Understanding Required Minimum Distributions (RMDs)
After years of saving for retirement, there comes a time when people must begin to withdraw from their accounts, even if it is just a portion. This is known as a Required Minimum Distributions (RMD) and is a rule retirees and pre-retirees are subject to follow. When this money should be withdrawn, along with how much must be taken out, will depend upon several factors: type of account, age, retirement account’s prior year-end fair market value, and life expectancy. Life expectancy is a formula dictated by the IRS. To avoid costly penalties, it is important to understand the rules and strategies for managing your retirement withdrawals. In this article, we’ll look at what RMDs are and take a deeper dive into the various factors surrounding the rules regarding RMDs and the amounts that need to be withdrawn. What are RMDs and Why Are They Important? RMDs are mandatory withdrawals from certain types of retirement accounts upon reaching a specific age. It is important to understand the rules surrounding RMDs because when people do not adhere to them, they will be given tax penalties. Additionally, making withdrawals helps to ensure a steady income stream throughout retirement. Need help figuring our your RMD status and requirements? Find a financial advisor who can help! RMD Rules: Who, When, and How Much? RMD requirements apply to various types of retirement accounts, have age requirements, and calculated amounts. Let’s take a closer look at how these RMD rules work because they directly affect your taxable income. Who Needs to Take RMDs? Account Types and Eligibility Once a retirement account owner reaches the required age to take RMDs, they must do so, lest they face IRS penalties. Retirement accounts requiring RMDs include: *Keep in mind that RMD rules do not apply to Roth IRAs for the individual account owner, only to inherited Roth accounts since they aren’t tax-deferred accounts for the original owner. Age Requirements for RMDs An important rule to know is if you make withdrawals from a retirement account before you turn 59 ½, you will receive a 10% early withdrawal penalty. This isn’t advisable because it is costly. You can choose to withdraw at age 59 ½ without penalty, but you would still be young enough where it’s not required. Many people choose not to begin withdrawing at 59 ½ to avoid increasing their taxable income. However, once you turn 72 years old, you must begin to make withdrawals within the required distribution period for your retirement savings (the IRS provides this information). If you reach 72 after December 31, 2022, you can begin withdrawing at age 73. Keep in mind, that these rules are always subject to change since laws continually change regarding retirement accounts. Most recently, the Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act) directly affects RMDs. Furthermore, it’s possible other laws may also be passed or further modifications of the SECURE Act occur (this law was most recently modified in December 2022). Previously, individuals were required to take RMDs at 70 ½, but with the new change, they can delay this until age 72, and no later than 73. Keep in mind, that retirement funds taken out become taxable, so you want to strategically select the time frame you choose to begin withdrawing. Working with an experienced financial advisor can help you determine what’s required in your situation, along with determining the best retirement savings and withdrawal strategy for you. Ready to speak with a financial advisor? Use Our Free Advisor Match Tool How to Calculate Required Minimum Distribution (RMD)? The Internal Revenue Service uses the Uniform Lifetime Table (ULTAB) to calculate RMDs. For original account owners, the account’s year-end balance is divided by the current year’s life expectancy factor, which can be found on the ULTAB, to determine the required withdrawal percentage. This is based on your age and your retirement account’s fair market value. Because your end-of-year balance and life expectancy factor change every year, your RMD will be different each year as well. However, there are some variations of this rule. For instance, if you have a spouse who is more than 10 years younger than you, and you’ve listed your spouse as your 100% primary beneficiary for the year, this will directly affect your RMD. The IRS, in this case, will use the IRS Joint Life Expectancy Table (see page 7 of this IRS document) instead. People with much younger spouses will find the inclusion of their ages will increase the life expectancy factor, which changes your RMD requirement. Essentially, with a higher life expectancy factor, the IRS will permit you to withdraw less money from your retirement account. Tax Implications of RMDs RMDs are typically taxed as ordinary income, so this can potentially greatly impact your tax bracket. A primary effect is for people who are still working but reach the age when RMDs are required because they’ll have more income with each withdrawal, subsequently increasing their taxable income. Fortunately, there are financial strategies you can leverage to help reduce the potential tax effects of RMDs. For instance, you may be able to utilize Roth conversions or use pre-tax dollars in retirement accounts. Using these or other strategies could help reduce tax liability and other burdens associated with RMDs. Financial advisors can help identify tax-reducing strategies. Get Matched With a Financial Advisor Today Planning and Timing Your RMD Withdrawals Ideally, you want to include timing in your retirement planning strategy. Since RMDs from tax-deferred retirement accounts increase each year once you reach 73, you may need to offset some income to avoid being put in a higher tax bracket. Bottom line, you should know your deadlines for taking RMDs each year, along with the potential consequences of missing your deadlines. Equally, you must balance your withdrawals with all of your retirement income sources, including but not limited to pensions, Social Security, and other retirement accounts to ensure you have a sustainable income stream. ** Missing an RMD: Penalties
Top 3 Retirement Portfolio Strategies for $1,000,000+
Ideally, the earlier you begin saving for retirement, the better, especially if you want to meet the $1 million goal. Starting later in life doesn’t mean reaching your financial goals is not impossible, but you will need to do some catching up. Whether you’re younger and want to get on the path to meeting your $1,000,000 target goal or if you have already begun building your retirement portfolio and want to ensure you make the most of your investments, you’ll need to do careful and strategic planning. Regardless of age, investing for your retirement years is critical, but the strategies you utilize will likely need to change as you grow older. This means, that as your investment portfolio grows, you’ll make changes to it. Investing is not a set-it-and-forget-it type of planning. This article aims to assist high-net-worth individuals in maximizing their retirement income by presenting three top strategies, enabling you to make informed decisions so you can enjoy long-term financial stability. 