Retirement Investment Planning
Will you be in a lower income tax bracket during your Retirement Years than you were in during your Working Years? That’s been the assumption but it seems increasingly in question given the following:
- US debt is at alarming, historically high levels (see US Debt Clock)
- Many US states have income taxes beyond the federal tax burden
- You may live longer than you anticipated, stretching your resources
- Long term care and health care expenses may be more likely than you anticipated because you may live longer to experience more ailments.
If I asked you the question: “What is the next move for income tax rates? Up, down, or remain the same?” What would you guess?
Many Americans may guess “up”.
Economic Signals
All of the above signals a need to invest–to take some risk–to help generate enough return to fuel your retirement.
Why? Because preservation of capital strategies may not generate sufficient returns to keep your resources–which many Americans will ultimately convert to retirement income–ahead of inflation to last as long as you do. You may be retiring but you also may have 20-30 years ahead of you. That’s more than enough time to participate in the expected growth of the world’s economy during that time through investing.
Lifetime Investor
If you think once you retire your investing needs may be over, think again. Retirement investment planning may be a part of your life for the rest of your life.
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Investing In Retirement Years
What’s the difference between investing after retirement and investing before retirement?
Before you retire you may not need to use your retirement money. Once retired, you do. So, you need to plan your investments more carefully.
Short Term = Minimal Risk
One of the cardinal rules in investing in retirement–or whenever you need cash in the next 1-2 years–is to put the cash you know you need within 1-2 years aside, safely. You shouldn’t put money you know you’ll need soon at risk. This way, if the market drops, you won’t worry how you’re going to pay next month’s retirement spending needs (i.e. pay your monthly bills).
What’s the difference between investing after retirement and investing before retirement?
Before you retire you may not need to use your retirement money. Once retired, you do. So, you need to plan your investments more carefully.
3 Tax Efficiency Strategies
Convert
Convert your pretax accounts to after-tax accounts (Example: 401k to Roth IRA). This will help immunize your retirement resources from the risk of higher income tax rates. Start doing this when you’re age 60 each year up to the next tax bracket so you don’t increase your tax rate. Consult your tax advisor if you have questions.
Tax Harvest
Use an asset manager (perhaps through a financial advisor for retirees) which offers tax harvesting (using losses to offset gains to reduce your tax liability) and tax overlay services (uses software to identify which financial positions to match to offset one another to reduce tax liability–it’s a step beyond tax harvesting).
Product Diversification
Use product diversification (munis, life insurance, and other products) to move your future income off-tax return. Pay historically lower tax rates now so you don’t have to pay them later. That will help keep your reported income lower later in life.
Sound intimidating? It can be. That’s why you might want to engage a financial advisor for retirees to help you navigate and manage through all of this.
Takeaways
Having a . . .
1. Strategy you understand
2. your short term income needs not at market risk, and
3. a longer term investment strategy that’s aligned with your risk-comfort level to help you outpace inflation
. . . can help make the financial side of your Retirement Years easier.
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How financially literate are you compared to the average American? You can take one of the shortest of those financial literacy quizzes here (it’s only 6 questions) to get a taste of the questions asked.
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