Strategies to Establish a Financially Secure Retirement
Steps You Can Take to Help Your Money Last Once Your Earning Years End| By: Randall E. White, CFP®, RICP®, CRPC®, CMFC®
It can be a difficult and stressful task to accumulate the required funds for a financially secure retirement – especially when none of us can know how long we will get to enjoy this phase of life. While your cost of living may be less than it was when you were working, chances are your income is lower, too. This means you’ll need to have the proper savings and investments in place to support the difference and provide you with a reliable retirement income. When determining how much you should save to achieve your retirement income goals, you’re going to want to take into consideration your expected expenses, your Social Security benefits, any other income sources you have, as well as any money you want to avoid spending so that you can leave it to your heirs.
Whatever your financial situation, you’re most likely going to need a significant retirement nest egg to support yourself. Here are some helpful strategies you can use to build your retirement savings and lay the foundation for a financially secure retirement.
Capitalize on Employer-Sponsored Plans
Most employers offer some type of retirement savings plan, such as a 401(k). If this is the case at your workplace, be sure that you’re participating and that you’re maxing out your contributions whenever possible. What makes these plans so helpful in building a financially secure retirement is that any contributions are tax-deferred, so they provide immediate tax benefits. Most retirees depend on their 401(k) funds for their major source of retirement income, so you want to be sure that you’re contributing to your 401(k) as much as possible, especially if your employer offers to match your contributions.
Be Smart About Your Social Security Strategy
Current statistics on Social Security benefits show that an average of 65 million Americans received Social Security benefits in 2021 and those benefits accounted for about 30% of those retirees’ income. If you’re like many retirees, you may be planning to claim your benefits when eligibility begins at age 62. However, there is good reason to consider waiting to claim your benefits until later – and waiting until age 70 if you’re able. For starters, the government rewards those who wait, adding a delayed retirement credit of about 8% to your monthly payout for each year you hold off, so you’ll be getting a larger check each month. Additionally, if you wait until after you retire to claim your benefits, you’ll have a lower tax bill, as you probably won’t have as much taxable income and, therefore, your provisional income will be lower. By increasing your monthly check and decreasing your tax bill, you’ll be able to make your money last longer into your retirement.
Invest, Invest, Invest
Investing is a fantastic tool for retirement planning because it helps ease the burden of saving the full amount you’ll need to support yourself. Take the time to build an investment portfolio that’s properly diversified with the appropriate amount of risk for your situation. As a young investor, you’ll be able to take on more risk since you’ll have a longer time horizon for your investments to bounce back from any market volatility. However, as you near retirement, you’ll want to employ some risk mitigation in order to protect your portfolio since you’ll soon be relying on your investments for income. Investing can be intimidating because you can’t avoid risk and you can’t avoid losses. However, smart long-term investing can provide significant returns over time to boost your nest egg and help you meet your retirement income goals.
Consider a Roth IRA Conversion
Taxes are one of the biggest threats to the financial security of retirees. Too often, retirees find themselves blindsided by how much they have to pay in taxes throughout their retirement. One reason for this is that many retirement savings vehicles, such as 401(k) and IRA accounts, are tax-deferred, meaning that though you don’t have to pay taxes when contributing to the accounts, you do once you begin withdrawing from them. A smart way to reduce taxes in retirement is to convert funds from your IRA to a Roth IRA because, while you’ll have to pay taxes on the conversion, once the funds are transferred your money can grow tax-free and be withdrawn tax-free, as well. A Roth IRA conversion isn’t the best move for everyone, so you’ll want to do your research or talk with your financial advisor to see if it’s the right move for your retirement planning strategy.
Smooth Out Your Income in Retirement
Another strategy to help mitigate taxes in retirement is “income smoothing,” where retirees work to lower their income level so that they can avoid being pushed into a higher tax bracket. One example of income smoothing is to begin taking distributions from your tax-deferred accounts at an earlier age rather than waiting until you hit 72 and the RMD mandate kicks in. In doing so, you would be able to lower your estimated average tax costs throughout retirement, saving yourself money in the long run.
It’s important to note that, any time you try income smoothing, you’ll want to be cautious of the fact that tax rates change, and if tax rates were ever to drop in the future, it could adversely impact the efficiency of this strategy. The flip side of this, however, is that if tax rates were to rise, then the benefits of this strategy would be magnified.
Concluding Thoughts on Creating a Financially Secure Retirement
There are many strategies retirees can use to maximize their retirement savings and help build a financially secure retirement for themselves. Each retiree is different in terms of their financial situation and the goals they’re working towards, so you’ll want to adopt the strategies that make the most sense for your unique situation. The best way to ensure that you understand all the options available to you is to speak with a professional financial advisor you trust.
At TriCapital Wealth Management, we specialize in building each client’s financial plan in a way that will help provide them with financial confidence for the entirety of their retirement. Our mission centers around our desire to help clients develop confidence in their long-term financial plans so they can enjoy each phase of life. If you’d like to start a conversation with one of our financial advisors to see if our services are the right fit for you, please contact us today to schedule a complimentary call.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.