When it comes to retirement planning, you’re either proactive—addressing challenges before they happen—or reactive, leaving yourself vulnerable without a plan for taxes, healthcare, or income. Taking a proactive approach gives you greater control over your future. Below, you’ll find four areas of retirement planning worth evaluating. Are you set up proactively for retirement? Read on to see how well you’re set up with these proactive strategies.
1. A Forward-Looking Tax Plan
Taxes can be one of the biggest challenges in retirement, especially when you’re living on a fixed income. Tax planning, not just preparation, is key. You need a strategy for when and how you withdraw money from tax-deferred accounts like your IRA or 401(k) to avoid an unexpected tax burden. Most people don’t realize that they could be creating a tax time bomb. The IRS wants their cut, so when you withdraw that money, you must pay taxes.
Required Minimum Distributions (RMDs) are mandatory once you reach a certain age, and failure to comply can result in hefty penalties. Social Security benefits can also be taxed, potentially up to 85%, a fact many retirees overlook.
What To Do:
- Tax diversification: Spread your assets across accounts that are taxed now, taxed later, and taxed rarely (like a Roth IRA).
- Roth conversions: Converting part of your traditional IRA to a Roth can reduce future RMDs and the taxes on your withdrawals.
- Tax-loss harvesting: Offset capital gains by selling underperforming assets at a loss.
- Charitable contributions: Donations to qualified charities can reduce your taxable income. However, this is typically best when all of your itemized deductions exceed the standard deduction you would receive for your filing status.
2. Lifetime Income
Retirement requires a consistent income to maintain your lifestyle. It’s the only thing that could help ensure your money lasts as long as you do. Years ago, this income was a “three-legged stool” supported by Social Security, pensions, and savings. Today, pensions are rare, and many people rely solely on Social Security and personal savings.
With increasing longevity – more people are living to 100 and beyond than ever before – retirees face the risk of outliving their savings. Add to this low interest rates on savings accounts and skyrocketing healthcare costs, and income planning becomes more crucial than ever.
You might think that those most likely to go broke in retirement are people with limited means. But that’s not the case. It can happen to middle-class families, and even to those who are wealthy. Nobody’s exempt.
What To Do: Diversify your sources of income to ensure your money lasts as long as you do. Regularly review and update your income plan to adjust for market conditions, inflation, and life expectancy.
3. Social Security Optimization
Social Security may seem straightforward, but how and when you claim your benefits can have a significant impact on your retirement. And, frankly, how to claim them and when to do so have become more confusing than ever before. You could unknowingly trigger an avalanche of taxes and increase Medicare premiums. Claiming too early or making a wrong decision about spousal benefits can cost you tens, if not hundreds, of thousands of dollars.
What To Do:
- Maximize your benefit timing: Delay claiming Social Security to increase your monthly benefit. Waiting until full retirement age or later can boost your income significantly.
- Coordinate spousal benefits: Strategize with your spouse to optimize benefits, ensuring you both receive the maximum payout and avoid forfeiting valuable spousal benefits.
4. Asset Allocation & Rebalancing
A well-diversified portfolio is key to protecting your retirement savings from market downturns. The market is unpredictable, and long bull markets often end in corrections. Regularly rebalancing your assets to match your risk tolerance helps shield you from significant losses. If your current advisor isn’t meeting with you to make proper adjustments at least once a year, you may want to look for a second opinion.
What To Do: Meet with your financial advisor regularly to adjust your asset allocation as markets fluctuate. This proactive step can guard your portfolio from unnecessary risk.
So, based on these standards, are you proactively preparing for retirement? Do these strategies sound like things you’re doing? Or are you setting yourself up to scramble when it arrives? These proactive strategies can strengthen your retirement plan and help avoid common pitfalls.
To refine your strategies, give us a call today at 952-460-3290. We’re eager to help you live comfortably in your golden years.
