Retirement Planning is a Game of Chess

Keep Retirement Strategy in Mind This Holiday Season

With the holidays rapidly approaching, a goal often set during these times is to diversify your retirement funds. With retirement investment there are two main focuses: investing/saving and distribution. During retirement you are at your most vulnerable financially because a regular paycheck is not coming in. It is the longest self-imposed period of unemployment most folks face. The following is fantastic advice for when you are trying to invest.

Your retirement planned around living and may seem expensive to support. Remember, roughly 55% of folk live beyond their life expectancy. So, it is important to plan for the long haul. A long-term investment sustains a better savings, but there are risks being found there. Short-term investments usually have higher yields. It is important to balance these.

Spending now can save more money for the long road. An example of this is withdrawing properly to avoid provisional income.

Be reasonable when it comes to expectations. Historical returns may not be what your portfolio does. Returns typically fall below the average. However, this can be balance with a diversification of accounts. Though we have historically low interest rates, this means bond returns will not impact retirement much. This will affect those who have retired most.

Heedless of where you are at in retirement planning, relying solely on plans that require higher returns is dangerous. If you expect to make more in the future, that means spending much more upfront. Stocks carry a higher risk than bonds, so they will yield higher return rates. Simply put: Spending more today and expecting higher returns in the future is risky business. The risks and consequences must be evaluated on a case-by-case basis.

Strategy should always be a top priority. Diversifying your retirement portfolio is just a start. Considering all the risks you will face in retirement is the next stop. Putting all your funds in one bucket will expose you to much more risk—taxable, tax-deferred, and tax-free. Integrate different approaches and accounts to combat inflation, tax rates, rate of return, and even long-term care.

READ MORE
elder woman smiling in semi retired life

Does Semi-Retirement Expose You to More Risks?

Retiring is tricky enough, and retirement planning is also not a walk in the park. Those who decide on a semi-retired life should be aware of a few things before moving forward.

Working for Your Current (and likely last) Employer:

Depending on the company, if you reduce your hours, you may still be eligible for your employer’s retirement plan and health benefits. For instance, if you are still able to contribute to your 401(k) with your employer match while working 30 hours weekly, you may want to consider this as an option. It is a great way to keep the retirement funds increasing, and it is a great potential way to increase your Social Security benefits since you work history will continue and you are still paying into it from each paycheck.

Income Tax

Semi-retirees often find themselves in a higher tax bracket due to retirement income withdrawals, required minimum distributions, Social Security, and the part-time job income that is flowing in. Reducing your work hours and the withdrawals from your retirement accounts is the best way to combat this higher tax bracket. Depending on where you are financially, a Roth conversion may also be an option.

Social Security Risk

CPAs who work before full retirement age and receive Social Security benefits are subject to have their benefits reduced monthly. The exemption limit was $18,960 in 2021 and for 2022 is $19,560. Making more than the limit means your benefits are reduced by $1 for every $2 made over the limit. And once you reach the full retirement age the SSA has calculated, your benefits are reduced by $1 for every $3 over $51,960 in 2022. Please note these limits are predicted to increase for 2023, but announcements for this information are not released until the start of the 4th quarter.

Healthcare Decisions

Once you are 65 you are eligible for Medicare. However, if you are still working, even part-time and qualify for your employer’s healthcare plan, you will have both plans and will need to work out coordination of benefits. Outside of Medicare Part A, there are premiums. For Part B enrollees pay $170.10 monthly in 2022 with a deductible of $233. Deciding to delay Medicare Part B may result in a penalty. You may even opt into a MediGap or Medicare Advantage Plan based on your needs. Considering your options carefully before you enroll into Medicare and are semi-retired is crucial. The earlier you investigate Medicare options the better off you will be.

READ MORE
Inflation Reduction Act of 2022 and retirement planning

The Inflation Reduction Act of 2022 and Its Impact on Your Retirement

As a watered-down version of the Build Back Better Act of 2021, the Inflation Reduction Act of 2022 is set to be signed by President this week. The bill is designed to reduce the deficit and lower inflation while investing in domestic energy production and lower prescription drug costs. On top of the deficit reduction projected to be more than $290 billion, this bill allows Medicare to negotiate lower drug costs and extends the Affordable Care Act program through 2025. The goal: lower consumer costs and help the nation reduce emissions long-term.

Once signed into law, how will my retirement be impacted?

Your retirement will be impact someway somehow.

The deficit reduction is intended to fight inflation by cutting the taxes Americans are paying. With the capability to reduce inflation, your retirement income will have more spending power, and we will eventually hopefully enter a period of deflation. However, there is a slim chance we will see a dent in inflation this year with this bill.

Since Medicare will be able to negotiate drug prices with pharmaceutical companies the savings will impact retirees directly. In addition, a $2000 out-of-pocket cap for Medicare enrollees buying prescriptions comes along with preventative vaccines being free.

Moreover, since the ACA program is being extended, the Covid-19 subsidies helping make insurance more affordable for some Americans. Good news: this is most applicable to those who had to retire early and aren’t eligible for Medicare just yet.

With the focus of the Inflation Reduction Act being partially on cleaner energy investments, business and consumers can participate in clean energy investment incentives, too. Businesses themselves can receive a tax credit for clean energy manufacturing, and another tax credit for wind and solar energy production. Consumers get to enjoy the tax credit incentives for greener options for investing in renewable energy and further tax credits for buying electric cars, new and used.

