inflation and interest rates on your retirement overview

Retirement Planning: The Impact of Inflation and Interest Rates

Retirement planning is so much more than putting your money into a 401(k). With so few people spending the time they need on sitting down and planning their retirement, each day brings a new challenge or concern to the table. We are facing unprecedented times when it comes to traditional retirement plans. Retirements are being robbed because of financial risks that cause retirees to run out of money before they run out of retirement. And one of the biggest challenges is planning for inflation and interest rates. Inflation refers to the increase in prices of goods and services over time, while interest rates are the cost of borrowing money or the return on lending money. These two factors are closely related, and they can have a significant impact on retirement planning.

Inflation and Retirement Planning

Inflation is a key factor that can affect retirement planning. As prices of goods and services rise over time, the value of money decreases. This means that the amount of money you save today may not be enough to cover your expenses in the future. For example, if you save $100,000 today and expect to retire in 30 years, assuming an inflation rate of 2%, the purchasing power of that $100,000 would be equivalent to approximately $54,000 in today’s dollars.

To account for inflation, it is important to adjust your retirement savings goals to ensure that you will have enough money to cover your expenses in the future. This means that you may need to save more money than you initially planned. One strategy to combat inflation is to invest in assets that tend to increase in value over time, such as stocks or real estate.

Interest Rates and Retirement Planning

Interest rates are another important factor to consider when planning for retirement. Higher interest rates generally mean that your savings will grow faster, while lower interest rates can make it more difficult to reach your retirement savings goals. For example, if you invest $10,000 today in a savings account with a 1% interest rate, in 30 years, your investment would grow to approximately $13,400. However, if the interest rate was 3%, your investment would grow to approximately $24,000.

In addition to savings accounts, interest rates can also impact other types of retirement investments, such as bonds or annuities. In a low interest rate environment, these investments may not provide enough return to keep up with inflation. Therefore, it is important to consider the current interest rate environment when selecting investments for your retirement portfolio.

The Relationship Between Inflation and Interest Rates

Inflation and interest rates are closely related, and changes in one can impact the other. As mentioned earlier, inflation tends to lead to higher interest rates. This is because lenders need to charge a higher interest rate to compensate for the loss of value of the money they are lending. Conversely, if inflation is low, interest rates may also be low, as lenders do not need to charge as much to compensate for inflation.

When planning for retirement, it is important to consider the relationship between inflation and interest rates. If you are investing in assets that are sensitive to interest rates, such as bonds, you may need to adjust your investment strategy if interest rates rise or fall. Additionally, you may need to adjust your retirement savings goals if inflation is higher than expected.

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Wanna be tax free in retirement?

Wanna Be Tax-Free in Retirement?

As you approach retirement, it’s important to consider tax-efficient strategies that can help you make the most of your retirement savings. By minimizing the amount of taxes you pay, you can stretch your retirement income further and make your savings last longer. Below are some tax-advantaged and tax-free retirement accounts you can utilize.

Roth IRAs

Roth IRAs are a popular retirement savings vehicle that can offer significant tax benefits. Contributions to a Roth IRA are made with after-tax dollars, which means that you won’t receive a tax deduction for your contributions. However, once you reach retirement age, you can withdraw your savings tax-free. This can be a valuable tax-free source of income in retirement.

Health Savings Accounts (HSAs)

HSAs are tax-advantaged accounts that are designed to help you save for healthcare expenses. Contributions to an HSA are made with pre-tax dollars, which can help reduce your taxable income. Additionally, withdrawals from an HSA are tax-free if they are used to pay for qualified medical expenses. This can be a valuable tax-free source of income in retirement.

Municipal Bonds

Municipal bonds are issued by state and local governments and are typically exempt from federal taxes. If you purchase a municipal bond issued by a state in which you reside, the interest on that bond is also exempt from state and local taxes. This can be a valuable tax-free source of income in retirement.

Life Insurance

Certain types of life insurance policies can offer tax-free benefits in retirement. For example, a permanent life insurance policy can provide tax-free withdrawals of the policy’s cash value. Additionally, a death benefit paid to your beneficiaries is typically tax-free.

Real Estate

Investing in real estate can be a tax-efficient strategy for retirement planning. Rental income from investment properties is typically taxable, but there are ways to offset that income. For example, you can deduct expenses such as property taxes, mortgage interest, and repairs. Additionally, if you hold the property for more than a year, any capital gains from the sale of the property will be taxed at a lower rate.

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Secure 2.0 Act helping today and tomorrow's retirement planning: reshaping the future of retirement

Making Improvements in the Retirement Landscape: How the Secure 2.0 Act Impacts Your Retirement Today & Future

With the intent to reshape the American retirement landscape, Congress passed, and President Biden signed into law the Secure 2.0 Act as part of a large end-of-the-year spending deal. This Secure 2.0 Act is meant to help Americans save more for retirement and continue paving the way for a better retirement like how the original Secure Act had.

