3 T’s to Retirement Planning

Retirement Planning | 0 comments

3 “T’s” to Keep in Mind When Planning for Retirement
For many of us, retirement planning ranks near cleaning the garage on our list of priorities. We know we should do it, and every time we park the car or open the investment statement, we’re reminded of the need to address the situation, but we find it far too easy to simply shut the garage door or file the statement until the next time we’re reminded. If you’re like me, a gentle nudge (or a 2×4 across the head) can provide the jumpstart we need. Here are three considerations to get started down the path:
1. Taxes: Retirement plans such as a 401(k) and Traditional IRAs allow investors to save on a “tax-deferred” basis – in other words, you get to forego paying income taxes on the money you save in the retirement plan. The savings continue to grow tax-deferred until you withdraw them, at which point, they are taxed at your new income tax bracket (and without penalty provided that you are over age 59 ½). This strategy is advantageous if you are taxed at a lower rate than when you made the contributions, however, not everyone is in a higher bracket right now compared to the rate they’ll be taxed at in retirement, therefore it may be wise to consider a Roth option – i.e. pay income taxes now and never be taxed again provided that distributions qualify for the favorable tax treatment. The bottom line is that tax-planning isn’t “cookie-cutter” and requires individual consideration of your situation.
 

The bottom line is that tax-planning isn’t “cookie-cutter” and requires individual consideration of your situation.

photo credit Huffington Post
2. Time-Horizon: It’s a statistical fact that a diversified stock portfolio outperforms a bond portfolio on an average annual basis. What’s the trade-off? Why wouldn’t everyone just invest in stocks? Generally speaking, you have to be willing to take higher risks in order to enjoy the higher rate of return that stocks have to offer. It’s commonly accepted that as an investor approaches retirement, risk should decrease in a portfolio as the “proximity to use” of the investment income nears. However, what if you can’t afford to take less risk in your portfolio; i.e. what if you need the additional return that stocks provide? What if the financial planning process reveals that you have adequate income from sources such as Social Security, a pension, after-tax savings, or elsewhere, and therefore you can “afford” to take more risk, or no risk at all with you principal? Also, do you want to preserve your account balance as an inheritance to beneficiaries, or do you “want the last check you ever write to bounce?” These are important considerations that influence the construction of a portfolio as an investor plans for retirement.
3. Travel & Expenses: The principal of compounding growth; e.g. “the snowball effect” is best realized when investments are made early. Few of us are more that cognitively aware of this principle. After all, we’re just trying to survive the
grind of work, kids, too little sleep, and too many things to do! We’re fortunate if we’re saving up the match our employers offer in our 401(k), and so we generally aren’t asking ourselves what is truly the savings target we should be aiming for. In general, I don’t advise counting on more than a 20% reduction in living expenses in retirement.
Anecdotally, I’ve found that the earlier one retires, the more immediate and higher the income needs can be – this is the time you’ve been waiting for all your life: the dream vacation, remodel or home purchase, RV, or just simplyRich Cullen Financial Planning the fact that you have more time on your hands and are more prone to spend money are discretionary items. It’s a worthwhile endeavor to have an accurate appraisal of your current spending habits and debt obligations are as a starting point to project what you’ll need in the future.
photo by Market Watch
In summary, there are certainly many factors when considering both the ability and desire to retire. Getting an early jump on some basic planning components can pay huge dividends (literally!) in the future. This certainly isn’t an exhaustive list of considerations: Estate planning, Long-Term care, and the approach to debt reduction and cash flows are just a few others. When it comes to planning for retirement, there is no “one-size-fits-all” solution, so taking some time to weigh your individual situation and discuss it with a financial planner can help set you on the right trajectory to hit your goals!
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