retirement risk – Retirement Risk Advisors

Market downturn and your retirement portfolio

17May

Can Your Retirement Porfilio Handle a Drop In the Market?

BlogMay 17, 2023

Imagine you’re five years out from retiring. Your assets are performing great, and you get excited because you will have enough money to retire and travel like you’ve always wanted to!

Then a major drop in the market happens, taking with it your hopes of traveling and a good chunk of your retirement money.

This is what sequence of return risk looks like for many retirees.

What is Sequence of Return Risk?

Sequence of return risk is the risk that an individual may experience negative investment returns early in retirement, which can significantly reduce the value of their retirement savings and potentially lead to a shortfall in retirement income. This can occur even if the average investment returns over the course of retirement are positive.

To illustrate the impact of sequence of return risk, consider two retirees who have the same average annual investment returns of 6% over a 20-year retirement. However, one retiree experiences a period of negative returns in the first few years of retirement, while the other retiree experiences negative returns in the last few years of retirement. The retiree who experiences negative returns early on will have a much lower retirement income than the other retiree, even though their average annual returns were the same.

Risk Management:

Sequence of return risk is important because it can significantly impact a retiree’s financial security. If a retiree experiences negative returns early on, they may need to withdraw a larger percentage of their savings to maintain their desired standard of living, potentially depleting their savings too quickly. This can make it difficult to recover even if investment returns improve in later years. In contrast, if a retiree experiences negative returns later in retirement, they may have more time to recover from losses, as they will have already withdrawn funds from their portfolio.

There are several strategies that retirees can use to manage sequence of return risk, including:

Diversify your portfolio: Diversification can help to mitigate the impact of poor investment returns in any single asset class.
Consider a more conservative investment strategy: A more conservative investment strategy may provide more stability and reduce the risk of significant losses during market downturns especially as retirement gets closer.
Implement a withdrawal strategy: Developing a withdrawal strategy that takes sequence of return risk into account can help to ensure that retirees don’t withdraw too much from their portfolio early in retirement.
Use annuities: An annuity can provide a guaranteed stream of income, which can help to mitigate the impact of poor investment returns.
Consider working longer: Delaying retirement or working part-time in retirement can provide additional income and allow retirees to delay drawing down their savings until market conditions are more favorable.

inflation and interest rates on your retirement overview

11May

Retirement Planning: The Impact of Inflation and Interest Rates

BlogMay 11, 2023

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.

457 retirement plans when and what, the affect on your retirement

09May

When Would A 457 Account Affect Your Retirement?

BlogMay 9, 2023

If you’re a government employee, you may have access to a 457-retirement account. A 457 plan is a type of tax-advantaged retirement account that is available to employees of state and local governments, as well as certain non-profit organizations.

Let’s take a closer look.

What is a 457-retirement account?

A 457 plan is like a 401(k) or 403(b) plan, but it is designed specifically for government and non-profit employees. Like a 401(k), a 457 plan allows you to make pre-tax contributions, which can help lower your taxable income. The money you contribute to the plan grows tax-free until you withdraw it in retirement. Additionally, like a 401(k), some employers offer a matching contribution, which can help boost your savings.

One key advantage of a 457 plan is that it allows you to contribute more to your retirement savings than a 401(k) or 403(b). In 2023, the maximum amount you can contribute to a 457 plan is $22,500. However, if you are 50 or will be 50 by end of the year, you can contribute a catch-up of an additional $7500.

Another advantage of a 457 plan is that you may be able to withdraw money penalty-free before you reach age 59 and a half. This is known as the “substantially equal periodic payments” provision, and it allows you to receive a stream of payments over your lifetime, based on your life expectancy.

What are the differences between a 457 and a 401(k) or 403(b)?

While a 457 plan shares many similarities with a 401(k) or 403(b), there are a few key differences. For example, a 457 plan does not have an early withdrawal penalty if you leave your job before age 59 and a half. Additionally, you can contribute the maximum amount to both a 401(k) or 403(b) and a 457 plan in the same year, which can help boost your savings.

However, one key disadvantage of a 457 plan is that it may not be as well-known or widely available as a 401(k) or 403(b). Additionally, some 457 plans may have higher fees or less investment options than other retirement plans.

Is a 457-retirement account right for you?

If you are a government or non-profit employee and have access to a 457 plan, it may be a good option for your retirement savings. However, like any retirement plan, it’s important to carefully consider the fees, investment options, and contribution limits before deciding to contribute.

30Mar

Not To Scare, but with Age Comes Long-Term Care

BlogMarch 30, 2023

As people are living longer, the need for long-term care in retirement is becoming increasingly important. Long-term care refers to the assistance that individuals may require with activities of daily living, such as bathing, dressing, and eating. In this article, we will explore the increasing need for long-term care in retirement and what individuals can do to prepare for this potential expense.