3 Strategies for Your $1 Million Retirement Portfolio A tried-and-true approach many financial experts recommend is to diversify your investments so you have several different areas to draw from as you approach your Golden Years. The following are three good strategies many people use. 1. Live Off Dividends in Retirement If you have a $1 million portfolio, chances are you’ve spent time investing in the stock market and know you can receive a dividend disbursement from the company. Depending upon how well your stock investments do, and if stock prices consistently increase and pay out, you could theoretically rely on these disbursements as a part of your retirement strategy. Benefits you can expect to potentially gain from income derived from your dividend portfolio include: With all this being said, the stock market is known for its volatility, so you will want to invest in companies with a long, solid track record in terms of financial performance while balancing what you choose with your risk tolerances. Partnering with a skilled and knowledgeable financial advisor is recommended if you want to pursue this strategy as a part of your retirement planning, especially if you have a large investment portfolio, since these tend to be complex. You want to ensure you’re getting the most for your hard work and savings. Ready to connect with a professional to help you manage your $1,000,000+ portfolio? Find a financial advisor with this free tool 2. Secure Your Income Stream with Annuities Annuities are another potential mechanism to bolster your income stream to firmly establish it as a source of reliable income for your retirement years. According to some statistics, in the second quarter of 2022, annuity sales rose 22% to $77.5 billion. You may be asking yourself what an annuity is. If so, you’re not alone in wondering how many stocks and annuities can fit into your investment portfolio. What is an annuity? In the most basic of terms, annuities are financial products sold by insurance companies, banks, or brokerage firms. They are designed to provide investors with reliable, guaranteed income over a specified period or for the duration of one’s life. How Do Annuities Work? How it works is you make a lump sum payment or several payments (premiums). In exchange, you will receive regular payments either right away or at a future date. An annuity contract involves three parties: the owner (person purchasing the annuity and paying premiums, the annuitant (person receiving the benefits, usually the owner), and the beneficiary (individual receiving the death benefit when the annuitant passes away). Many financial planners may recommend annuities because they are a guaranteed source of funds upon retirement age. Be Wise About How You Choose Annuities Being there are several different kinds of annuities, you want to be selective in how you choose to invest in them, because not everyone will find this strategy to be their best option. While you will receive a guaranteed income stream that is customized to your needs, there are fees involved and they can be complex. This can be resolved by working with a financial professional who can guide you to the right products and annuity strategy. 3. Bucketing Strategy with Multiple Asset Classes Taking the bucket approach to high-portfolio retirement strategies is a popular method. Essentially, you divide your retirement savings into three buckets. These buckets will be determined by when you need to access funds. This is generally how you’ll approach: Bucket #1 Emergency funds and readily available cash for living expenses (including major purchases) in a high-yield savings account. Growth potential is not high, but it’s guaranteed and accessible. Bucket #2 Funds not needed for the next three to 10 years can go in longer-term, safe accounts, such as CDs, money market accounts, traditional IRAs, or bonds. If you’re OK with low-risk, you can also consider putting some money into mutual funds. Bucket #3 Any money you do not plan to use for more than 10 years can go into the third bucket. In many cases, you can do a little asset allocation and place some money in stocks and other higher-risk strategies to help you earn more money to boost your retirement accounts. The bottom line is, that spreading out your assets keeps you balanced and able to access your money while still growing your retirement nest egg. Managing Retirement Portfolio Risks Speaking of spreading out your assets, this also helps you manage risk. How you approach managing retirement risks will largely depend upon your age. Utilizing an asset allocation strategy that greatly factors in your age and risk tolerance will help you achieve balanced and effective retirement planning. Achieving your $1 million goal is only a portion of the equation, you also want to make sure you safeguard a percentage while attempting to grow your investment portfolio so you can maintain it once you begin withdrawing at your selected retirement age. Seeking advice about how to build and maintain your large portfolio? Get Matched With a Financial Advisor Today 1. Inflation Erosion
How to Manage Your Retirement Asset Allocation for Long-Term Success
As you approach or enter retirement, managing your investments becomes not just about growing your wealth but also about preserving what you have accumulated over the years. Strategic asset allocation—the way you divide your investments among different types of assets such as stocks, bonds, and cash—is a crucial component of this management. What Exactly is Asset Allocation, and Why Does it Matter? Asset allocation involves the strategic distribution of your investments across different asset classes. Asset classes you might use include stocks, bonds, real estate, cash equivalents, and others. Diversifying beyond one asset class is important in case something happens to a particular asset class. By spreading your investments across various asset classes with differing risk and return profiles, you can mitigate the impact of volatility and potentially enhance your overall returns. A downturn in stocks, bonds, real estate, or some other asset class will only affect a portion of your portfolio, rather than most or all of it. You may also realize greater gains if any one of these sectors grows more than others. Determining An Investment Mix Best for You Your chosen asset allocation will depend on your specific financial goals, risk tolerance, and investment horizon. It’ll also take into account your needs, whether those include guaranteed income, portfolio growth, capital preservation, or other particular needs. Some specific factors to take into account are: Many people find it helpful to discuss these factors with someone else. While each is personal, it’s helpful to have a knowledgeable and objective person work through your decisions. That could be a financial advisor if you want specific guidance on market conditions, financial goals, or risk tolerance. At the very least, discuss your time horizon and goals with a trusted family member or friend. Investment Vehicles and Asset Allocation There are many different investment vehicles that might be included in a well-balanced portfolio. Some of the most common investment assets are: 1. Stocks and Mutual Funds These are generally investments in companies. They offer potential growth, and sometimes regular dividends. Stocks carry some risk, but they’re broadly considered an important part of most people’s retirement portfolios. Mutual funds are mostly collections of stocks. 2. Bonds Bonds can represent investments in public works projects, corporate projects, or other large undertakings. They may provide guaranteed fixed returns or variable returns. Most bonds are considered to be more conservative than stocks, offering less growth potential but presenting less risk. They may have a place in many people’s portfolios, especially those who want a more conservative asset allocation. 