Millions of Americans face quite a few challenges when it comes to retirement. As you enter your “Golden Years,” thoughts of travel, leaving the work place and enjoying time with family are clouded by the important question, “How am I going to pay for it?” Many retirees see the cost of living on the rise, shortage of pensions, insignificant savings and a longer life span.
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Andrew Crowell, Vice Chairman of Wealth Management, D.A. Davidson & Co. discussed with Fox Business ways to stretch your retirement income and distribution. Here is what you need to know:
Boomer: How can individuals use the resources available to them to stabilize and stretch income in retirement?
Crowell: Boomers today have a myriad of resources available to help evaluate preparedness, although the value of working with a financial professional during this transition should be evident. Most individuals and families make the transition to retirement once during their life, but professionals have been assisting retirees for years.
Drafting a financial plan can help provide some reassurance on whether you’re financially ready for retirement. The plan may reveal that you should work a bit longer and take advantage of your company’s 401(k) plan and generous health insurance benefits for a few more years. Could you maximize your retirement contributions and company match for a few years more (including catch-up contributions)? Should you extend your employer’s health insurance plan a bit longer? What about your liabilities? Itemizing a thorough expense inventory and determining what you can reduce or even eliminate before retirement can greatly help your future cash flows. Can you consolidate high interest debt into one lower rate account? There are often more attractive borrowing and refinancing opportunities available while you are working than once you are retired. Investigate these while you still can. Further, do you know all of your available retirement benefits? In addition to your company’s plans, other organizations and resources like AARP, the Veteran’s Administration, your parish, and trade unions may also offer valuable retirement benefits.
Boomer: Under the new tax plan, how can Boomers maximize tax reform to their favor in retirement?
Crowell: While there are numerous changes and nuances to the law, the good news is that for scores of middle income families throughout the country, their marginal tax rate most likely has been reduced, meaning more discretionary spending money.
Additional great news is that the final tax law did not include a mandatory First-In-First-Out (FIFO) rule which had been under consideration in earlier versions. This means that investors and savers retain the potential for tax sensitivity and flexibility when selling investments during their distribution years.
One more potential positive of the final law for retirees is that there was not a change (as had been earlier considered) to the home sale capital gains exclusion. This means that retirees who may need or choose to downsize their home in retirement retain a meaningful tax benefit.
Elimination of personal and dependent exemptions, new caps on state and local tax (SALT) deductions, revisions to home mortgage interest deductions, changed medical expense deductions, etc. all impact individuals and families differently. Recruiting a tax professional to guide you through the twists and turns can help you stretch your valuable retirement dollars by keeping more of what you earn.
Boomer: Why should you implement a blended approach to investments, and how do we do this?
Crowell: Conventional wisdom used to state that you should own stocks during your accumulation (working) years to maximize your nest egg’s growth potential and gradually shift more toward bonds as retirement approaches in order to reduce risk. However, since breakthroughs in medicine are allowing us to live longer, it may actually be the most risky move for savers to get overly conservative too early. During this period of historically low interest rates, locking in low yields may actually result in reduced future purchasing power as inflation rears its head and possibly cause you to even outlive your money.
A well-crafted asset allocation plan balances risks, reduces tax impacts, optimizes income streams and maintains a stable foundation during the unexpected events of retirement. Planning ahead can ensure that you’re never out in the cold without a warm jacket.
Boomer: How can you properly utilize employer 401(k)s, Social Security and insurance products?
Crowell: Where will your paycheck come from in retirement? For most people the answer is a variety of sources including 401(k)s, Social Security, pensions, benefit plans and annuities. Optimizing these resources in the most tax-advantaged way possible is invaluable. Not all retirement accounts are created equal in this regard. For example, Roth IRAs and 401(k)s do not have required minimum distributions (RMDs) the way that traditional pre-tax IRAs and 401(k)s do, and further, qualified distributions from them are tax-free. This means these instruments can grow longer and distribute more tax sensitively than other retirement income sources.
Social Security optimization is also a critical retirement income strategy. While individual situations vary, as a general rule, delaying receipt of your Social Security income can result in larger total payments to you.
Some retirees seek to reduce uncertainties and risk in retirement through products like insurance and annuities. While these can be appropriate in many circumstances, it is important to know that these products come in many shapes and sizes. Careful comparison shopping and review of the fine print can help avoid unexpected surprises like abnormally high fees, long “lock-in” surrender periods, and adverse tax treatment. Although annuities may help mitigate market risk, it is important to know that there are other risks associated with fixed annuities that must be considered.
Simply knowing what your retirement income sources are is only part of proper planning. Optimizing those sources with the help of a financial professional can ensure you maximize those precious funds and stretch them for as long as possible.