As I listened to the weather forecasters tracking the storm named Henri, I could not help but think about retirement planning and how similar it could be to preparing for a hurricane. With the …
As I listened to the weather forecasters tracking the storm named Henri, I could not help but think about retirement planning and how similar it could be to preparing for a hurricane. With the improvements in science, the meteorologists can notify us literally weeks in advance that a serious storm is coming our way.
Then, it is up to us to decide what to do to prepare for the storm. There seems to be two groups on opposite ends of the preparation scale; those that over prepare, board up their windows and leave town and those that will hunker down and ride out the storm regardless of the severity and multiple warnings. Of course, there are different groups in between the two extremes. Where would you be on this scale?
Let’s compare the two extremes and compare them to retirement planning. How far in advance do we typically start hearing about a hurricane possibly forming and possibly coming our way? If I recall correctly, it was a couple of weeks when the meteorologists began tracking the initial stages of Henri.
What steps did you take? Typically, we would look around the yard and pick up loose items and bring them to safety, gather up the seat cushions, bring in the umbrellas, etc. How is that like retirement planning? Well, our first instinct is to protect things. When it comes to retirement it is important to protect your retirement savings. Having too much risk in your portfolio is generally not recommended as you near your retirement date. Too often we meet with couples and individuals that have excessive risk in their portfolios even though they may be ready to retire in just a few months or within a couple years away from retirement.
It is an accepted financial planning principle that risk should be reduced as you near retirement. The real question is how much risk is enough? It can be important to keep some assets invested in the stock market to help your assets grow for the future and to better offset inflation. However, it can be critical to protect a portion of your retirement nest egg, especially the amount needed to generate the income you will need to supplement your social security benefit amount.
When it comes to retirement, how much “notice” do we have? Decades! Let’s face it, we all think of retiring and enjoying the fruits of our labor at some point in the future. So, even though we know that retirement is coming, too many of us don’t take the simple steps to start preparing to retire, especially the part about protecting a portion of your hard-earned money.
The obvious first step is to begin investing for your future. If you have a retirement plan where you work, you should start there. The earlier you start investing money, the better it will be decades down the road. The one thing no one can buy is more time. Time is the difference maker when it comes to investing and building wealth for your future.
An important question would be: should you save in a pre-tax or an after-tax account? Which is right for you? There are some generalities that can be followed. If you are just starting out, or even if you are 20 years away from retirement, I would suggest that you save in after-tax accounts such as a Roth 401k or a Roth IRA. This means that you would pay income taxes on the amount you are contributing. Then, your money grows tax-deferred and would come out tax free in the future if you comply with the two basic rules. The two rules are, you must be over 59 ½ years of age and the money must have been in the Roth account for 5 tax years in order to withdraw the GROWTH from the account. The money contributed can be withdrawn without tax or penalty prior to age 59 ½ as you paid income tax on the contributed money.
In my humble opinion, paying the taxes that are in place today will probably be the lowest income tax rates that we will see going forward. Under the current rules, the so-called “Trump tax plan” will sunset on December 31st of 2025. At that point, income taxes will be going up for all brackets except the first level of taxation which did not go down when all the other brackets did. So, we know that increase is already on the books. When you review the federal debt load and the likelihood of even more spending being approved, I think it is reasonable to assume that income taxes will increase in the future, beyond the increase that will happen as of January 1, 2026. Therefore, paying today’s income tax on the “seed” (your contributions) and taking out the “harvest” (your retirement income) tax free could be a big advantage.
The question now is: which group are you in? Will you be the in the group that prepares for retirement or will you “hunker down” and try to survive as the storm passes? Just like preparing for a hurricane, the better prepared you are, the better off you will be. Planning makes much more sense. Work with a professional team that can first determine where you are now and where you want to go in the future as it pertains to your retirement planning. You deserve a great retirement!
This content is provided for informational purposes only and is not intended to serve as the basis for financial decisions. We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims paying ability of the issuing insurance company. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Massey and Associates, Inc. are not affiliated companies. 1022390- 8/21