Why the Need for Long-Term Care is Increasing

The need for long-term care in retirement is increasing for several reasons:

Longer life expectancy: As people live longer, the likelihood of requiring long-term care increases.
Age-related health issues: As individuals age, they may experience a range of health issues that can impact their ability to perform activities of daily living.
Rising healthcare costs: Healthcare costs continue to rise, and long-term care expenses can be particularly expensive.
Changes in family structure: Changes in family structure, such as a decrease in the number of family members available to provide care, can make long-term care an increasingly important consideration.

The Costs of Long-Term Care

Long-term care can be expensive, and it is important to understand the potential costs associated with this type of care. The cost of long-term care can vary depending on several factors, including the type of care required, the geographic location, and the length of care required. According to a recent survey by Genworth, the national median cost of long-term care ranges from $4,576 per month for a home health aide to $8,821 per month for a private room in a nursing home.

Preparing for Long-Term Care

There are several steps that individuals can take to prepare for the potential need for long-term care in retirement:

Long-term care insurance: Long-term care insurance can help to cover the costs of long-term care, and can be a good option for individuals looking to protect their retirement savings from potential long-term care expenses.
Health savings accounts (HSAs): HSAs can be used to save for future healthcare expenses, including long-term care.
Lifestyle modifications: Making healthy lifestyle choices can help to reduce the risk of age-related health issues that may require long-term care.
Retirement planning: Including the potential costs of long-term care in retirement planning can help to ensure that individuals are financially prepared for this potential expense.

The need for long-term care in retirement is increasing, and it is important for individuals to understand the potential costs associated with this type of care. By taking steps to prepare for long-term care, such as purchasing long-term care insurance, utilizing health savings accounts, and including the potential costs of long-term care in retirement planning, individuals can help to ensure that they are financially prepared for this potential expense.

07Mar

Wanna Be Tax-Free in Retirement?

BlogMarch 7, 2023

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.

Withdrawal Rate Risk in retirement: methods and strategies that could impact your retirement

14Feb

How Your Withdrawal Rate Could Cause You to Run Out of Money Faster: Strategies to Know

BlogFebruary 14, 2023

Knowing how to withdraw your money from your retirement accounts doesn’t translate directly to sitting to one fixed method the entire time. Every CPA’s retirement is unique and what will work for one may not work for another. Some key factors that contribute to your withdrawal rate are:

Retirement Age
Predictable Income
Retirement Portfolio
Retirement Needs & Lifestyle
Other Risk Tolerance

Determine Your Investment Mix

Considering all the factors, the next step is to evaluate your investment portfolio. Do your investments support your long-term goals? Are they diversified enough to help reduce other risks you may face like inflation, longevity, or market downturn? The important thing to have in your retirement assets is the potential for growth while still withdrawing.

Strategy: 4% Rule

A fixed rate may be that perfect strategy for some retirees. Systematic withdrawals offer control for a specific period, but many people don’t consider these factors with the 4% rule:

Low interest rates make traditionally income-producing investments generate less income than expected
Inflation erodes the buying and spending power over time so you may need to withdraw larger amounts down the road
If the principal value of your investment is to decrease you will have less of your portfolio to withdraw from
Your income needs may become inconsistent due to increasing health care or medical costs. Thus, increasing the need for more money later in retirement

If you need a set amount withdrawn for a specific length of time, this method is perfect. Say you plan to work part-time for the first 5-10 years of retirement or are killing time until your Social Security benefits kick in.

Strategy: Buckets of Investment

Buckets help diversify your assets and provide different streams of income for you. One bucket may hold cash such as your emergency fund or another could hold fixed-income investments and protect principal. The last would hold the most growth for a longer period.

This strategy requires you work with an advisor to determine proper allocation and that your investments are protected and fit your long-term retirement goals.

Strategy: Interest-Only Income

Depending on your retirement accounts, you may be able to only pull from the interest earned without drawing on the principal balance. However, specific assets may unfortunately have penalties if you withdraw on interest only until a certain age.

This method does offer flexibility of switching from income stream to income stream yearly. This is another strategy that can be good for those transitioning from working full-time to part-time then to full retirement or those waiting for other income streams to kick in.

Important: Required Minimum Distributions

Federal tax rules deem you must begin taking required minimum distributions (RMDs) from tax-deferred retirement accounts such as 403(b)s or 401(k)s by April 1^st after you turn the Stated Age. Same with your IRAs. Your Stated Age is as determined: age 71 if born 1950 or earlier; 73 if born 1951-1959; and 75 if born 1960 or later. Failure to take your RMD on time could result in a 25% penalty.

Other things to consider with RMDs:

The set amount you must take depends on your age, life expectancy, and year-end account balance
For multiple accounts, each RMD needs calculated separately but you can withdraw the total amount from just one account
Roth IRAs and other non-qualified employee-sponsors plans do not require RMDs
You cannot rollover RMDs into other tax-advantaged accounts
If you are still working at your Stated Age, you may be able to defer RMD withdrawal from your 401(k) or 403(b). However, the same does not apply to IRAs.

