By James D.Hoyt, CPWA®, CFS®
Founder and CEO
By James D.Hoyt, CPWA®, CFS®
Founder and CEO
Americans have a bit of a problem with retirement. Saving money is always difficult with ever-rising costs of living, but many Americans drastically underestimate their post-career financial needs. For starters, non-smoking retirees who call it quits at age 65 have a 50% chance of making it to age 90 – that’s 25 years of retirement income. Unfortunately, the median balance in retirement funds for Americans age 55 to 64 was a mere $107,000. And a stunning 33% of Americans have no retirement savings at all.
Social Security will help brunt some of this impact, but guarantees of it being fully funded in the future are no longer on the table. Plus, there’s no guarantee you’ll be able to work deep into your 60s. Family health, economic downturns, and other risks are always present in our careers. How do we ease these concerns? By planning for retirement with a trusted advisor.
Retirement planning involves many different gathered financial disciplines. But when these disciplines are put together, a roadmap for post-work life will appear. And it’s not something to be put off – even young people in their 20s employed for the first time should understand the key features of retirement planning.
Retirement planning is more than just socking money away under the mattress. How do you get the most bang for your buck with investments? How should you structure your assets to minimize taxes? And what happens if the markets melt down? These questions can produce sleepless nights if you don’t have an advisor for guidance. Every person is different with individual goals, dreams, and risk tolerances. The ideal retirement plan for a wealthy business owner will be drastically different from someone just beginning to build a new career. Here are a few of the main retirement planning topics that advisors have expertise in.
“Don’t spend more than you make” is advice you can get from your mother, but saving for retirement is a little more complex. How much will we need for retirement? That depends on your goals and aspirations once you finish working. Do you want to travel the world or spend more time with your grandchildren? Where do you want to live in retirement? And how much can you afford to save now while still keeping up with your ideal lifestyle?
Saving for retirement also means using the proper vehicles to take advantage of tax breaks. If you have a 401(k) at work, you’ll be able to contribute $19,500 annually while getting a tax writeoff. Pair that with a Roth IRA and you’ll have tax savings on both the front and back end of your financial journey. A savings plan is something a financial advisor can tailor to your specific needs and goals.
Managing your investments is a crucial component of retirement planning because our risk tolerance changes over time. When you’re young and entering the workforce for the first time, you have decades of human capital at your disposal and the longest time horizon in the room. For young workers, taking risks in the markets isn’t only acceptable, but sensible. The yearly ebb and flow of stocks isn’t a concern to someone who has decades to recoup any losses.
With that said, when you are young, planning for inflation may not be top of mind, but it’s an important step when managing your investments.
As retirement age approaches, losses are magnified since we no longer have time to make them up. If risk preferences aren’t altered and a 30% stock market drawdown happens the year before you plan to retire, your plan might get thrown out the window. Managing investments means managing risk throughout your time horizon.
As retirement nears, most savers will mark down their risk acceptance and rotate into a more stable portfolio. A 90/10 stock to bond portfolio might make sense for a 30-year old, but a 63-year old could face disaster if a bear market hits and their carefully constructed nest egg receives a 25% haircut only two years before their planned retirement.
Investment management isn’t just about portfolio construction and risk tolerance either. Once we enter retirement, how we spend down our savings is nearly as crucial as the time spent building them up. If you have a variety of retirement accounts like a 401(k), Roth IRA, and/or a taxable account, the timing of your asset sales and withdrawals will go a long way toward determining how long your assets will last. That brings us to our next important aspect.
If you’re reading an article about retirement planning, you probably already know the difference between capital gains taxes and income taxes. Any asset held and sold for profit in less than one year will be taxed at the ordinary income level. But holding for longer than one year means getting hit at the much more manageable capital gains rate, which currently maxes out at 20%.
Tax planning is arguably the most important aspect of post-career planning because our human capital has been extinguished and the primary concern switches from capital appreciation to capital preservation. Investing in funds with the lowest fees is important here, but so is minimizing your tax obligations. The pool of money we can draw from at this point is now fixed. Once retirement funds are exhausted, that’s it – seniors can’t go back to work and rebuild another nest egg and no one wants to be entirely dependent on Social Security and Medicare for their well-being.
Tax planning helps retirees pay what they owe each year, but not a penny more. A financial advisor with tax planning chops can recommend which investment accounts to draw down first, how to manage unexpected expenses, and when to tap into Social Security. Tax evasion is illegal, but tax planning can prevent us from needing government supplements in our golden years.
How much insurance do you need in retirement? We all know that health and life insurance are must-haves, but how much life insurance do you need? And what about other types such as disability or long-term care insurance? As we get older, the risk of an adverse health event multiplies, and retirees should expect at least one major hospital stay or surgery during their golden years.
Insurance is a confusing topic, but it’s necessary to discuss it with your advisor. Even pets have their insurance plans these days. Paying too much for insurance can drain your nest egg over time, but paying too little could see it evaporate in one fell swoop. Insurance planning should be a top priority for all financial planners, especially those with clients staring down retirement.
Retirement planning isn’t something that should be neglected, especially as our income rises and assets accumulate. Making a planning mistake can be costly. For example, investing in funds with high expense ratios that don’t outperform the market could create a six-figure hole in your nest egg. Or maybe you take on too little risk and are forced to load up the stock segment of your portfolio when you really should be trimming it. Retirement planning helps avoid these uncorrectable mistakes, but that’s not its only benefit.
Plans can be altered as circumstances change, but having a retirement plan gives you a roadmap for your working career. You know when to crank up your savings rate, adjust your asset allocation, and take risk off the table. But more importantly, you’ll be able to end your career on your own terms.
You don’t need to keep working into your golden years with the concern of running out of money. When you hit your specific milestone, you can walk away because you want to. And if you want to keep going, well, no one ever panicked over having too much money in retirement.
Retirement can be a scary proposition. Not only does your daily routine change, but your nest egg becomes a fixed amount that must be strategically drawn down over the course of your remaining years. In retirement, nothing takes a bigger bite out of your savings than taxes.
You might get a refund if you overpay the IRS, but you’ll permanently lose savings if you withdraw your funds inefficiently. Reducing your overall tax burden is an important job for a financial advisor. You only have so much money to play with in retirement, don’t let the IRS take more than they deserve.
Life is full of unexpected twists and unfortunately, these unpredictable events get expensive as we age. Whether it’s an injury or diagnosis of a degenerative disease, having a sturdy plan for retirement can help smooth these hardships. If you suddenly find yourself needing a windfall to pay a medical bill, you won’t need to go into debt to resolve it. An ample nest egg provides options when it comes to our health and well-being.
Retirement should be a joyful time free from the burdens of work and financial constraints. But as the statistics show, far too many Americans stress about their finances as retirement approaches.
In fact, according to a recent CNBC poll, 77% of Americans are feeling the pressure. 77% of Americans are anxious about their financial situation—here’s how to take control
Whether it’s starting too late or simply making critical errors along the way, falling short of our retirement goals is something that can’t be undone. But if you plan carefully, spend and save wisely, and invest in the proper vehicles, you’ll achieve something far greater than financial security – peace of mind. And when you’re in your golden years, a good night’s sleep can often be the best reward.
Ascendant Financial Solutions, Inc. is an independent SEC Registered Investment Advisory firm serving clients in the Flagstaff and Phoenix, Arizona areas. With more than thirty years of experience in the financial industry, we partner with families, business owners, and retirees to ascend to greater financial heights on their journey to financial freedom. No matter how complex your financial goals are, our team will rise to the challenge to help you meet your goal.