3. Real Estate and REITs Real estate is often investments in residential or commercial buildings, but it’s possible to invest in other types of land. Investments might provide regular income, possible appreciation, and tax benefits. Those are perks that many retirees appreciate. The method you use to invest in real estate would depend partly on how hands-on you want to be. Options include purchasing and managing properties yourself, purchasing properties that are managed by a property management company, or REITs. REITs are akin to mutual funds but for real estate, granting exposure to larger properties without requiring a lot of capital or time. 4. Annuities Annuities usually provide a certain amount of guaranteed income, and also a certain amount of growth. Growth might be fixed, meaning it’s a set amount, or variable, in which case it’s often pegged to an index. Lump sum annuities, deferred annuities, life annuities, and others offer various solutions that combine income and growth potential. Annuities may have a role in your portfolio if you’d like some potential upside, but also value having another known income source. 5. Cash and Cash Equivalents No matter your risk tolerance, it’s usually advisable to keep at least some savings readily available. These investments are referred to as “cash and cash equivalents.” Their purpose isn’t growth, but rather liquidity should you need funds quickly (e.g. for an emergency). Keeping large amounts of actual cash on hand presents obvious risks, so most people choose other options. You might keep funds in a checking account, high-yield savings account, money market account, or similarly liquid investment. (Liquidity refers to how quickly funds can be accessed.) 6. Certificates of Deposit CDs usually provide a guaranteed return if you’re willing to lock up funds for a certain amount of time (e.g. months or years). These may preserve capital while providing a slight hedge against inflation. Some CDs qualify as cash equivalents, but not all do. 7. Precious Metals For investment purposes, the main precious metals are usually gold, silver, platinum, and palladium. When included in a portfolio, they usually account for a relatively small percentage of the portfolio. Their purpose is primarily to hedge against inflation and provide diversification. 8. Other Investments There are still many other investments, such as cryptocurrencies, commodities, collectibles, artwork, and many others. Such investments aren’t often recommended unless they’re specifically relevant for some reason (e.g. you’ve spent a career curating artwork). Even then, alternative investments typically should make up only a very small percentage of a portfolio. Getting Help Evaluating Options So many potential asset classes present many different choices when determining how to structure a portfolio, and these decisions don’t even take into account the process of choosing specific investments within an asset class. A financial advisor can help evaluate the various investment vehicles, providing personalized input as to which ones likely fit your age, risk tolerance, and goals. If you’d like to talk with a financial advisor, we can match you with a qualified advisor. Advanced Retirement Asset Allocation Strategies Asset allocation involves more than just a one-time decision about assets. It’s an ongoing process that can include several more advanced retirement asset allocation strategies. A few are: Avoiding Common Asset Allocation Mistakes Wise asset allocation isn’t only about making smart decisions, but also avoiding some common mistakes. Retirees are sometimes prone to: If you aren’t experienced in asset allocation and retirement planning, it’s easy to make these mistakes. Working with a financial advisor could help
How to Manage Retirement Risks in Portfolios
The primary objective of managing a retirement portfolio often shifts when you stop working. Whereas the main goal during working years is to accumulate capital, the main goal during non-working years frequently becomes to preserve capital. Preserving your hard-earned savings requires managing multiple retirement risks. Here are some of the most important risks to consider, and how they may be mitigated. Understanding Retirement Risks Most of the risks that you need to consider during retirement are always present. There’s always the risk of market volatility, inflation, and interest rate changes, for example. These and others take on a new urgency once you stop working, however. 1. Market Volatility Anyone who’s been investing for retirement knows that markets don’t constantly go up. Corrections are generally considered a necessary period of market activity, and there can be crashes at times. At the very least, plenty of choppiness is common as equities go up and down. Market volatility is always a risk, but a less urgent one when you have years to save and invest. With income from a job, you could likely wait for markets to recover from a downturn. You don’t necessarily have time to wait out a temporary downturn if you’re reliant on your portfolio for retirement income, though. 2. Sequence-of-Return Risks Sequence-of-return risk refers to the timing of returns and withdrawals from a retirement portfolio. Negative returns early in retirement can significantly deplete your portfolio, leaving less capital to recover from subsequent market downturns. The problem is compounded if you still need to take withdrawals during the early down period. This risk is related to market volatility but not the same. Market volatility is simply the risk of markets going up and down. Sequence-of-return is the more specific risk that markets could go down early during your retirement, leaving you with less to invest later on. 3. Inflation Inflation erodes purchasing power over time, which can be particularly damaging during retirement if you have fixed income sources. If your investments don’t keep pace with inflation, your retirement income may not be sufficient to cover your expenses. Even low inflation rates may cumulatively reduce how much you can afford later in retirement. High inflation may have an even faster effect, possibly one that you’d notice in just a few years. 4. Interest Rate Fluctuations Changes in interest rates can impact the value of many different investments. Bonds are often directly impacted by interest rate fluctuations, and stocks, mutual funds, and real estate can be indirectly impacted. In most cases, rising interest rates cause lower bond, stock, and real estate prices. If you’re paying off variable-rate debt, a portfolio downturn could come right as your debt payments are going up. 5. Longevity Risk Longevity risk is the possibility of outliving your savings. Increasing life expectancies can make this a real risk, particularly if you’re a younger retiree and in good health. You might need your portfolio to last decades. 6. Healthcare and Long-Term Care Costs Healthcare costs are a serious concern for many retirees. If you need major or ongoing care, the associated medical expenses and long-term care costs can quickly drain your retirement savings. With proper planning, the possibility of a major medical issue can still be disconcerting. Without planning, the possibility of a serious or ongoing medical issue might be downright scary. Mitigating Retirement Risks Multiple strategies might be used to mitigate the risks that retirement portfolios are exposed to. There’s ultimately no way to remove all risks, but informed strategies can greatly reduce how much of a negative impact these risks have on your retirement savings. 1. Diversification Diversifying into multiple types of assets may help mitigate market volatility and sequence-of-return risk. If your portfolio contains a good mix of stocks, bonds, real estate, precious metals, and other assets, then a downturn in one sector or asset type won’t affect all of your savings. A financial advisor can recommend different assets and specific investments that you might use to diversify your portfolio’s holdings. You can find a financial advisor if you’d like to speak with someone about your investment holdings. 