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Proactive Retirement Planning


Chances are, you’re in one of two camps when it comes to planning for retirement.

If you’re being proactive, you’re addressing the coming challenges in retirement before they happen. This puts you in a position of strength and control.

But if you’re being reactive, there’s no plan to reduce your taxes in retirement. There’s no plan to pay for healthcare. There’s no plan to generate income.

This makes you vulnerable as problems arise.

In many cases, it could be too late to do anything about It.

I’ll share 4 proactive strategies that could be a game-changer for your retirement, including how you could turn your social security benefits into a $1.5 million annuity, the two words that could legally help you save a fortune in taxes, plus, a bullet-proof income strategy that could stand up to the challenges of a low-interest world.

Proactive Strategy #1: A Forward-Looking Tax Plan

From The Motley Fool: No matter how much you try to avoid it, Uncle Sam will always take a chunk out of your paychecks. The same is true in retirement, although taxes in retirement can potentially have greater consequences than when you’re working — because you’ll likely be living on a fixed income in retirement, spending more than you anticipated can throw off your entire plan. And if you’re not prepared for them, taxes can take a serious bite out of your retirement budget.

If you want to keep more of your hard-earned money, and ensure your success in retirement, you must have a plan for the taxes you could pay.

There’s a big difference between tax planning, versus tax preparation. Tax preparation is something you do with your Accountant, or CPA. You’re just reporting what happened last year. But if you want to pay fewer taxes, then this requires a forward-looking tax plan.

So what exactly is tax planning? According to Investopedia: Tax planning is the analysis of finances from a tax perspective, with the purpose of ensuring maximum tax efficiency. Considerations of tax planning include timing of income, size, timing of purchases, and planning for expenditures. Tax planning strategies can include saving for retirement in an IRA or engaging in tax gain-loss harvesting.

You need a tax strategy for the following:

Withdrawing money from you IRA, 401K, and other tax-deferred accounts

One of the biggest retirement tax traps, is withdrawing money from your 401K, IRA, or other retirement accounts.

What most people don’t realize is that you 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 force you to withdraw money from your tax-deferred accounts. You’ll have to pay taxes on that money.

According to Time Magazine, “A $2 Trillion Tax Bill is Coming Due for Baby Boomers.”

If you ignore required minimum distributions, or don’t follow the rules to a “T,” you could face taxes, penalties and fees. According to MarketWatch: You could face one of the steepest penalties the IRS levies, a tax penalty of 50%. For example, if your RMD is $40,000 and you fail to take it, the IRS will levy a penalty of $20,000.

Social Security

From The Motley Fool: Yes, you’ll likely still owe taxes on your benefits even when you’ve been paying Social Security taxes throughout your entire career. 

Most people don’t realize they could pay taxes on as much as 85% of their Social Security benefits.

According to Fidelity If you are approaching retirement and think your Social Security benefit always comes tax-free, you’re mistaken. Today, 56% of Americans pay taxes on their Social Security benefits—up from 10% of Social Security recipients in 1984 when the federal government first began taxing the Social Security benefit.

Here’s how you could reduce your taxes in retirement:

Tax Diversification

From Kiplinger “You don’t want to own too many assets that are taxed the same way or at the same time. This accentuates the significance of tax diversification. In my experience, it’s one of the most underrated financial planning concepts.”

There are three basic tax categories to diversify in:

Taxed always – brokerage accounts, checking and savings accounts. You pay tax on the dividends, interest, or capital gains.

Taxed later – 401(k), Traditional IRA, 403(b), real estate, or hard assets.

Taxed rarely – Roth IRA, interest from municipal bonds, and certain types of life insurance.

Converting some of your money to a ROTH

From Kiplinger: “By strategically shifting assets out of your IRA before you turn 70½ through Roth IRA conversions during years in which your marginal tax bracket is low, you may reduce your RMDs and the amount of tax you pay.”

“Even if you convert only a small portion of your traditional IRA into a Roth, this may help you lower your tax bill in retirement, since Roth distributions aren’t taxed.”

Tax loss harvesting

Tax loss harvesting is a popular tax-savings strategy. Essentially, you are selling securities at a loss to offset a capital gains tax liability. If you have an underperforming security, consider using tax-loss harvesting to get a break on your taxes, and put the proceeds from the sale of this asset to better use.

