Regardless of how far away or close your retirement is, you should plan thoroughly because, without it, you could face significant challenges that aren’t top-of-mind right now. These issues may affect your lifestyle in the future. You may encounter hidden roadblocks on your way to retirement, so you should educate yourself about them and take the appropriate steps to reduce their impact. Consider these five essential elements when planning your retirement:
Taxes
The majority of people do not take into account taxes in retirement enough. When they withdraw large amounts of money from traditional 401(k)s, as many do, those funds will be taxed. Tax problems can arise when required minimum distributions (RMDs) are not addressed ahead of time at age 72.
To reduce the tax burden in retirement, you can convert some pre-tax money into Roth IRAs or Roth 401(k)s. Be strategic when converting, and know how much to convert at each stage. When withdrawn, Roth IRAs and Roth 401(k)s are tax-free beginning at age 59.5, although they must also be held for at least five years before the withdrawal. The converted amount is taxable yearly, while Roth IRAs and Roth 401(k)s are tax-free when withdrawn starting at age 59.5. Roth IRAs do not require RMDs, while Roth 401(k)s do, but account holders can roll those contributions into Roth IRAs.
RMDs can also be reduced by using Qualified Charitable Distributions (QCDs). IRA custodians can make QCDs by paying part or all of your RMD to qualified 501(c)(3) charities. You must be at least 70.5 years of age to make a QCD, and the maximum contribution is $100,000.
Risk Tolerance
What is the maximum amount you could lose if a significant downturn occurs? You need to be comfortable with whatever number you choose.
It is essential to discuss your risk tolerance with your financial planner and find a balance between being too conservative and too risky. You will most likely want to grow your investments, but you will also want to protect some of your assets.
Investment Mix
Investing is like using different kinds of tools for various tasks. Many people in the financial industry are trying to sell you products, but they may not be the right fit for you. Their goal is to sell you something, while an independent adviser focuses on investments based on your needs. However, depending on your needs, different products can be helpful. Generally speaking, bank-type products such as savings accounts, money market accounts, and certificates of deposit (CDs) won’t lose money, but they won’t grow either. Stock market accounts are also a type of tool. They can grow very well, and they are used for long-term growth. Even so, you can’t guarantee you won’t lose money at some point, so investing is often a long-term endeavor.
In addition, there are insurance-based solutions, such as indexed annuities. They’re safe and contractually guaranteed not to lose money, so there can be moderate growth in those vehicles. (A guarantee is backed by the financial strength of the company issuing the product.) However, they usually require a commitment of time.
Costs
Clients should be fully informed about compensation, commissions, and fees their advisers and account managers charge. For those watching your money, what’s in it for them? These fees are displayed in some cases, such as with mutual funds. Others, however, are hidden or not as publicly disclosed. Some financial professionals get paid a percentage, and others are paid on a retainer basis. Understanding how advisers and account managers are compensated empowers you as a consumer.
Knowledge Gaps
Unlike home improvement videos where you can learn how to add a room for half the contractor’s cost, financial planning isn’t like that. An experienced professional can help you plan your financial future and retirement. For most consumers, planning their retirement is their first time. However, seasoned planners do it daily and know how to navigate around hidden obstacles. Experienced advisers can be a great asset to clients.
By working on your retirement portfolio, you can identify hidden obstacles well in advance. To achieve your retirement dreams, you must know what could stand in your way and how to make your retirement experience as enjoyable and smooth as possible.