2. Conservative Asset Allocation Moving a larger portion of your assets into fairly conservative investments can further reduce the risks that market volatility presents, and correspondingly sequence-of-return risk too. More conservative assets normally don’t have the same growth or appreciation potential that less conservative assets do. There’s usually at least a loose correlation between risk and potential reward, after all. More conservative assets usually don’t fall as much during downturns, however. Sacrificing some upside potential for lower downside risk may be an effective way to limit losses during a correction or crash. Bonds, annuities, and certain blue chip stocks are assets that might carry less risk than what’s currently in your portfolio. Before purchasing any specific investment because it carries less risk, discuss the investment with a knowledgeable financial advisor. They can review it and other investments in light of changing risk tolerance. The process of deciding what types of assets you invest in is often referred to as “asset allocation.” 3. Portfolio Rebalancing Your retirement portfolio isn’t static, and neither are your financial needs during retirement. Portfolio rebalancing involves a regular review and adjustment of your portfolio, to maintain your desired asset allocation. Some assets may be sold and others bought, in order to maintain your target percentages for different assets. It’s often necessary to rebalance a portfolio after large gains or losses in a particular investment. You may also rebalance periodically to adjust for your age, financial needs, health care needs, or other changes in your situation. Rebalancing your portfolio helps ensure that your portfolio’s asset allocation aligns with your risk tolerance and time horizon. Deciding Which Strategies to Use Which specific strategies you should use to mitigate retirement risks depends on your situation, including your retirement plans and your portfolio’s holdings. A financial advisor can give you personalized advice on which strategies could be helpful. If you haven’t previously worked with a financial advisor,
Why is Planning for Retirement Important?
Retirement planning is a critical process for creating financial stability later in life. It is more than just having a savings account. It empowers you to use tax savings strategies, investments, and time itself to help you build the financial wealth desired so you do not have to worry about the future. Why is retirement planning important for everyone? The fact is, no one can rely on Social Security benefits to be enough to meet their financial obligations. In many cases, you’ll need some source of retirement income during those later years. If you don’t want to work for the rest of your life, you’ll need to consider the available strategies that could help you create financial security. Whether you have a lot of assets and wealth or you have a lot of debt, what you do today about your retirement planning will impact your life for years to come. Invested Better provides you with guidance on finding the best financial advisor for your needs and goals. No matter where you are in your wealth-building journey, you can get matched with a financial advisor that can help propel you forward. The Benefits of Planning Early for Retirement If you need more reason than that, consider the following benefits of having a comprehensive retirement plan and what retirement planning could mean for your future. 1. Financial Security For many people, the main reason for utilizing a retirement plan is to create financial security later in life. It enables you to have money put away to cover all of your bills and needs without having to worry about having to work when you are older. With the help of a retirement plan, you can reduce unnecessary stress on daily life well into the future. For many people, no matter how hard they work to save money, it will not be enough to meet their financial needs during retirement, unless they develop a complete retirement planning strategy. Creating a retirement plan now means you are likely to retire sooner than if you wait even a small amount of additional time. Consider that the true benefit that comes from setting up a retirement plan early is that there’s the opportunity for compound interest to build over time. That means you’ll put in less to get to the retirement goals you set overall or be able to retire early. 2. Preparation for Health Costs The cost of healthcare continues to rise. From just 2023 to 2024, healthcare costs have risen by 7%, and that value is likely to continue to go up. In the US, the average life expectancy for all adults in 2022 was 77.5 years. With improved cancer treatment and more advanced therapies, this increase continues to happen year after year. Both of these factors mean that you need to plan for retirement and long-term healthcare costs. You will need investment strategies that allow you to take advantage of tax savings while also reducing your risk of any early illness onset. Healthcare costs are on the way up, and since you may live longer than your parents did, it is critical to have some mechanism in place to cover your future medical costs. 3. Protection Against Inflation With the help of financial experts, you can develop a retirement strategy that helps you fight back against inflation. Investment gains in a simple savings account may not be enough to keep up with inflation, but with the help of investment strategies created by your financial advisor, you can often significantly reduce the impact of inflation on your earnings. A financial advisor can help you select the best retirement planning strategies to reduce inflation risk, but they could be include investing in precious metals like gold, commodities, or real estate. Most often, there is a combination of strategies used. More so, by building your retirement plan early, you gain the benefit of having higher interest rates that often accompany increasing inflation costs. That could mean retiring earlier. When you build a retirement plan now, it will continue to work for you for years, building financial health over the course of your life at a rate that’s more than inflation. 4. Tax-Advantaged Retirement Savings Most people want to take advantage of any opportunity available to them to reduce the amount of money they have to put into savings. One way to do that is to not have to pay as much in taxes. With tax-advantaged retirement savings accounts available, you are reducing how much taxes you pay now or pay later, depending on the strategy you select. Tax benefits are one of the most lucrative ways to protect your financial future. If you want to retire early, retirement accounts are one tool to enable that to happen. These tax-advantaged accounts, such as a 401(k) from an employer or an IRA or Roth IRA you establish yourself, require you to keep money in them over the long term until you reach your retirement age. Create a tax strategy during your working years that allows you to minimize how much tax you pay each year on your income. More so, if you have access to an employer-sponsored retirement account, such as a 401(k), your employer may be matching a portion of your contributions. That means you are earning more for the time you put in each day, which is going directly into funding your retirement. If you don’t use those retirement accounts, you miss out on money each and every paycheck. 5. Legacy Planning Retirement plans may be meant to be used for you during your lifetime after you stop working. However, they are investment strategies that allow you to pass on your wealth to future generations. Retirement benefits are a component of your estate, which means that you can utilize them as a part of the assets you pass on to heirs when you die. A comprehensive retirement plan typically includes an estate plan and legacy planning. Both of these components enable you to make key decisions
How Much Do I Need to Save for Retirement?
