Retiring In A Volatile Market
Planning for a nearing retirement during market volatility is unsettling.Whether you are on the cusp or have already made the leap, a market downturn’s impact on your savings will be felt now and potentially for years to come. How do you keep your plan on track and your desired lifestyle in place?It all comes down to managing income, expenses and taxes appropriately.
There are strategies that you can implement today that can help to improve your retirement outlook and ensure you are able to live the life you desired in retirement. Keep in mind that the use of some of the strategies will be even more powerful if you start planning for them well before retirement.
Set A Realistic Budget & Stick to It
Lifestyle creep can impact us all. No matter how carefully you budget, the numbers on the spreadsheet can look much different from reality when faced with fun events, delicious food, seeing family, a quick weekend trip, or anything else. You get the idea.Couple that with a volatile market and you may find yourself having to sell investments in a down market. This not only cements the loss, but it also increases the amount of shares you may need to sell to cover your expenses, further hindering the ability for your portfolio to recover.Reviewing your budget to ensure you keep your spending at a level that is commensurate with your income is critical. This may require some difficult decisions about cutting back when markets are down, but it can also mean that you can afford to spend more when markets are good.
Create An Asset Allocation Aligned with Your Financial Needs
Different types of investments have different risk and volatility characteristics associated with them.For example, small company stocks are a lot riskier and will move up and down in price much more than US Treasury Bonds, which have much smaller price fluctuations.That’s why it is important that your portfolio is invested in a manner that suits your financial needs when approaching or living in retirement.That may mean keeping near term income needs in safer investments such as cash or short-term bonds, more intermediate term income needs in risker bonds and long-term income needs invested in stocks to provide growth potential.Having these different “buckets” also means that you won’t have to sell your risker stock investments when the market is down and can allow for their price to recover.
Take a Proactive Approach to Taxes
Planning strategically for taxes can help you keep more of your income.
Investing in a tax efficient manner, understanding what accounts to draw from and when and knowing what investments to sell will all impact the after-tax value of your money. And the less you pay in taxes, the more that stays in your pocket to fund your retirement.
So, what are a few actionable ways to help manage taxes?
• Hold tax efficient investments in taxable accounts and income producing assets in tax-deferred accounts.
• Take advantage of long-term capital gains by holding investments in a taxable account for more than 1-year.
• Use tax loss harvesting to your benefit.
• Create income flexibility by having accounts with different tax characteristics – more on this below.
Maximize Tax-Free Social Security Income
A significant percentage of people claim social security at age 62, the earliest allowable age to claim. And while there is no one size fits all recommendation when it comes to social security, claiming at 62 can have significant long-term disadvantages.
Here is something you may not have known…part of your social security benefits may be taxed as ordinary income. But they also have a tax-free component of at least 15%. Whether you pay taxes on the other 85% depends on your overall income level, but you can increase your tax-free income by maximizing your benefits.
Waiting until age 70 to claim increases your annual benefit by 8% for every year from age 62, the earliest point you can claim social security. If you are married, it may make sense for the spouse with the highest income level to wait until age 70, while the lower-income spouse claims at early or full retirement.
Utilize an Asset Location Strategy – Start Planning for This Early!
Asset location refers to the types of accounts where you hold investments. They are tax-deferred such as pre-tax 401(k)s and IRAs, taxable brokerage accounts and tax-free accounts.
The goal is to utilize a combination of these accounts to create the highest after-tax value of your money. The general principle is to match the asset up to the account’s tax treatment. Stocks receive tax-favorable treatment on qualified dividends and long-term capital gains, so one option is to put them in a taxable account. If you hold municipal bonds, they also go into a taxable account. Higher yielding corporate bonds would be held in a tax-deferred account, as the lower growth rate compared to equities will help reduce required minimum distributions, which are based on the account value.
Using the Roth IRA account as a flexible source of funds can help keep you in lower tax brackets. In years when taxable income is higher, using funds from the Roth account for living expenses can reduce income taxes and help you avoid the IRMAA Medicare Part B and Part D premium surcharge.
Take Advantage of Lower Asset Values with a Roth Conversion
The drop in value of 401(k) and IRA accounts is painful – but it also means that you can convert those assets to a tax-free Roth account with a lower tax liability. This can set you up for a more effective asset location strategy and can help you control future income and taxes by eliminating RMDs on the assets that are converted.
Retiring in a volatile market adds a layer of complexity to all the choices you need to make. It means emphasizing controlling your expenses, whether lifestyle or the taxes on the income you draw from retirement accounts. The critical thing to remember is that you do have options, and you can control several important levers that can help you keep your retirement plans intact.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original.