Charitable contributions

Charitable contributions are another great way to lower your taxable income. From The Balance: Donations to qualified charities are tax-deductible expenses that can reduce your taxable income and lower your tax bill. You must itemize your tax deductions to claim them, however, and this is typically only in your best interest if the total of all your itemized deductions exceeds the amount of the standard deduction you would receive for your filing status. 

Proactive Strategy # 2: Lifetime Income

According to The Motley Fool: Most of us depend on a paycheck to provide the funds we need to cover costs of living. But when you retire, your paycheck ends even though you still need a source of support. 

Income will be the lifeblood of your retirement. It’s the only thing that could help ensure you money lasts as long as you do, so it’s critical you take a proactive approach to income planning.

From Investopedia: years ago, retirement income was often pictured as a three-legged stool. One leg was Social Security benefits, another was employer pensions, and the third was savings. A lot has changed since those days. Many of us no longer have traditional employer pensions, leaving us with a wobbly, two-legged stool. What’s more, because of today’s rising life expectancy, those two legs may have to support us for a much longer period of time—three decades or more in many cases.

We’re living longer than ever before

A “centenarian” is someone who has reached their 100th birthday. There are now an estimated 450,000 centenarians living in the world today. (Imagine what that number will look like 20-30 years from now). Now imagine you retired 5-10 years sooner than expected. This makes the problem that much worse.

“The world was home to nearly half a million centenarians (people ages 100 and older) in 2015, more than four times as many as in 1990, according to United Nations estimates. And this growth is expected to accelerate: Projections suggest there will be 3.7 million centenarians across the globe in 2050” – Pew Research

Longevity can be a snowball effect – the longer you live, means the more your expenses will pile up. And the greater your chance of experiencing a market (or multiple market) crashes. And the more money you will need for ongoing healthcare expenses, and the more expensive that healthcare will get, year after year. It’s never-ending.

Record low interest rates

Interest rates are still hovering at record lows. Not long ago, interest rates were on the rise. The fed raised rates 9 times since 20-15, with promises for even more increases to come. This was great news for savers. But recently the fed put on the brakes.

The Federal Reserve just cut rates again! From Barrons: “Federal Reserve officials reduced interest rates by a quarter-percentage point for the third time this year and signaled a pause in further cuts unless the economic outlook changes materially.”

If this was 1980, you’d be getting 20% with a savings account at the bank right now. But it’s not 1980. Today, rates on CD’s and savings accounts are a joke. It’s more like 2% OR LESS. Your money is basically keeping up with inflation, which means you are NOT generating any income at all.

The cost of Healthcare and Long-Term care are through the roof

From The Motley Fool: Healthcare costs alone are skyrocketing, and the average person in their 40s now is expected to spend roughly $335,000 on healthcare expenses throughout retirement, according to a study from Urban Institute. The numbers are even higher for those who expect to live long lives, too — the average worker who lives until age 90 or beyond could spend around $500,000 on healthcare costs over the course of retirement.

Retirees also face astronomical long-term care costs as they age. Seven in 10 retirees will need long-term care at some point, according to the most recent data from the U.S. Department of Health and Human Services. The average stay in a nursing home costs roughly $6,800 per month, so at that rate, three years of care will amount to close to a quarter of a million dollars.

As if that’s not a hard enough pill to swallow, the kicker is that Medicare won’t help with long-term care bills.

Inflation could devastate your portfolio

According to Investopedia: “Inflation can be a retirement killer.” Inflation steals from retirees by lessening the value of their savings. This erodes their purchasing power. A dollar today, will be worth less tomorrow. For example, a dollar in 1950 had the same buying power as $10.23 in 2017. That’s inflation. In 1930, the average cost of 1lb. hamburger meat was 12 cents. In 2013, it cost $4.68. That’s inflation.

This is another case of 1, 2 or even 3% may not seem like much. But if you add it up over 20 or 30 years, it could have a huge impact on your lifestyle in retirement. That’s why they call inflation the “silent killer.”

According to Kiplinger: Inflation is cumulative. A 2% inflation rate means that something that costs $10,000 now will cost $12,190 in a decade and $14,859 in two decades.

What to do about it

You might think that the people who will go broke in retirement are the ones who have little means. But that’s not the case. It’ll happen to people who are middle class, and it’ll to those who are wealthy. Nobody’s exempt.

The only way to ensure this doesn’t happen to you is to have multiple sources of income (aka income diversification). Income diversification isn’t a one-time thing. You should be constantly updating of your plan.  Things change quickly in today’s world, so if you aren’t updating your plan, you’re setting yourself up for a major fall.