One of the most common questions people ask when it comes to retirement savings is this one. How much do I need to save for retirement? While there’s no single answer, there are several key factors to consider. The best way to start is to think, save, retire with a strategic plan in place. The retirement lifestyle you desire and the income sources you have available will ultimately shape how much you need to save. Though no magic number exists, there are some steps you can take to assess your situation how much you should save for retirement. Whenever possible, always think, save, retire with a financial planner’s guidance who can help you develop an effective investment strategy tailored to your needs, ensuring your financial well-being. While tools like retirement calculators and expert recommendations are useful, it’s vital to consider your unique needs and goals. When determining how much to save, remember that the factors that affect your number are highly personal. As you think about the future, prioritize your plan to save effectively and ensure you can retire comfortably. Factors Affecting Your “Think, Save, Retire” Strategy When you see retirement calculator estimates, they often give you a number based on your current age, current annual income, and your retirement budget. What if you do not know, though, what your retirement looks like just yet or when you will retire? Consider the following factors that affect your retirement budget, as well as the amount of money you need to save for retirement planning success. 1. Retirement Age When do you plan to retire? Your retirement age is a crucial factor in determining how much money you need to save. The sooner you hope to retire, the more money you need to place into your savings to cover your financial needs during retirement, no matter what your life expectancy is. As you consider your retirement savings goals, consider the fact that if you are relying on Social Security benefits, you must reach full retirement age, which is generally 65 ½ years of age, to see your full Social Security benefit. If you retire earlier than that, the potential income from Social Security is not available at the full value. You will need to compensate for that in another way. 2. Desired Lifestyle Another key factor in determining what your total savings need to be heading into retirement is what you will need during retirement. That’s based on the type of lifestyle you plan to live. To retire comfortably at the age of 65 and travel, you will need more money and a higher savings goal than if you plan to work until 65 and then retire and stay home most of the time. The financial decisions you make must take into consideration the way you wish to live. That way, you have sufficient savings put aside to meet your expectations and can spend money to live the lifestyle you want, whether you’re spoiling the grandkids or traveling the world. 3. Life Expectancy How long will you live? The U.S. Centers for Disease Control and Prevention notes that life expectancy for men is 74.8 years, and for women, it’s 80.2 years of age. As you consider how much to put into your retirement accounts, you certainly need to plan for your future life expectancy. Assume that you live longer than these averages, though. That way, you have enough retirement savings to account for all of your potential needs. Also, note that your current retirement savings must extend enough to cover inflationary costs that are likely to rise. That means if you have $1 million in the bank today, it will not be worth $1 million in terms of how far it goes in 20 years. 4. Current Savings Beyond your retirement age and when you expect to retire, consider what steps you are taking right now to plan for it. Your current retirement savings makes a big difference thanks to compound interest. Depending on the type of retirement investment strategy you use, chances are that you will have accounts that build interest on top of the interest they have already earned. The more you put your pre-retirement income into these accounts now, the more time there is for it to build. That means you’ll need to funnel less into it to reach your goals. 5. Income and Expenses Saving for retirement also means looking at your current spending and saving habits. Consider the following specific factors as you work to build your retirement account: If you retire with significant amounts of debt or you are spending more than you are making on a routine basis, then you may need to reassess to ensure you are putting enough money aside. What factors do you need to meet – such as being debt-free – to make your retirement plan work? The best way to learn what you really need to save is to work with a professional financial planner or advisor. Get matched with a financial advisor now and start working on building a retirement plan that fits your needs. Saving Goals by Age For some people, having a monetary figure to work towards makes sense. If that’s you, consider these often recommended savings objectives and goals with pre-tax income: At this savings rate, you should generate enough income to pay for the type of lifestyle you desire (and one that you are already accustomed to). Following these goals helps you think, save, retire with confidence. Strategies to Reach Your Retirement Savings Goal Now that you have some insight into a dollar amount that is considered ideal, you may need a bit of help knowing what specific steps to take to reach these objectives. To get better clarity into what you need to retire, it’s a good idea to see legal or tax advice (and remember, past performance is not always a reliable indication of future performance). 1. Maximizing Employer-Sponsored Plans Even if you are counting on receiving full Social Security benefits, it
Top Retirement Income Strategies: Complete Guide
Planning for retirement involves more than just saving enough money—it’s about creating retirement income strategies that will provide a sustainable stream of income that will last through your non-working years. That requires strategic planning ahead of time, so you know what to save, how to invest, and ultimately what being financially prepared for retirement looks like. What Are Your Retirement Income Goals? Before looking at strategies, first define what your retirement income goals are. Retirement doesn’t look the same for everyone, and income needs during non-working years vary. You can only begin strategizing once you know the target. Rather than arbitrarily picking a number that sounds good, think about what you’re hoping to do. What lifestyle would you like? Where do you want to live, and do you need to buy a house? Any hobbies or travel that you’ve been looking forward to doing? How about major expenses like healthcare and long-term care? What do you want your financial legacy to be like? Answering questions like these will help you define goals, and then you can calculate how much your retirement will cost. How Much Will Retirement Cost? Estimating the cost of retirement is complex and influenced by many factors, not the least of which are your answers to the questions above. You should also take into account inflation, unexpected costs, and taxes when determining how much you’ll need. The following is a general guide that you can follow to get a rough estimate of your retirement costs: You should also take into account major healthcare costs, long-term care costs, and any legacy you hope to leave. These might be considered major