Celebrate Financial Literacy Month by brushing up on retirement readiness

It’s no secret that retirement represents the greatest expense you are ever likely to bear. Underwriting 20 to 30 years’ worth of living expenses will generally cost more than any number of cars, houses or vacations you might buy. In light of April’s Financial Literacy Month, we thought it was a good time to remind our readers of the importance of planning for retirement and how pre-retirees can best position themselves for their golden years.

Retirement planning can be tricky to navigate. Education is key for investors who want to position themselves for success. No matter what phase of life or career you may be in, consider the following tips:

Identify, so far as you can, anticipated living expenses during retirement. A key driver to retirement planning is knowing how much you will need during retirement. To start, take a close look at current living expenses. If you plan to travel in retirement, determine how much to spend for each trip. If family obligations are likely to continue during retirement – such as education expenses or providing support for a family member – include that need in the budget. Talk with an advisor to ensure your expectations are carefully and thoroughly considered.

Calculate how much to withdraw from retirement accounts. A common question we are asked is: How much money can you withdraw from your portfolio without eventually depleting it? The specific amount depends on how the portfolio is allocated. As a rule of thumb, however, try to keep recurring withdrawals to less than 4 percent of the portfolio’s value. By this measure, a portfolio worth $1 million could potentially support recurring withdraws of up to $40,000 per year. Withdrawing less – such as 2 or 3 percent — might work even better. The value of a lower withdrawal rate is that you retain more of the portfolio’s value so it can potentially grow over time. With enough growth, the same rate of withdrawal can mean a lot more money in your future pocket. Conversely, a higher withdrawal rate – such as 5 percent or more – increases the likelihood of eroding portfolio assets. (Please note that we are referring to discretionary withdrawals. If an account is subject to Required Minimum Distributions, you may need to withdraw a larger percentage of the portfolio in order to comply with the Federal mandate.)

Maximize retirement assets. There are two ways to maximize retirement assets. First, maximize annual contributions to retirement accounts. This can not only help to build the wealth you will need during retirement, but also will reduce taxable income. Second, make sure that your retirement assets employ a suitable investment strategy. We often see investors who are tempted to invest too conservatively, too soon. Remember that these assets will need to support you for a long time. It is vital to meet with an advisor to design a suitable strategy.

Begin saving money in an after-tax account. While retirement accounts offer tax advantages that can help to build wealth, withdrawing money from them can be another story. That is because withdrawals are typically subject to ordinary income tax rates. This can render retirement assets an expensive source of income when you need money. For this reason, it is advisable to establish an after-tax account well before retirement. Even something as simple as a savings account can provide the resources needed to address emergencies or short-term needs without raising concern about adding to your tax bill. The more after-tax assets you can accrue now, the more you may be able to manage taxes during retirement. After-tax assets permit you to avoid the “cost” of withdrawing money from your retirement accounts.

Even the process of trying to save “extra” money offers a benefit: It may help to identify and then control expenses in the present. Ultimately, controlling and managing expenses is essential to the realization of retirement goals.

Determine when to take Social Security. It may make sense to delay taking Social Security benefits, since doing so increases those benefits by approximately 8 percent per year for every year you wait. This may be particularly meaningful for a family in which one member earns significantly more than the other. By waiting, the benefit of the higher wage-earner will continue to increase. Since the surviving spouse will keep only the larger of the two, maximizing that larger benefit can help to protect the survivor.

Review and update beneficiaries. It is important to review and update beneficiary designations. Incorporate this as part of an annual review. Family changes and financial changes are part of life. At such times, you will want to revisit the beneficiaries selected for accounts like a 401(k), Roth IRA, etc., to ensure that they reflect your wishes.

Designate a Trusted Contact. As you approach retirement, you may want to set up a “trusted contact” with your financial service provider(s) that can be notified if/when financial exploitation is suspected. Financial scammers are getting more and more sophisticated and all investors (including those approaching retirement) are at risk. Having a trusted contact can add an extra level of protection to your accounts.

Stress-test your financial plan every five or so years. Meet with an advisor to review your entire financial picture from time to time. Examine not only existing assets and current investment strategies, but also anticipated contributions, projected Social Security benefits, and any other sources of future cash flow in light of expected income need during retirement. This will help you to truly understand if you are on a path that will lead to your desired outcome during retirement.

Retirement planning is a dynamic process with many moving “parts” and changing concerns. It is crucial to start early and learn all you can about the process, as well as to work with professionals who can ensure that your path to retirement is on par with your expectations and wishes.

Nathan Boxx, Bradley Newman, Jason Seltzer

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