Category: Retirement

A well-thought-out plan for a comfortable retirement is important, even more so in a tough economy.

EXAMINE THE PAST

Start by looking at your spending habits for the last three years and determine if it’s sustainable for the next 20 years. Keeping in mind that most retirees take on a new hobby or activity that usually costs money. Travel, large home improvements, or restoring a classic car can cost thousands of dollars and stress your financial plan.

TIMING IS EVERYTHING

Plan to keep your portfolio diversified, and don’t try to time the market. Selling investments because they are down means you could miss out on a recovery. Stripping emotions out of financial decisions is vital but not always easy. If you’re not confident doing this on your own, work with your financial professional for guidance.

STAY FLEXIBLE

Spending in retirement requires flexibility. You may need to reduce your withdrawals when the market is slowing, but you can increase them when it recovers. Be sure to notice the warning signs of a slowing market, like rising interest rates and higher inflation.

With Social Security benefit payments increasing nearly 9% this year, you may need to rethink your retirement tax planning.

INCOME MATTERS

If you started working part-time to offset some of the recent price inflation, this increase in your Social Security payments might make some or more of it subject to federal income taxes. If you file as an individual and your combined income is between $25,000 and $34,000, up to half of your benefit may be subject to income taxes. Social Security defines combined income as your adjusted gross income, plus nontaxable interest, plus one-half of your Social Security benefit.

CONSIDER A REDUCTION

With the possibility of being in a higher tax bracket this year, due to increased Social Security benefits, consider cutting back on withdrawals from your qualified retirement plans. If you can avoid taking more than your required minimum distribution (RMD) in 2023, you might be able to limit your tax liability.

If you need more than your RMD, consider pulling funds from a taxable brokerage account where you’ll pay the lower long-term capital gains rates if you held investments for more than a year.

Also consider qualified withdrawals from a Roth IRA, a Roth 401(k), or a health savings account (HSA), which would not be subject to federal income tax and wouldn’t have an impact on how your Social Security benefit is taxed.

This year’s cost of living adjustment can help you keep up with higher prices. And in the short run, managing your withdrawals may help you smooth out the tax bumps during a period of high inflation.

Figuring out withdrawals from retirement and brokerage accounts can be complicated, so it may help to work with an advisor. But even if you do it yourself, try to withdraw from your Roth and HSA accounts last, allowing those assets to grow tax-free longer. Withdrawals from all three types of accounts in the same year can help manage combined taxable income.

As the fourth quarter of 2022 is upon us, you may consider providing annual bonus payouts to your employees. It’s a great way to thank them for their hard work.

Once you settle on the bonus amounts, consider notifying each employee before you make the payments to provide them with a choice as to how they prefer to receive the funds. They could choose to take it as regular income or invest it in their retirement account.

If your company already has a 401(k) plan, depositing their year-end bonus will function like any other payroll deductions you make on their behalf.

If your employee has already maxed out their 401(k) contributions for the year, you may be able to send their bonus to their IRA.

Tapping your retirement accounts before age 59½ usually comes with a 10% early distribution penalty, in addition to any income tax that’s due. But if you must make an early withdrawal, the IRS allows a few exceptions from the penalty.

MEDICAL EXPENSES

If you have large medical expenses that your health insurance doesn’t cover, you can withdraw money from a 401(k) plan or traditional IRA to pay these bills. However, these medical costs must be greater than 10% of your adjusted gross income to avoid the 10% penalty.

Also, you can take withdrawals from a traditional IRA to cover health insurance premiums paid while unemployed. There are several conditions that need to be met to avoid the 10% penalty in this situation, so speak with your tax professional beforehand.

DISABILITY

Becoming disabled and unable to work means you may be able to tap your tax-deferred retirement accounts without the 10% penalty to provide income that supplements your Social Security Disability or Supplemental Security Income benefits. You’ll need your physician to document and substantiate your disability to avoid the penalty.

HOMEBUYERS

If you are buying or building your first home, you can withdraw up to $10,000 — if you’re single, or $20,000 — if you’re married and both have a traditional IRA, without paying the 10% penalty.

HIGHER EDUCATION

Pulling contributions out of a Roth IRA to pay for higher education expenses for you or your dependents is always penalty-free. But withdrawal of Roth IRA earnings will be subject to the penalty if you don’t meet the exception requirements.

AVOID WITHDRAWALS

Being fully prepared for retirement requires financial planning and leveraging tax savings and the time value of money. Consider other cash sources like taxable brokerage accounts.

Offering an employer-sponsored retirement plan is one of the most effective ways to help workers save for retirement. And most provide tax advantages for both employers and employees.

PICK A PLAN

The 401(k) is one of the most common plans employers offer because they’re fairly easy to set up. They also offer higher contribution limits than individual retirement accounts (IRAs). But they require more administrative work. An annual report must be filed with the Department of Labor to disclose the plan’s financial condition, investments, and plan operations.

Smaller employers can consider a Simplified Employee Pension (SEP) or SIMPLE retirement plan. Both are easier to maintain than a 401(k). The SIMPLE plan allows employees to contribute with pre-tax payroll deductions but is limited to companies with 100 or fewer employees. A SEP plan only permits employer contributions.