costs that you need to save for, as opposed to ongoing retirement expenses you need regular income for. Your total estimate will only be as accurate as the numbers you use. A financial advisor can help you calculate these different factors as precisely as you can. If you don’t have a financial advisor to assist with this process, our financial advisor matching tool can pair you with a qualified advisor who knows how to calculate retirement costs. How Will You Pay for Retirement? Most retirees draw from multiple income sources to cover their retirement expenses. You might rely on: Determining What You Need From Your Portfolio Many retirees don’t fully fund their retirement without using at least some of their investment portfolio. To determine how much income you need from your portfolio, subtract your estimated expenses from your anticipated income sources. You’ll likely have a negative amount, which is the amount you need from your portfolio. Using Your Investments To Pay For Your Retirement The amount you need can hopefully be withdrawn from your investments without infringing on the principal in your portfolio. If you’re able to do this, you can have retirement income and preserve your savings. Investment Income Sources There are several ways of setting up your investments for regular withdrawals or income. You could use one or several of the following methods. 1. Sustainable Withdrawals You simply take withdrawals from your portfolio. Your withdrawals are within an estimated sustainable withdrawal rate. This is an amount that’s expected to be covered by your portfolio’s continued returns. A common guideline is a withdrawal rate of 4%, which should be sustainable based on historical data. Depending on your situation, your investments, and market conditions, you might want to use a higher or lower withdrawal rate. A financial advisor can help you decide what rate is right for your portfolio. Advantage: Taking sustainable withdrawals means that you don’t necessarily need to change your investments. For example, you may still focus on growth but also access income. Disadvantage: Investments carry risk, and your portfolio balance could go down. Historic data isn’t a guarantee of future results. 2. Dividend Payments Some retirees prefer to focus equity (e.g. stock) investments in dividend stocks. This can be done by purchasing individual stocks with long dividend histories, or mutual funds focused on dividends. With this strategy, you typically leave the stock alone but use the dividend as income. Advantage: Dividend stocks tend to be more stable than growth stocks, and long dividend histories are often fairly reliable (although not guaranteed). Disadvantage: Dividend stocks are still stocks that can decrease in value. Their potential growth tends to be lower than that of growth stocks. 3. Bond Payments Bonds can be used similarly to dividend stocks. The bond itself is left alone, while the interest paid is used as income. The bond amount can easily be reinvested once a bond reaches maturity. As an added benefit, U.S. Treasury bonds usually aren’t subject to state income tax (federal still applies). You can do this with certificates of deposit (CDs) as well, but bonds might pay slightly higher interest rates. Advantage: Most bonds that retirees use are essentially guaranteed, and some of the most secure investments you can hold. Disadvantage: Bonds typically don’t appreciate like dividend stocks or other investments can. Although they technically can increase or decrease before maturity, most retirees hold bonds until maturity when the principal paid is returned. 4. Annuities Annuities usually provide predetermined payments while also offering some growth potential. There are many different types of annuities, including life annuities, lump sum annuities, fixed annuities, and variable annuities. These vary in how payments are disbursed and how potential returns are calculated. A financial advisor can help you determine which kinds of annuities might make sense for you. To speak with a financial advisor who knows annuities, you can find a financial advisor that we at Invested Better work with. Advantage: The combination of potential growth and regular payments is attractive to many retirees. Disadvantage: The growth potential is often capped, and some annuities come with notable fees. 5. Real Estate Real estate properties can be leased out for regular rental income. Rent generally needs to cover all costs associated with a property, but any additional rent could be used as income. Owning rental properties diversifies into the real estate market. Additionally, rentals
The Different Types of Retirement Accounts
Planning well requires knowing what options are available, and this is as true for retirement as for anything else. Understanding the various types of retirement accounts is crucial for building a robust retirement savings plan. Each type of retirement account has its own eligibility requirements, features, and benefits. By familiarizing yourself with these options, you can design a strategic retirement savings plan that leverages the most advantageous accounts for your financial goals. 1. Individual Retirement Accounts (IRAs) Perhaps the most well-known retirement savings account is the individual retirement account (IRA). This is a personal long-term savings account that’s available to anyone with earned income. It’s one of the most common accounts that’s not employer-sponsored. An IRA is primarily intended for retirement. Funds can be invested anytime you have earned income, and the same account can continue to be used even if you switch employers. Contributions and potential gains can compound over years and decades, possibly growing to be a significant nest egg by retirement age. Retirement age is defined as 59½ for the purposes of this account. Withdrawals can be made from the account without penalty beginning at age 59½. Any withdrawals before then will likely be subject to a 10% penalty (in addition to taxes). Non-penalized withdrawals are also permitted in select other situations, such as paying health insurance premiums when unemployed, paying for qualified higher education expenses, purchasing a first home, and some other situations. These are intended to help with major costs or during difficult times, however, and not meant to be the main purpose. An IRA generally should be thought of as savings specifically for retirement. Since 1998, individuals have been able to use two different types of IRAs: Traditional IRA and Roth IRA. These differ most significantly in how funds are taxed: – Traditional IRA Contributions generally aren’t taxed when they’re made, but withdrawals are taxed. This allows for a larger starting balance that can be invested. This provides two potential benefits. First, the higher starting balance can hopefully yield more investment returns than a smaller, taxed balance would. Second, many individuals pay a lower tax rate during retirement because their income drops. This can mean that the tax rate paid is lower than it would be if taxed as income when working. – Roth IRA Contributions generally are taxed when they’re made, but withdrawals aren’t taxed if used for qualified purposes (e.g. retirement). This allows for untaxed growth throughout the life of the account. Over time, the fund may grow to be multiples of what the taxed contributions total. Roth IRAs usually also aren’t subject to mandatory withdrawal requirements, which Traditional IRAs usually do come with. This tends to be a somewhat lesser consideration for most people, however. The tax benefits are the biggest factor to consider when selecting an account. Investment advisors frequently recommend a Roth IRA if you have any significant amount of time before retirement. It’s important to review your specific situation with a qualified advisor, however, as each situation has different factors to consider. A qualified advisor will be able to make an informed recommendation as to which type of IRA would be best for you. Both types of IRAs are subject to the same maximum contribution limits. The 2024 limits are $7,000 if under age 50, and $8,000 if 50 years or older. This is per person, so married couples could each open an account and contribute the maximum amount. 