retirement

Retiring in a Volatile Market: Control What You Can

August 23, 2022

Loving mature wife embracing husband from behind while writing in book. Happy middle aged couple making to do list of purchases and discussing future plans. Cheerful senior man working at home on wooden table with beautiful woman hugging him from behind, copy space.

Retirement during a volatile market is unsettling.

Whether you are on the cusp or have already made the leap, a market downturn’s impact on your savings will be felt now and potentially for years to come. How do you keep your plan on track and your desired lifestyle in place?

If you can’t control income, you’ll need to control expenses. And that means budgeting and taxes. You can deploy tactics and strategies to optimize these factors no matter what stage you are in on your retirement journey.

Set a Realistic Budget – And Stick to It

Lifestyle creep is real.

No matter how carefully you budget, somehow, the numbers on the spreadsheet don’t mean much when confronted with fun, deliciousness, seeing family, a quick weekend trip, or anything else. You get the idea.

A volatile market means that drawing income from investments will likely result in selling into a down market. This not only crystallizes the loss, but you may also have to sell greater amounts to make up for lower prices. This will hamper your recovery, and your assets may not grow as much over time.

Reviewing your budget to ensure you keep your spending at a level that is commensurate with your income is critical.

Plan Proactively to Reduce Taxes

Planning strategically for taxes can help you keep more of your income.

This can compensate for budget shortfalls or help you give long-term capital growth investments the time they need to recover. There are a lot of things you can do to keep yourself in the lowest possible tax bracket.

Maximize Tax-Free Social Security Income

Social security benefits have a tax-free component of at least 15%. Whether you pay taxes on the other 85% depends on your overall income level, but you can increase your tax-free income by maximizing your benefits.

Waiting until age 70 to claim increases your annual benefit by 8% for every year from your full retirement age (FRA). If you are married, it may make sense for the spouse with the highest income level to wait until age 70, while the lower-income spouse claims at early or full retirement.

Deploy an Asset Location Strategy

Asset location refers to the types of accounts where you hold investments. They are tax-deferred such as 401(k)s and IRAs, taxable brokerage accounts, and tax-free Roth accounts.

Using all the accounts together to create a tax strategy that lowers lifetime taxes is the goal. The general principle is to match the asset up to the account’s tax treatment. Stocks receive tax-favorable treatment on qualified dividends and long-term capital gains, so one option is to put them in a taxable account.

If you hold municipal bonds, they also go into a taxable account. Higher yielding corporate bonds would be held in a tax-deferred account, as the lower growth rate compared to equities will help reduce required minimum distributions, which are based on the account value.

Using the Roth IRA account as a flexible source of funds can help keep you in lower tax brackets. In years when taxable income is higher, using funds from the Roth account for living expenses can reduce income taxes and help you avoid the IRMAA Medicare Part B and Part D premium surcharge.

Take Advantage of Lower Asset Values with a Roth Conversion

The drop in value of 401(k) and IRA accounts is painful – but it also means that you can convert those assets to a tax-free Roth account with a lower tax liability.

This can set you up for a more effective asset location strategy and can help you control future income and taxes by eliminating RMDs on the assets that are converted.

The Bottom Line

Retiring in a volatile market adds a layer of complexity to all the choices you need to make.

It means emphasizing controlling your expenses, whether lifestyle or the taxes on the income you draw from retirement accounts.

The critical thing to remember is that you do have options, and you can control several important levers that can help you keep your retirement plans intact.

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

In Celebration of International Women’s Day: A Look at Financial Milestones in Women’s Lives

March 7, 2022

International Women’s Day started over 100 years ago as a labor movement in New York City.

Women workers in the needle trades began to demand fair wages and workplace limits and protections. Women did not have the right to vote, so to effect change and call attention to the cause, they organized a march through New York City’s Lower East Side.

From the beginning, women’s day has focused on economic equality across every dimension of life, education, and work.

There is excellent news on increasing women’s participation in traditionally higher-paid, male-dominated professions. The now decades-long focus on encouraging STEM education for girls and women has dramatically increased participation in related vocations.

The U.S. Census Bureau reports that while overall women’s workforce participation is up slightly in the 20 years between 2000 and 2019, certain careers have seen tremendous inflows of women. The number of women becoming veterinarians has doubled. Women are becoming chemists and other scientists, mathematicians, and dentists at impressive growth rates.

As women enter higher-paid professions at increasing numbers, they lower the gap between male and female salaries. And as women are creating their wealth, they are doing it in ways that reflect their lifelong needs, habits, and goals. These are – and should be – different from men at every life stage.

Here’s our round-up of some things women should consider as they work to create lasting wealth at every stage of their financial journey.

The Early Stage of Your Career

Income has likely increased substantially, but debt is often still significant at this stage. One other danger is “lifestyle inflation” – being careful to live within your means and save for the future is the foundation of wealth. Your goal in this stage is to create financial security as a baseline and then work to build flexibility. You may want to change careers, go back to school, even take time off. Saving and investing can make those choices possible.

Lower Debt. Strategies to lower debt quickly include refinancing to a lower interest rate, paying more than the minimum every month, and automating your payments.
Create a Cash Flow Plan. This isn’t about budgeting – it’s about lining up your money with your short- and long-term goals. Especially if you have lumpy income from bonuses or variable work hours, you’ll want to map out a strategy to put your money to work. Hint: open separate bank accounts to align with goals.
Take Advantage of Employee Benefits. Employee benefits are where it’s at to increase income and reduce taxes. Contribute at least enough to a 401(k) to get the employer match and strive for 15% of salary. Take advantage of healthcare and commuter benefits.
Begin Saving. Saving into an emergency fund is critical. Automate the process until you have 3-6 months of saved income.

The Mid-Career Stage

For most women, mid-career is the busiest stage. You’re focused on work, but you’re also likely getting married, having kids, buying a home, etc. Besides being the mainstay of your partner’s and kid’s lives, you need to be the CEO of your career to be sure you get paid what you deserve and that you can have the career flexibility you want.

Love and marriage (and finances). Yours, mine, and ours is how you create trust and set a precedent for open, honest conversations about money and goals. Begin the conversation before you get married.
Maximize retirement savings as soon as possible. Women have longer retirements. If you’ve left the workforce and your spouse is still working, contribute to a spousal IRA annually to keep retirement saving on track.
Put Investing on a Schedule. Open a taxable investment account and set up an automatic contribution schedule. Be thoughtful and understand your risk parameters – but get invested.
Proactively Advance your Career. Benchmark your career every year. Don’t wait to get promoted or get a raise. You can hire a consultant, build a relationship with a good recruiter, or use Linkedin effectively.

Retirement Planning

It’s finally here! You’ve built a solid retirement savings account; now you’re ready to enjoy your new life. Setting up income in retirement looks different for women than for men, because of their longer life expectancy. Think through:

Social Security Income. Delay claiming social security if possible. This can provide a much larger lifetime benefit.
Consider working for a few years. Social security bases your benefits on your 35 highest-earning years, so replacing an early career year with a much more highly paid later year can bump up your payments.
Life Insurance. If you’re married, think about a spousal life insurance policy.
Long Term Care Insurance. Get a long-term care policy in place.
Estate Planning. Update your estate plan and talk through everyone’s wishes for what will happen as you age. Doing it now while you’re healthy and creating a funding source will help ensure a graceful, happy older stage.