TAX CREDITS

A federal tax credit of up to $5,000 for the first three years is available to eligible employers that start a new retirement plan. The credit is for ordinary and necessary costs to set up and administer the plan and educate employees.

To help workers save for retirement, an additional $500 credit is available for the first three years — if your plan has an automatic enrollment feature.

Remember, tax credits offset the amount of tax you owe dollar for dollar, but deductions only reduce your taxable income.

IT’S A MATCH

Offering to match employee plan contributions is a valuable perk you can use to attract and retain top talent. The good news is that your matching contributions are tax-deductible.

To start, you’ll need to determine when you’ll begin matching contributions (e.g., after the employee has worked for a year), when your contributions will vest, and how much your business can afford to contribute.

Meet with your financial professional for help deciding which plan is best for your company.

Here are the average retirement account balances by ages, according to a Survey of Consumer Finances.* This chart clearly demonstrates that most Americans are not saving nearly enough for retirement. Fortunately, you do not have to be average. Working with your financial professional is your best chance of developing a realistic savings strategy that works for you.

AGE GROUP AND THEIR AVERAGE RETIREMENT SAVINGS

• Under 35: $13,000
• 35-44: $60,000
• 45-54: $100,000
• 55-64: $134,000
• 65-74: $164,000
• 75 and up: $83,000

FIRE stands for Financial Independence, Retire Early. It’s a financial movement growing in popularity as more and more people seek to eliminate debt and build savings so they can retire earlier than usual. Regardless of your target retirement date, this movement focuses on some smart financial strategies:

REDUCE

One of FIRE’s focus is on eliminating all debt and reducing expenses. Paying off debt is the first step with a focus on not accumulating new debt. Start by scrutinizing how you spend your money to identify unnecessary expenses.

INCREASE

FIRE followers also look for ways to increase their income. Things like switching jobs for a significant pay increase, working side gigs or generating passive income from owning rental property add money toward the early retirement goal.

INVEST

The last tenement of FIRE involves sound investing strategies. Start by maxing out retirement plan contributions. And if your employer offers a matching contribution, be sure you’re saving at least the minimum amount to get the maximum contribution.

One of the common retirement plans offered by employers is a 401(k) plan. These plans make saving for retirement convenient. But make sure you understand the basics so you can capitalize on plan options and determine how your 401(k) fits into your overall retirement strategy.

ELIGIBILITY RULES

Some employers allow new hires to enroll in the company 401(k) plan on day one, and some even offer automatic enrollment. But employers can have waiting periods of a few months to a year before you’re eligible to participate. To get the most from the plan, however, sign up as soon as you’re allowed.

IT’S A MATCH

Many companies offer a matching contribution to employees who participate in the company plan. While amounts vary, matching contributions are usually a fixed percentage on a predetermined portion of an employee’s annual salary. For example, an employer may contribute fifty cents for every dollar you contribute, up to 10% of your salary. So if you earn $60,000 per year, you could receive a $3,000 annual contribution from your employer, provided you contribute $6,000 each year.

KNOW YOUR LIMITS

The IRS places limits on the amount you can contribute to qualified retirement plans each year. For 2021, the limit is $19,500, but if you’re 50 or older you can contribute an additional $6,500. Any 401(k) plan can set its own contribution limits, which may be less than the IRS limits.

VESTING

The money you contribute to a 401(k) is yours to keep from day one. But the contributions from your employer may come with a contingency, also known as a vesting schedule. That means you may need to work for the company for a year or more before you gain 100% ownership of the company’s contributions.

TAKE OUT

Although you may not plan on tapping your 401(k) account before retirement, sometimes life’s events require you to do so. Some plans will let you take a loan that you repay with interest over time. Or you may be able to take a hardship withdrawal that doesn’t require repayment. But you’ll have to pay income tax on the amount withdrawn and if you are under age 59½ there is an additional 10% federal tax penalty. Consider this option as your last resort, because that money will no longer be there to grow for retirement.

Longer retirements mean inflation can put a serious dent in the best-laid plans. Most people factor in inflation when planning how much they will need when they reach retirement. But inflation does not stop the day you retire. In fact, your budget on the day you retire could look very different five, 10, or 20 years into retirement.

BE REALISTIC

It’s important to set realistic expectations for both how long you may be in retirement and how much income you’ll need. Designing a realistic budget that considers essential, discretionary and unexpected costs is a smart first step.

With that as a start, you can review the ways high inflation and low interest rates may affect total rates of return on your investments and your annual income.

WITHDRAWAL PLANNING

Maybe you’ll try to address inflation risk on your own by withdrawing no more than 4% of an asset and then increasing the withdrawal by the rate of inflation each year. But as those withdrawals grow, they could represent a large piece of your retirement account over time. This can seriously erode funds.

Some fixed index annuities and index variable annuities offer potential income increases every year to help address the effects of inflation. These annual increases are available by purchasing optional riders for an additional charge.

CHOOSE TO DELAY

If you can delay applying for Social Security benefits until you’re 70, consider doing so. Each year you put off collecting Social Security increases your annual payments 8%. This a cost-effective way to maximize your inflation-protected income.

As you think through your future expenses and how inflation may impact them, it’s essential to manage expectations, be realistic and focus on what you can control. Working with your financial professional can help address longevity, inflation risk and rising health care costs in retirement.