2. Employee-Sponsored Retirement Accounts Employee-sponsored retirement accounts are accounts that employers may make available to employees as one of their benefits. Employees can contribute funds directly from their paycheck if one of these accounts is available to them. Most accounts offer some tax advantage. Some employers still provide a partial or full match on funds invested (up to a maximum amount). Each of these employee-sponsored retirement accounts can only be used if your employer offers it. – 401(k) Plans 401(k) plans are the most common employee-sponsored retirement account offered by private sector employers (i.e. companies and businesses). Employees contribute a percentage of their income from the employer, and the employer might offer a match on the amount the employee invests. Employer matches are slowly becoming less common. Like with a Traditional IRA, contributions to a 401(k) are made with pre-tax income. The contributions aren’t taxed at the time, thus allowing for a larger initial balance in the account. Withdrawals later on normally are taxed. In addition to a possible employer match, 401(k) plans also have a few other notable points of differentiation from IRAs. Most 401(k) plans allow you to take a loan against the account, which normally isn’t recommended but might be necessary during times of financial hardship. 401(k)s also come with much higher contribution limits. The main contribution limit is $23,000 for 2024, although employees age 50 and older can make an additional $7,500 in catch-up contributions. The combined maximum of employee and employer contributions is $69,000 or the employee’s salary (plus catch-up contributions if old enough). The funds within a 401(k) can only be invested through one of the options that the employer offers. Most employers offer a good variety of bonds, stocks, mutual funds, and other assets, however, so this typically isn’t an issue. – Roth 401(k) Plans A Roth 401(k) plan functions much like a 401(k), but is taxed like a Roth IRA. Contributions are taxed when made, but withdrawals generally aren’t if used for qualified purposes. Other details (e.g. employer match, contribution limits, etc.) broadly follow the 401(k) plan. A minority of employers offer Roth 401(k) plans, but this is slowly growing in popularity. – 403(b) Plans 403(b) plans are similar to 401(k) plans, but are specifically designed for employees of non-profit organizations, public schools, and certain religious institutions. They largely follow 401(k) plans with regard to potential match, pre-tax contributions, contribution limits, and other details. Sometimes the investment options available through a 403(b) are a little narrower than those through a 401(k). This isn’t always the case, however. – 457 Plans
How to Interview Potential Financial Advisors
Interviewing a financial advisor is crucial to understanding how they can meet your financial needs and what level of service you can expect. You should should only make a decision after you have taken the time to compare several professionals, learn about your personal needs, and develop an idea of what type of personalized financial advice you need. To ensure you make the right choice, it’s important to ask insightful financial advisor interview questions that go beyond what’s available on their website. Instead, look at deep information about their abilities, beliefs, and strategies so that you choose a financial professional who is truly committed to the best possible outcome in your situation. Essential Steps Before Interviewing Financial Advisors Before you set up an interview with anyone, it helps to have some good ideas about what you need and want in this person. They will play an important role in your long-term financial well-being, and that means you really want to make this initial interview (and the actual hiring decision) with careful attention and insight. Here are several things to do before you set up that interview. Identify Your Financial Needs While you do not need to have an actual plan in mind just yet, you should have some idea of where your financial health stands right now. Identify your needs and goals: Your objective is to ensure that you are hiring a financial advisor with the skill and knowledge to guide you through these decisions. If you do not know what you want to achieve, it will be much harder to choose a professional. Many advisors will ask you what your goals and objectives are. Some may ask about your obstacles. Be ready for these questions. Researching Potential Advisors Next, take some time to consider a few different professionals. Do some academic research here – look at who they are, what they know, and what services they provide. You also want to read up on their education, licensing, and certifications. The more information you have in these areas, the better. Once you make a list of a few advisors to speak to, then it is time to gather the important questions you’ll want to ask. Invested Better is the ideal place to get a start on that list of financial advisors. We can help you find the company or investment advisor that is right for you based on all of the information you provide. You can get matched with a financial advisor with us now. Key Questions to Ask Potential Financial Advisors Use the following questions as an example. Make sure you consider various questions that are specifically important to you on your quest for hiring the best financial advisor for your needs. What is the Advisor’s Credentials and Experience? Start here with some questions about their credentials. Not all financial advisors are, in fact, licensed or certified. It helps you learn what types of services they offer, and then, based on a bit of research, you can verify that they have the necessary credentials to provide those specific investments. Keep in mind that fiduciary duty does not mean any specific licensing, but it may indicate that they follow key regulations to make decisions based on what is best in your situation. What is the Advisor’s Investment Philosophy? You certainly want to have a meaningful relationship with your financial advisors. To do that, you need to choose an advisor who really has your best interests in mind but who is also clear on their investment goals and methods. You want to be sure you are on the same page with them. If you do not know what your financial goals are, you have to trust your financial advisors to make wise decisions for you. Choose a professional who supports their clients and is clear about how they make investment or other financial decisions. What is the Advisor’s Fee Structure? It is critical that you know what the financial planning or investment management services provided