Three Steps to Make Retirement Planning Easier07-17-2014 |
Market volatility has spiked in July, driven by issues ranging from anxiety over the Federal Reserve raising interest rates to worries about the health of Portugal’s banks. While summer is usually a time for rest and relaxation, investors watching the markets may have a hard time breathing easy. This should serve as a reminder that retirement planning doesn’t take time off. The need for Americans to save enough for retirement has perhaps never been greater. (The financial blog Zero Hedge offers 35 facts about why Baby Boomers should be concerned about their retirement portfolios.)
Here are three simple steps to make the best out of your retirement portfolio so that you can go back to relaxing.
- Protect your capital against a crash. Investors in or near retirement have a relatively short investment horizon, which means that they may not have enough time to wait for the market to rebound from a crash like the one we experienced in 2008. Investors can protect themselves against a doomsday scenario by allocating more of their portfolio to low-volatility securities, thus minimizing potential losses. Consult your financial advisor to determine the securities that would be the best fit for your portfolio.
- Budget what you have. Many individuals expect to retire and be able to afford the same lifestyle that they have become accustomed to. But the reality is that many senior citizens outlive their retirement savings, according to this CNNMoney article, with U.S. citizens expecting a 33% shortfall. Investors can stretch what they have by budgeting their expenses better. For instance, instead of that month-long vacation to visit Europe, consider a cheaper alternative closer to home. If you’re accustomed to eating out at expensive restaurants, then try to make more of a commitment to cooking your own meals. The savings add up over time.
- Be tax efficient with your account withdrawals. Most retirement-age investors have a number of different investment accounts, from IRAs to brokerage accounts to personal savings. But investors can incur unnecessary taxes if they aren’t strategic about how they convert their retirement savings into income. Generally, retirees should liquidate their brokerage accounts first because the capital-gains tax rate is often more favorable than the income-tax rate they’d pay by withdrawing from tax-deferred accounts, such as a traditional IRA or 401(k). Once the brokerage accounts are exhausted, investors should move on to their tax-deferred accounts, especially because the IRS requires taxpayers to begin taking required minimum distributions at age 70.5. Last comes the tax-free accounts, such as a Roth IRA, that can continue delivering compounding returns without incurring any additional taxes.
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