At last you’re there — retirement. Let the good times begin! Yes, but that’s not to say you can take off your thinking cap. In fact, just the opposite. The early years of retirement lay the foundation for your remaining years. Missteps now can have ruinous ramifications.
Here's what to keep in mind.
Rethink tax-deferred retirement accounts
Some people continue contributing to tax-deferred retirement accounts in early retirement. "At a moment’s notice the government can effectually seize a majority of your wealth by raising income taxes and therefore decreasing your net available values from your tax-deferred retirement accounts while increasing the amount of money the government grabs from every dollar you distribute to yourself," explains Michele Lee Fine, founder and CEO of Cornerstone Wealth Advisory in Jericho.
A tax rate increase from 25% to 30% means theoretically a -6.7% decline in your accessible wealth. "With future income tax rates unknown, diversify into other investments where you pay the tax upfront, and pay either capital gains tax in the future or benefit from tax-free growth and withdrawals that are not as sensitive to potential changes in income tax rates," Fine says. Roth IRA retirement accounts and cash value life insurance, for instance, are funded with after-tax dollars with the ability to take distribution of values and growth without incurring any income tax.
Create a budget and stick to it
If you’re spending like you’re still working, you’re headed for trouble. "It takes deliberate preparation and discipline to shift from years of working to earn money, to ultimately one’s money working for you," Fine says.
Many people underestimate the impact of stealth risks and costs like inflation and how they affect future purchasing power of expenses they can't even anticipate yet. "As soon as possible, quantify your fixed and discretionary monthly expenses. It will take a few months to see a pattern. Set a baseline for going forward that you can then add inflation to test the sustainability of that ‘burn rate’ against your retirement assets," Fine says.
Put your plan in writing
You can’t shoot from the hip during retirement. "You need to make assumptions about the future — taxes, inflation, investment returns, spending, longevity, etc. Then you need to run an analysis to see if your assets can provide the necessary income to support you and your spouse for your life expectancy," says Eric Diton, president and managing director of The Wealth Alliance in Melville.
Once you run this analysis, revisit it annually to see if you are on track, and if your assumptions were realistic. Make needed adjustments. Says Diton, "You get one shot to retire. If you blow it, there are no second chances."
Be mindful of when you take Social Security
Although you are entitled to take Social Security at the age of 62, if you have enough funds to wait, claiming it at 70 will provide 30% more and you will get an 8% boost between the ages of 67 and 70. "You don’t want to take Social Security too early. Talk to a financial planner and look at the various scenarios for how to maximize Social Security," says Aviva Pinto, managing director of Wealthspire Advisors in Port Washington.
Don’t get too conservative
Just because you’re retired doesn’t mean the bulk of your portfolio should suddenly be conservative. "Retirement is not the finish line. The average person should plan on roughly 30 years of retirement, and in many cases your assets have to have the ability to grow to offset the effects of taxes and inflation over time," says Christopher Congema, principal and investment adviser with Landmark Wealth Management in Melville.
Cushion yourself with passive income
One of the damaging things one can do in retirement is to be forced to liquidate assets at the wrong time to fund a lifestyle during a temporary market downturn. This is compounded by the risk that such a liquidation may trigger taxable gains with income taxes being an always irrevocable cost.
"To mitigate this risk, it’s best to always have in place asset classes that can generate reliable streams of passive income which can reduce the pressure on market-based assets," Fine says.
Examples include earnings generated from interest, dividends, Social Security, rental income, and tax-free distributions from cash value life insurance policies.
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