As retirement planners at REAP Financial, we have the privilege of seeing many different portfolios, families, and business owners throughout the year. No matter who you are, there are do’s and don’ts that apply to successful retirement planning across the board. In this article, we’ll take you through the top dos and don’ts for building a successful retirement plan. Make sure you read to the end, where we share one aspect of retirement most people don’t consider, but everyone should!
Dos
Do Start Planning Early
You do want to start planning early, so you can take advantage of time. Retirement planning is all about the power of time. Most people are saving to an arbitrary number, but it is easy to get caught up in those numbers and miss the big picture. For example, many people want to have a million dollars in retirement; that sounds like a large and difficult to achieve number. But, if you were 20 years old, saving $111 per month at an average market return until age 65, you would have a million dollars by 65. If you start saving at 30 or 40, that number goes up. The important aspect here is saving consistently and having it come out of your check without seeing it. The discipline of staying in your budget and not always overspending on wants.
Do Diversify Your Investments
Although diversification is an overused word in finance, there are two types of diversification that are very important: investment diversification and tax diversification. Investment diversification allows your portfolio to remain stable, even when the market is fluctuating. This is how successful retirees stay retired without worrying about movements in the market. Staying retired is obviously a main goal in retirement, and diversifying your investments will give you the confidence you need to do that.
The second type of crucial diversification is tax diversification. Where you save your money today impacts how and when you’ll be taxed in the future. Often, we see retirees who have saved well up to retirement in 401s and IRAs, without realizing they’ll have to pay lots of tax in retirement. For example, if you have 1 million dollars in your 401k, it will probably only be worth $800,000 since you’ve never paid tax on it. If you need $10,000 a month to live on and you are only drawing on IRAs and 401ks, you’ll have to pull out $12,000 to net $10,000, meaning your drawdown rate will be much higher. Additionally, your Medicare premiums and Social Security taxation will all be based on your tax bracket, your income tax. That is why it is so important to have a plan for tax diversification, with tax-free options, such as the Roth IRA, Roth 401k, and HSA.
Do Plan for Inflation
You always need to plan for inflation. For many years, inflation wasn’t a big concern. Then, we experienced Covid-19 and inflation started going through the roof. There is still high inflation today. Though it is not 8%, it still isn’t back to 2% inflation levels. It’s likely we’ll be in an inflationary period longer than we’d hope, which is important for retirees. While your Social Security benefits will likely get a cost-of-living adjustment, chances are that won’t be enough to make up the difference. So, you want to make sure you have a plan that accounts for inflation over the next thirty years, since your purchasing power is eroding by inflation. At REAP Financial, we always say inflation won’t make you broke, but it’ll make your lifestyle broke, since you’ll have to scale back in lots of little ways.
Don’ts
Don’t Overlook Tax Implications
When you’re planning your retirement, it is crucial that you don’t overlook tax implications or the opportunities to minimize taxes on your retirement income. Lots of people don’t even know they’ll have to pay taxes on their Social Security benefits or that Medicare premiums go up depending on your net income. Though no one likes paying taxes, right now in 2024, taxes are at the lowest they’ve been in forty years. They’re likely to only go up in the future, so think through how you’re planning and where you’re saving today, with the idea that taxes will be higher in the future.
When you consider all this, you may decide it doesn’t make sense to save money through vehicles that give you a tax deduction today, but tax you when you take it out in retirement. The question is, do you want to pay tax on a little today or a lot down the road? Many families we talk to funnel money into 401ks, without considering the tax implications down the road. This is especially important for people retiring in the future, when tax rates are likely to be higher than they are now. Most successful retirees that have saved and want to maintain their lifestyle in retirement end up in the same tax bracket (or higher) than before they retired. Either because they want to scale up their lifestyles or because they have to take high required minimum distributions at age 73 or 75, many of these families end up paying higher taxes because they’re receiving more money. Always be thinking through the tax implications and opportunities to minimize your taxes not just today, but also twenty or thirty years down the line.
Don’t Let Emotions Impact Your Finances
It is so easy to let emotions dictate your financial decisions. However, this is incredibly dangerous territory for people. We’re seeing this a lot these days, especially with high-stress elections. At the end of the day, nothing is guaranteed, but we like to look at the data at REAP Financial. Over the past 100 years, through every presidential election cycle, there have only been two election cycles where the stock market has been negative. Plus, historically stock markets are largely positive, even in the first year of new elected presidents’ terms. All this data suggests that elections do not drive the long-term markets. While presidential administrations can impact markets, they don’t drive the long-term outcome of markets. Don’t let emotions about politics or anything else impact your financial decisions.
Be Sure to Build the Right Retirement Plan for You with REAP Financial
One thing you can do to ease stress about retirement is building a contingency plan. In retirement, you should have a well-diversified plan that could carry you through a negative dip in the market. At REAP Financial, we structure truly diversified plans so that families can stay retired in good and bad markets. If you want to learn more about how to make sure your emotions don’t dictate your retirement, read this article about emotional risk and how it can impact retirees.
If you’re in the Austin, Texas area and seeking expert guidance on planning your finances, connect with the experienced team at REAP Financial. We focus on crafting personalized retirement strategies tailored to your specific financial objectives and lifestyle dreams. We can assist you in navigating the complexities of retirement planning to ensure a secure and rewarding future. Contact us today for a consultation and take the first step toward a comfortable retirement.
Give us a call: (512) 249-7300
Our Main Office Address
REAP Financial
9414 Anderson Mill Rd #100
Austin, TX 78729