by this client will cost you. Financial advisors should have no problem talking to you about their fee schedule. Ask these questions: What is the Advisor’s Communication Style? Another important question to have with the financial advisor is a bit more specific to your needs. Learn which ways advisors communicate with their clients. Whether they are selling products or providing advice, you want to know how they will talk to you, including answering questions such as: Post-Interview Evaluation With all of this information available to you, it becomes possible to start making some decisions about which person may be a good fit for you. As you work to build your financial life, though, you need to take into consideration more than just services. You need to choose the financial advisors who have your best interest at heart. Consider answering these questions yourself after each of the interviews you conduct. Asking the right questions plays a big role in how you will then answer these questions. In order to really get a good idea of what a person can and will provide to you, then evaluate each person from an objective standpoint. Then, go back and compare them. Look for Red Flags As you compare options, consider these common red flags: Comparing Different Advisors How do you know which advisor is the right one for you? Financial advisors have to show you, in that interview and onward, that they care about you. That means they make time for the client, answer the client’s questions, provide clarity when needed, and are willing to offer custom solutions. As you compare each one of the options available to you, consider a few more questions to ask. With all of this information available to you, the next step is really to learn as much as you can about the provider. Research them online, explore their history, ask them to speak to one of their clients, and always discuss your expectations with them. Be clear about what you want to achieve
When to Fire Your Financial Advisor
You want to fire your financial advisor. Many people find themselves in a situation like this, where they are unsure if they should continue using the same person or service or make a move. Your financial advisor has to be someone you trust and believe in. If they are not providing you the help you need, or your current advisor is not being realistic about their portfolio management, it may be time to find a different financial advisor. You may be thinking about finding a different advisor for many reasons. They may include costs, getting bad advice too often, or wanting a new financial advisor who will take control and “fix” what the current advisor is doing or has not done. Take a deep breath. The good news is that you can hire a new advisor, and you can do so with more clarity when choosing a professional who is capable of meeting your needs. Why Evaluating Your Financial Advisor Matters One of the first steps is to evaluate your financial advisor. It’s critical to understand what is going “wrong” with the situation. For example, if the stock market has been on a downswing for some time and your investment records indicate your investor isn’t taking aggressive enough action, it may be time to make a switch. Here’s what’s most important to remember. If you do not think about what went wrong with your former advisor, it will be much harder to choose another advisor more aligned with your goals. Also, note that there is no rush to find a new financial advisor. You can take a few extra days to check out some options, consider your financial plan goals, and really get a better idea of what you need and want from a provider. On the other hand, it may be time to move on, especially if you’ve put off this decision for some time. To avoid making a poor decision, use Invested Better to help you. Get matched with a financial advisor who can provide the resources and tools you need to make better decisions. Signs You Might Need a New Financial Advisor You ask for financial guidance and do not get it. Your financial situation seems to be worsening instead of getting better. You may know that the stock market is not doing all that well right now. So, how do you know if your financial advisor is the problem or if investments right now are just not good? Before you formally terminate your relationship, look at some of the most important signs that it is time to switch to a new financial advisor. If this is happening to you, it may be time to get started on finding a new advisor. 1. When It’s Difficult to Reach Your Advisor While financial advisors are busy professionals, their job is to meet your needs. Ultimately, that means they need to be able to communicate with you. If poor communication is the source of your concern, and you have already talked to the advisor about it, it may be time to move on to another person. What is a timely manner, though? You can expect for your financial advisor to be able to get back to you within a day or so, depending on the situation. Remember your client agreement and how frequently they promised to connect with you. If that is not happening, it may be time to move on to other advisors. 2. When There’s a Lack of Transparency Personalized advice is a very big advantage of working with an advisor. However, if you do not know what they are doing, when they are making changes, or how often they even look at your account, that is a concern. Also note that if they are fiduciary, they have an obligation to operate in the best interest of the client. If you feel, at any time, that they are not making financial decisions based on your needs but perhaps on the money they could make selling investment products from others, it may be time to move on. 3. When Your Portfolio’s Performance Doesn’t Meet Expectations You are working with a financial advisor for a reason: to build your investment portfolio. If you are not seeing the results of that, it may be time to move on. People tend to only look at the short-term ups and downs, and that can be a problem. Instead, look at the growth over a specific time frame, such as quarter to quarter or even one year over the other. If you are not seeing improvements over the long term, it may be time to make your move. Use historical records to help you gain more insight. Do some research on what other investors have earned over the same period of time. Determine what assets and services you have now that have changed since you got started. 4. When there’s a Misalignment with Your Goals There are some situations where poor performance is a big factor. If your money is not growing or is not being put where you believe it should be, it may be time to move on. The key here is to pay attention to your own investment accounts, do some research, and know where your investments are going. If you do not feel comfortable with any aspect of the process, opening new accounts could be beneficial to you. Evaluating Your Current Financial Advisor Before you fire your current advisor, take the time to review and evaluate your current provider and relationship. Determine how well they are meeting your goals and what areas concern you. Review Your Portfolio’s Performance Start with a review of your portfolio investor satisfaction. That is, are you seeing improvement in your investments over time? If your portfolio is growing in value but not at the rate expected, you may wish to learn why that is the case. If the advisor cannot offer advice or clarity, that is a concern in itself. Remember, if your
