[vc_row][vc_column][vc_column_text]What most individuals want to do with their retirement funds is save, grow, make income, and pay as minimal income taxes as possible.
Many people do a good job when saving, even increasing savings in their retirement accounts annually. Growing such funds over time usually becomes difficult. Aside from the market’s ups and downs, there’s also the emotional rollercoaster that follows. When the markets are rising, everything appears to be OK. On the other hand, a downturn might cause many people to reconsider their investments and the level of risk they’re taking. Then, when the funds accumulate and the time comes to consider retirement, there are issues of transforming this accumulated money into income. With that comes the likelihood of having to pay income taxes on the retirement income.
There are ways that can help you in continuing the savings process while considering a re-alignment of your savings to build income-tax-free funds eventually. This might be achieved by simply relocating your savings over time rather than adjusting the amount you save. Market volatility and emotional plays, as well as trying to build your savings over time, can be addressed by considering active money and risk management. It’s possible to increase money by limiting downturns and having non-emotional choice triggers. That might then lead to considering strategies to generate retirement income, converting savings into income while reducing the income tax effect.
The savings and accumulation phase is referred to as “climbing up the mountain.” As an example, consider Mount Everest. You’re doing your best, attempting to save as much as you can while climbing the mountain. Your goal is to achieve a specific rate of return on your investment and see it increase over time. The emphasis is on increasing your money and asset allocation; this is your Accumulation Phase. That is where you might consider repositioning your savings, or a portion of them, to accumulate funds that’ll be tax-free when withdrawn.
You can also explore the use of Roth accounts and cash value in adequately designed life insurance plans. Discussions would revolve around your current income tax situation and where you expect it to be in the future. The distinctions between tax deferral and tax-free can also be explored. For instance, if you’re saving $10,000 each year in your retirement account on a pre-tax basis (your regular 401(k), 403(b), TSP, and so on) and you are in a federal and state tax rate of, let’s say, 25%, you’re ‘deferring’ $2,500 per year in taxes. That is not to say that taxes won’t be due. They’ll be due when you begin taking money from your accumulated savings and its growth. That income tax may easily exceed your deferred tax of $2,500. Of course, a time value of money estimate would be required. However, as you may have heard, the general question is whether you would prefer to pay taxes now on the seed or later on the products grown from that seed?
As you go up the mountain and get closer to the top, the peak, you may begin to wonder, “What will my retirement income be?” You can do a good, if not a great, job of saving money and have a better understanding what your number is or will be. The next stage is to figure out how to transform that number into income.
You want to keep your money coming into the house. But where will it come from? This is your Distribution Phase as you make your way down the mountain. This period of time can last as long as, if not longer than, your climb up. You wish to survive (more people have died on the descent of Mount Everest than the climb up). You’ll prepare for this by exploring your income sources and recognizing the risks involved.
Social Security income (perhaps a pension) and withdrawals from accumulated savings accounts are all sources of retirement income. The risks to consider are the following:
- Longevity risk – people now live longer and don’t want to outlive their savings and run out of money. This also results in the possibility of health concerns in the long run.
- Stock and bond market risk – the investments’ volatility and the market’s ups and downs.
- Sequence of returns risk – how your assets perform over time, not simply as you accumulate, but also when you take income from them.
- Withdrawal rate risk – how much or what proportion of your savings can you withdraw each year (5%, 4%, 3%) and still have your money last.
- Inflation risk – the risk that the cost of products and services may rise over time and your capacity to generate enough income to keep up.
- Tax risk – understanding the income taxes payable on your retirement income, as well as taking into account any potential estate taxes due.
Now, you’ll want to think about your legacy. Will income keep coming into your household if something happens to you? What is it going to be for your partner? Do you want to keep your money in the family and see it increase over time?
You can take control of your savings and retirement income, regardless of your age or where you are on the mountain while trying to reduce your taxes.[/vc_column_text][/vc_column][/vc_row]
