3 WRENCHES THAT COULD THROW YOUR RETIREMENT INCOME PLAN OFF TRACK
For people just starting to save and people who have been diligently saving for retirement for a while, a frequent question is “How much savings do I need?” This is an important question to ask yourself when planning your retirement savings strategy. It may look like a simple enough question, however, it’s much tougher to answer as Americans face many obstacles to detailed retirement planning. As life expectancy increases, pension options decrease, and other financial obstacles arise, it can affect your planning. Once you enter into retirement, there are a variety of factors that can also impact how long your hard-earned savings will last.
Here are some important areas you should consider when planning how long your retirement savings will last:
1. Long-Term Care (LTC)
Long-term care is an important aspect of retirement that is all too often an expense many folks simply don’t account for.
According to LongTermCare.gov, the average cost of long-term care is over $80,000 per year. 7 out of 10 people retiring today will need some kind of long-term care during their retirement. While this does not mean that you’ll need long-term care, it does mean you should plan for the possibility of needing it during retirement.
There are many creative options you can explore with your financial advisor for guidance on a LTC plan that fits your situation.
2. Taxes
Like most people, you might think it’s best to defer taxes and reduce your taxable income as much as possible. Whether you do this by utilizing your qualified savings accounts such as a 403(b) or any other kind of tax-deferred accounts you may have, you will end up having to pay these taxes eventually.
The IRS requires you to take withdrawals at 70 ½ years of age, whether or not you actually need the money at that time. Many people fail to plan for paying off deferred taxes when planning for retirement, which can make a big dent in your savings.
Some solutions could be:
- Roth IRA don’t require you to take required minimum distributions (RMDs) every year after you reach age 70½, allowing your money to continue to grow if you don’t need to draw on that account. This account offers tax-free growth and tax-free withdrawals in retirement as long as you've owned your account for 5 years and you're age 59½ or older. However, you should consider if your tax rate is lower now than you think it will be in the future. This option takes some time to build up with contributions limits at $6,000 per year or $7,000 per year for people over 50 years old for 2019, making this option more difficult for those earning a higher income. A Roth Conversion allows you to convert money in any of your tax deferred accounts in order to pay taxes on it now rather than later. One benefit is that there are no income limits to do a Roth conversion.
- Life Insurance Retirement Plan (LIRP) has no contribution or income limits and allows you to withdraw money, tax free. However, LIRPs can have high fees and need to be designed properly to be effective.
It is important to understand the options above prior to pursuing them. Consult a financial professional for a full explanation to see if they are suitable for you.
3. Market Downturn
There is one thing that is consistent with investing – the market will go up sometimes and the market will go down sometimes. Anyone who invests money to make retirement contributions will know that a downturn is always a risk. In order to better plan your retirement savings strategy, it’s important to consider what your risk tolerance is and remember that market fluctuations will still occur in your retirement years. Developing a retirement income strategy is unique and requires special, separate planning from the plan utilized during your acquisition years.
These factors are crucial to consider and plan for in order to help ensure that you don’t fall short financially in your retirement. If you have not already, speak with an experienced financial professional to discuss your retirement plan options and help you come up with a plan that suits your individual needs.
Contact us to speak with an experienced financial advisor today.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of The Lincoln Investment Companies. The material presented is provided for informational purposes only. There is no guarantee that any strategies discussed will result in a positive outcome. None of the information in this document should be considered as tax advice. You should discuss any legal, tax or financial matters with the appropriate professional regarding your individual situation.