For most, retirement in some form is a worthy goal! Whether retirement means changing your primary residence to the beach, spending more time with family, or simply some well-deserved R & R, there are some core steps to take to reach the lifestyle you desire. As a rule of thumb, one should plan to have at least 70% of pre-retirement annual income for 30+ years to live comfortably. However, if your goals for the future are more expensive, additional steps are likely needed to move you and your family closer to where you want to be.
First, try this short exercise to determine if you are on track to reaching your retirement and savings goals.
Next, think about your results. Did you discover a shortfall? If so, our Team at Buttonwood has developed strategy for thousands of families to close the gap. Did you find you are right on track and maybe even have a surplus of wealth? While this is an ideal situation from a savings standpoint, we know that as wealth builds so do the complexities. Tax laws change regularly, age and opportunity surrounding RMDs, medical costs, and modifications to estate plans are just a few of the items we track and proactively address. The objective: A holistic plan providing the freedom to enjoy life without the fear of outliving your money.
How to build assets for retirement
When considering how best to plan for retirement, there are two primary questions to ask:
- How much should I contribute?
- Which accounts should I contribute to?
First, consider how much to contribute. This is the most important decision one can make as saving early allows for both greater compound growth as well as the reduction of your current tax bill. If you are in a mid to higher tax bracket and not currently maximizing contributions to retirement accounts, we strongly recommend reviewing your options.
Choosing the best retirement account(s) to fund is a key piece to your overall strategy. If you would like to reduce your tax bill, select an account with pre-tax contributions. If your tax bill is lower this year than it will be in the future, accounts that allow for after-tax contributions can provide more lifetime benefits. Either way, the maximum contribution to a 401(k) in 2021 is $19,500 plus a $6,500 catch up for anyone over 50 years old. It is important to keep in mind, there are tax implications later in life for the type of contribution you elect in your 401(k). Talk with us if you would like a Team to proactively review your tax brackets and adjust contribution strategy to maximize lifetime opportunity.
Income during retirement
You are ready to make the shift to retirement, but what is your income strategy? How do you turn years of savings into a new paycheck? How do you protect your savings to ensure you do not outlive your money? Before you begin taking distributions from retirement, it is critical to implement strategy for continued income through life and possibly, onto future generations.
The first step to developing an income strategy is determining how much you need to spend to live the life you would like. How much do you need to cover essential expenses? How much do you need to fund activities, travel, etc? Expenses in retirement can often run higher than expected and it is best to have a contingency plan.
Once you know how much money you need to live, be sure to partner with your advisory Team to track your cash flows and adjust your income strategy as needed. At Buttonwood we love multiple streams of cash flow! For example, choosing the right time to begin taking Social Security can impact your tax bill and your lifetime income by tens of thousands of dollars. Additionally, married couples may be able to take advantage of spousal benefits, survivorship elections and more to increase income. Other sources of income such as consulting part time, income focused annuities, commercial and residential real estate, or something as simple as modifying your second home to be a vacation rental can all provide additional cash flows, tax planning opportunities and can help to provide retirement projects too!
At Buttonwood, our emphasis for clients transitioning to their own paycheck turns toward maintaining a comfortable lifestyle, providing planning opportunities, and often, implementing strategy designed to set future generations up for success. Regardless of who you work with, be sure it is someone who can develop and implement a multi-year, and maybe better, a multi-generational strategy.
What to Avoid
According to a study done by Forbes in 2019, nearly 60% of Americans fear they will run out of money during retirement. The good news, though, is with the right strategy and ongoing implementation, you have an immensely better opportunity of ensuring your retirement savings will last through your life and beyond. Mistakes to avoid include:
You Don’t Have a Muti-year Tax Strategy
You may be looking at your savings and thinking, “That’s plenty for me to live for the rest of my life!” However, have you accounted for the tax you will owe? When it comes to tax-deferred accounts, not only will you have to pay taxes on what you withdraw, we regularly see withdraws pushing families into higher tax brackets – which increases tax liability even further. Additionally, don’t forget when you turn 72, required minimum distributions begin to take effect. You didn’t pay taxes on your contributions in tax-deferred accounts initially, but Uncle Sam wants his money and he’s going to begin collecting whether you need the funds or not.
You Don’t Regularly Track your Spending
We regularly see this mistake after several years in the “post-career” phase of life. New retirees often become excited to have the freedom to do whatever they want. Before long, a less structured lifestyle leads to additional travel and other activities, which can be expensive. If not planned and accounted for, these extra expenses can put a significant dent in what was a solid retirement nest egg.
You Lower Your Expenses Too Much
There is a reason the phrase ‘penny wise, pound foolish’ has been around for years. While it makes sense to lower monthly expenses during retirement, a big mistake could be lowering expenses too much and subjecting your financial assets and retirement life to increased risk. For example, dropping excess liability, life or other insurance when you stop full time work can expose you and your family to additional risks. It’s important to protect assets, and the older you are, often the more risk to your assets.
How Prepared Are You?
Whether you are enveloped in your career and inching closer to retirement, or already enjoying the retirement lifestyle, it’s always a good idea to have a fiduciary Team in your life. Your Team should be proactively evaluating and adjusting your retirement strategy as you move through life.
Try this short exercise to see where you are on the path to a successful “post-career” phase of life. After receiving your results, take the next step and schedule a conversation with one of our Lead Advisors at Buttonwood Financial Group. We are ready to interpret your result with you and provide initial strategy for your future.