the stock market and hoping things work out for the best.
2. The decision on when to start drawing Social Security.
I still meet people who think they should put off filing for their Social Security benefits for as long as possible — even if it means some discomfort early in retirement.
Yes, your benefits will be reduced if you take them at 62, or any time before your full retirement age. And you may have heard that for every year you defer claiming Social Security beyond your full retirement age, you can earn a delayed retirement credit of 8% — up until age 70. That’s true, but it isn’t the whole picture.
The Social Security Administration designs the benefit formula to offer, on average, the same amount in lifetime benefits regardless of when you begin receiving payments. So it’s a trade-off: Do you want more checks that are smaller and come sooner? Or would you prefer fewer checks that are larger but come later in life? It’s completely up to you to decide what suits your lifestyle goals.
One of the things we’ve noticed is that our clients who are in their 60s and 70s are a little more active. They travel more, or they have other passions they’re involved in. Once they get into their 80s and 90s, they don’t do as much, and they don’t require as much money. I prefer to see retirees have the funds for the things they want to do when they’re able — but that’s a decision every individual or couple needs to make.
3. How and when you pay income taxes on your retirement assets.
If you have multiple income streams from which to draw, nothing says you have to turn them all on at the same time. An important goal is to have the income you need and want each year without letting taxes erode your nest egg.
You can better manage your taxes if you follow a hierarchy. Typically, we recommend withdrawing from taxable accounts first (brokerage and bank accounts, certificates of deposit, interest on bonds). Next would be any tax-deferred accounts (401(k)s, IRAs). And the last place you want to draw money from is your tax-free accounts (Roth IRAs, Roth 401(k)s, municipal bonds).
Remember: If you continue to grow money in your taxable and tax-deferred accounts, you’re just growing your future tax bill. But your tax-free accounts can continue to compound without any impact to your taxes.
You also can minimize what you owe by managing your tax bracket. Your strategy should be to structure every retirement year to be taxable within the limits of the lowest bracket possible. And if there’s room, you may want to fill that bracket by withdrawing some of the money in a tax-deferred account for a Roth conversion or some other strategy. The money in the Roth IRA can grow tax-free, and you’ll lessen the chance that required minimum distributions will push you to a higher bracket in the future.
Retirement doesn’t have to feel like a frightening freefall. A steady but flexible plan that keeps your income and taxes on track can help you face your financial future with the same sturdy grip you had while working.
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