Having a withdrawal strategy in place for your retirement is important to ensure your funds last as long as you do and to also help reduce other risks you may encounter during retirement (market risk, tax risk, inflation risk). The last thing you want is to outlive your money and die broke.

12Dec

Retirement Plan Contribution Limits Are Increasing Come 2023

BlogDecember 12, 2022

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.

07Dec

Keep Retirement Strategy in Mind This Holiday Season

BlogDecember 7, 2022

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.

Crafty holidays savings to think about when retirement planning

22Nov

Crafty Savings as You Plan for Retirement this Holiday Season

BlogNovember 22, 2022

As retirement approaches, learning ways to spend less during the holidays is helpful! Shifting focus to doing so before retirement can also prepare you for when you’re living in the longest, self-imposed period of unemployment—heedless of what your retirement portfolio may look like!

Rethinking budget is a great first step. If you already have holiday decorations, don’t buy more; especially if they’re still in mint condition. This way it is one less expense on the holiday budget. Decide how much you want to spend on gifts overall and allocate so much to food. Remembering, be strict about your budget limits. If you can spend even less, do it!

For gifts, decide for who and how much per person. If you are able, shop in-stores versus online. This will save you shipping costs. If you want to gift a lot of people, consider doing smaller gifts for everyone. If there are couples on your holiday gift list, provide them with a gift card for a date night. The best gifts are also gifts homemade. Mass bake cookies or bread and give those out! You could always get crafty if you are able and make ornaments or simple photos collages. Lastly, another great idea would be the gift experiences. Much like giving a couple a gift card for a night out, take the grandkids together for a fun day to a public place such as a trampoline activity center or take your kids out of dinner once the holiday season calms down.

Meals, small or big, should be evaluated. If you are typically the one to hold a large family dinner in your home, see if family members can split making sides and desserts. Do a potluck. If you have done bigger family holiday dinners and are not feeling up to it, be honest with you family. Tell them you wish to not host the holiday this year or limit how many people you have over. This way the cost is either split up or at least reduced.

Take advantage of gift bundles and sales. A lot of places do gift bundles for things such as sample sizes for lotions or mini candle sets. Look into places that do gift card/certificate deals. Some food chain restaurants will give a packet of coupons if $50, for example, is spent on gift cards. Sometimes places will event gift “free” gift card money for a set amount on gift cards—buy $25, get $5 included.

living a long life comes with the need for more

16Nov

Annuities: A Longevity Risk Solution

BlogNovember 16, 2022

What makes an annuity tick? Short answer: Annuities are contracts made with an insurance company. Your annuity can be personalized to fit your exact needs.

The downside? The options can be overwhelming.

Types of Annuities

Fixed, variable, and fixed-indexed annuities are the three main types. Each comes with benefits and specific levels of risk based on your needs.

Type	Interest	Risk	Reward
Fixed	Guaranteed	Low	Predicted
Variable	Coordinated to investments	High	Unpredictable, yield varies
Fixed-indexed	Preset, linked to stock market index	Medium	Capped

Fixed Annuity

With the least risk and the most predictability, fixed annuities are contracted with a set interest rate. The only time the interest may vary is depending on terms of the contract with the insurance company. For example, per contract, sometimes the interest rate may reset after several years.

Variable Annuity

The variable annuity promotes higher yield but comes with the greatest risk. The interest rate is directly linked to an investment portfolio. Payments from the annuity are not consistent. If the investments are doing well, the payments will increase. If they are not doing well, the payments will drastically decrease.

Fixed-indexed Annuity

As middle grounds for fixed and variable annuities, this annuity comes to a compromised agreement. The contract carries lower risk and has a potential higher yield than fixed annuities. Thus, the interest rate will not sink below a present amount, but the rate is tied to a specific stock market index and could potentially rise.

Payment Arrangements

Immediate annuity, also income annuity, is when the holder begins receiving payments within a few years after the contract is purchased.

Deferred annuity is the most common in retirement, the most ideal to streamline retirement income for CPAs. These payments are started at a specific age while investment grows tax deferred.

Longevity Risk & Annuities

Since annuities guarantee lifetime income, they are a means to protect against the longevity risk your retirement will face. Payments are based on the health, age, and life expectancy of the annuitant holder. Note: The longer a person is calculated to life, the longer the payments may be.

Lifetime annuities: guarantee of an income stream for the holder’s lifetime. Often, the payments extend to beneficiaries after the holder’s passing. This covers your retirement and serves as inheritance for family.

Fixed-period annuities: guarantee of payment for a set period, also called term-certainty. These periods are typically 20-30 years. Moreover, the payments here are not as impacted by age and life expectancy of holder since they are a set period.