From Investopedia: The question of how much retirement income is “enough” doesn’t lend itself to a one-size-fits-all answer. It depends on many factors, most notably your future retirement expenses, to the extent that you can predict them.

Proactive Strategy #3: Social Security

According to Forbes: Proactive planning Is critical for claiming social security benefits.

Thinking of Social Security as longevity insurance is advantageous and understanding how it integrates with your overall financial and retirement planning is critical.”

Even if you’ve earned a modest income throughout your career, your Social Security benefits could add up to 6-figures in retirement. If you’ve earned an average income, it could be worth a few hundred thousand dollars.  And if you’ve earned an above-average income, your benefits could be several hundred thousand dollars in retirement.

Claiming your Social Security benefits is more complicated and confusing than ever before.  How and when you claim your benefits impacts a lot more than the amount of your benefits check. You could also unknowingly trigger an avalanche of taxes; double your Medicare premiums; and cause you to forfeit thousands of dollars in spousal benefits. 

Most Americans take their social security benefits at face value, and they wind up leaving tens of thousands, if not hundreds of thousands of dollars on the table. According to new research featured in Bloomberg 96% of HARDWORKING Americans lose an average of $111,000 in social security benefits. And it’s all due to critical timing mistakes.

Spousal benefits

You aren’t the only person to think about when you make your claiming decision. This is more than just about you. This impacts your spouse too. If you make a mistake, your decision could wipe out your spouse’s spousal benefits. And there’s no getting this money back. Once it’s gone … it’s gone. Your spousal benefits could add tens of thousands of dollars to your benefit. But it’s riddled with trap doors, so you have to know the rules.

Restricted application strategy is expiring soon

According to Forbes, there’s an opportunity that could INCREASE your Social Security income up to 32%! But this opportunity is expiring soon! They are talking about the restricted application strategy.

“If you were born before Jan. 2, 1954, and you wait to file for benefits at full retirement age, you have the option of filing what is called a “restricted application.” Put another way, anyone turning 66 years old before January 2, 2020, can employ this Social Security benefits strategy.”

The restricted application is a planning tool, used at full retirement age, that allows you to restrict your application for spousal benefits only and delay your own retirement benefit to age 70. This allows you to accumulate delayed retirement credits, effectively increasing your retirement benefit up to 32%.

Proactive Strategy #4:Asset Allocation/rebalancing

From Investopedia: Despite the Federal Reserve’s decision to cut rates for the third time this year, several prominent market strategists see a big stock market selloff in the near future.

Proper asset allocation/diversification is critical to your success in retirement. A properly diversified portfolio– one that mirrors your appetite for risk – could help protect you in any kind of market downturn.

According to Investopedia: The S&P 500 Index is expected to be at 2,500 by early 2020, a plunge of about 18% by early next year, Business Insider reports. He sees bearish manufacturing and consumer data, making a recession likely by the second half of 2020.

From MarketWatch: The ‘mother of all bubbles’ could blow up the economy if profits don’t improve.

“At the end of any economic cycle, we often get warnings that appear to be unrelated. It’s in hindsight that we realize that they were not at all random. Investors saw this during the runup and aftermath of the housing bubble, he added, and we’re seeing it now. Among the recent troubles he thinks are connected are repo market woes, negative-yielding debt, global trade conflicts and collapsing manufacturing. And every cycle ends with excess.

The chances of a bear market rearing its ugly head are growing by the day. We recently celebrated thetenth anniversary for the longest bull market on record. On March 9, 2009, the S&P 500 bottomed out at 676.53. Investors have been richly rewarded since then, the S&P has rallied a whopping 312% since then.

The average stock market correction over the past 70 years lost 13.3%. And the last MAJOR stock market correction resulted in a 57% loss. And $16 TRILLION in market value evaporated

You know what they say, what goes up, must come down. So, it’s not a matter of “if” but “when” this bull market finally comes to an end. And if you plan on retiring soon, this could pose a real threat to your livelihood in retirement.

This is why it’s critical you rebalance your portfolio now before it’s too late. This isn’t a one-time thing, you should be constantly updating your asset allocation. And If you’re 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.

This may sound intimidating, and maybe even a bit depressing. It doesn’t have to be this way! If you have any questions or concerns about your current retirement strategy or investments, please call 952.460.3260 to get in touch with one of our qualified advisors. We’re here to help.

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