Within the legislation there are 92 small and large changes and updates made to improve retirement. A complete summarized breakdown of all 92 sections can be found at our website: www.retirementriskadvisors.com/secureact. Since the Secure 2.0 Act has many significant changes from required minimum distribution age to 529 rollovers to contribution limit increases, this article will cover a portion of the major changes that have begun.

Betterment for New Retirement Plans

With the Secure 2.0 Act incentive has been given for employers to offer retirement plans—increasing the possibilities of employees having retirement plan benefits.

This legislation has introduced a tax credit for employers offering defined contribution plans. Businesses with less than 50 employees could receive a startup credit covering all administrative costs up to $5000 for their first three years if they offer a defined plan. Not only does this bring more opportunity to employees, but employers could also receive an additional $1000 credit for contribution to plans per non-highly compensated employee. Employers are also encouraged under this provision of the Act to offer small incentives and can offer participation to part-time employees.

Changes have been made to enrollment and contribution increases to 401(k)s and 403(b)s. Once an employee becomes eligible for the retirement plan, employees affected begin with a 3% pre-tax contribution and gradually increases each year of employment up to 10% and no more than 15% of the employee’s earnings (effective 2025). Please note existing retirement plans do not have to meet these and there are exemptions for businesses with 10 or less employees or businesses that are less than three years old; government or church plans may be exempt, too.

Betterment for Existing Retirement Plans, Too!

With incentives to offer retirement plans comes an ability to include newer saving offers into existing retirement plans! For example, beginning in 2024, under this legislation, employers could match qualified student loan payments as contributions to retirement plans. This creates a great potential for student loans to get paid down and for employees to build their nest egg especially if they are strained by student loan payments.

Another great opportunity for retirement savings has been created under the Secure 2.0 Act. Before, employer matching contributions could only be paid into pre-tax retirement accounts. Now, employers can offer their employees the choice to have the match contribution go into their Roth retirement accounts—either fully or partially. Any Roth contributions would not be excluded from an employee’s gross income.

Regulatory & Other Updates

From the first day of 2023, a few new changes went to effect that fall under regulatory updates. The new required minimum distribution age is 73 and will be bumped to 75 in 2033. Another change you will see with RMDs is the penalty for not taking your RMDs. Originally, the penalty fee was 50%, and now it is 25%. And lastly, a great change that comes from the Secure 2.0 Act is starting in 2024 you will not have to take an RMD from your Roth account that is issued by your employer.

While there were increases made to 2023 contribution limits and catch-up limits, The Secure 2.0 Act gives an extra bump for catch-up contributions. For those age 60-63 the catch-up limit for 401(k)s is $10,000 until 2025. There is wiggle room within the legislation for this temporary catch-up limitation to increase if inflation keeps rising at an alarming rate. Moreover, the bill allows for inflation-adjusted catch-up contribution limits towards IRAs if inflation keeps rising. Read more here on the recent changes and increases to contribution limits.

Another update seen under the Secure 2.0 Act is a major change to 529 rollover allowance. 529s allows money to be saved for higher education with tax-advantages. However, there has always been a concern should the child you are saving for choses a different route than higher education. Under the Secure 2.0 Act you can rollover funds from a 529 account into a Roth IRA after 15 years with some stipulations. The Roth IRA must be for the beneficiary and is subject to annual and lifetime contribution limits.

In conclusion, a lot about the Secure 20 Act will impact your long-term and short-term retirement planning and savings. Even your investment strategies may change now. But these changes are mostly positive, allowing for a better, safer, more secure retirement that you deserve.

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2023 Retirement contribution limits

Retirement Plan Contribution Limits Are Increasing Come 2023

2023 is upon us and an important factor to tax-advantaged accounts and plans is the contribution limits the IRS sets. This year the contribution limits were increased more than they have been in the past due to historically high inflation and cost-of-living. Here is a general overview for 2023:

401(k) Plans

In 2023, for 401(k) plans the contribution limit has been increased to $22,500. This contribution limit applies to most 457 plans and 403(b)s.

For those over 50, the catch up contribution limit is increasing to $7500. So those over 50 in 2023 can contribute up to $30,000.

Defined Contribution Plans and SEPs

For these plans, the contribution limit is increasing by $5000 from 2022’s limit: $66,000.

SIMPLE Plans

Increasing just over a $1000, these plans can contribute $15,500. The catch-up for those over 50 has been increased to $3500.

IRAs

While the over 50 catch-up limit is not being changed for IRAs, the annual contribution limit is being raised to $6500.

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