READ MORE

How Inflation Silently Robs Your Retirement

Even with careful retirement planning, one risk that is often not planned for well-enough is inflation. Inflation alone can hit retirement assets the hardest. The budget retirees begin with will change easily within the first 5-10 years—even 20 years down the road. It is most likely that inflation, assuming a rate of 3-4%, will cause daily living expenses to double within 20 years. Retirees should plan for this because, according to life expectancy statistics, folks live 20-24 more years.

That said, the following things should be taken into consideration when planning the silent killer of retirement:

  1. With aging comes more health concerns and more medical bills. Given that inflation will increase day-to-day life, it is predicted that health care costs and services will increase, too.
  2. Social Security benefits will increase for retirees. In 2020, benefits went up by 1.6% which was an additional $24 paid out; accounted when considering cost-of-living adjustments. However, the extra money from SS is offset by huge cost increases across the board. For example, medical services and cost go up; as does Medicare costs. SS should only be considered a baseline for retirement funds.
  3. As mentioned, living expenses are predicted to double within 20 years due to inflation. With inflation, spending power for retirement assets could drastically be reduced if not accounted for properly.

Tacking this silent killer and its concerns takes careful planning and risk managing.

With life expectancy, family medical history and personal medical concerns need to be discussed. Family history of heart disease and cancer will affect your life expectancy. This in turn will determine how long your funds will need to last. If your family members are known to pass away early on or live well into their 90s, this will also factor into how long your funds will need to last. Longer life expectancy means a longer time inflation will affect cost and standard of living.

Reviewing medical history in advance will also allow for the retirement budget to account for any major medical expenses that could arise. For example, a history of knee injuries could mean a knee replacement in your early 70s. Your occupational hazards could cause late-life conditions. If you spent your working years in a steel mill, you have a higher risk for COPD. Planning for these major medical expenses in advance will allow for inflation to be accounted for, for the money to be there if necessary. In retirement, folks spend $250,000-300,000 in medical costs alone.

To account for inflation a realistic budget plan should be set. This includes daily expenses, monthly bills, and additional spending such as travel and hobbies. Factoring into this budget, would be those said medical costs, too. Once a budget and cost-of-living expenses are decided, it is important to review how high inflation rates and the historically low interest rates affect other return rates and income during retirement.

Have a strategy addressing inflation in place. Begin with small withdrawal rates and increase as cost-of-living and inflation go up. During retirement, the small withdrawal rates will be a huge part of your income. Larger withdrawal rates will make deplete retirement funds much sooner—potentially running out of money before running out of retirement. If possible, during working years, saving more will go a longer way. Investing your future retirement younger will also help offset inflation. Consider different income sources: Annuities, long-term care policies, life insurance policies.

Creating an income strategy and working with a Retirement Risk Advisor is key to a safe and secure retirement. Discussing options that can reduce inflation and provide the best management for retirement will save you money and time and give you peace of mind.

READ MORE

2022 and You: Cause and Effect

In 2021, inflation reached a 40- year high from gas, lumber, the housing market, and even groceries. It was reported in October that the U.S. experienced an increase by 6% for the consumer price index. By November, a 7% increase was noted—the largest increase in such a short time since late 1982. Unfortunately, Americans, on average, brought more money home in their paychecks, but were not able to reap the benefits due to the inflation.

What does this mean for inflation in 2022? Economists have a gloomy outlook. With the unexpected, but impending price increases, it is important to allocate more in the budget for groceries and gas. To offset inflation, add more money to your emergency funds as you can. This will keep your retirement funds more secure.

Required minimum distributions, RMDs, had major changes in 2021 (and in 2020 when the Covid-19 pandemic started). As withdrawals for qualified retirement accounts—401(k)s, traditional IRAs, or 403(b)s—RMDS experienced a recent change that affects the age for when you can withdraw. Now it is 72 for those born after July 1st, 1949, and 70 ½ if born before then.

In 2020, RMDs were suspended under the CARES Act. This was in response to the 30% market drop that March. The hopes were to let the retirement money stay in the market and recover, but the 2020 change was short lived. RMDs resumed in 2021.

2022 Lookout:

Based on inflation rates, the IRS does make changes to tax brackets. Due to the 2021 inflation increase, the tax thresholds will drastically change.  This means more money can be earned before an individual or couple is bumped into the next tax bracket. Using tax-planning tactics during your working years and having a retirement plan in place allows for this potential risk to be easily managed during retirement.

Another major change happening this 2022 year is 401(k) contributions. The IRS is changing the max contribution for taxpayers. The increase is $1000 to $20,500. If you are age 50+, you get an additional $6500 as catchup. Unfortunately, traditional and Roth IRAs contributions are staying the same as 2021. However, high-income earners may be able to contribute to a Roth IRA. Income phase-out ranges were increased by the IRS to allow this. Ranging from $129,000 to $144,000 for single taxpayers and $204,000 to $214,000 for married and jointly filing.

**For more information on how is in store for 2022, please listen to Retirement Risk Show episode “The Know-How of Retirement Planning in 2022.” For all the challenges and changes 2022 will and may bring, register for our “Evolving Retirement Law: The Challenges, The Changes, and Your Choices” webinar.

READ MORE