Apt comparisons can be made between athletics and finance — even in terms of retirement strategies. Though retirees should have a trusted financial ‘coach’, the strategies and final decisions during game time is up to the quarterback — you. Brad Johnson, a former football player and current VP of Advisor Development, offered the three insights into how he turned his passion for football into a successful career as one of the foremost finance advisors.
Bend don’t break
Expect some losses but don’t accept them all. During volatile markets, investors oftentimes take flight. In long-term investing, this is the worst thing a retiree can do for themselves and the economy. If you can’t see past the burning forest, make sure you have a great team on your side to help advise you. If certain investments are “broken”, they should be able to steer you towards safer ground.
According to Brad Johnson, staying the course is the best way to ride out the volatility:
There was a saying we had as a defensive unit back in college when I was playing, “bend but don’t break” and I think it relates incredibly well to the mentality most retirees should take with their savings. You see in football it meant you can give up a first down or two on defense, just don’t give up the 60 yard [sic] bomb over your head or the big run down the sideline for a touchdown.
Don’t have all your players in one place
As mentioned in an earlier blog, much of the last 60 years of “tried and true” investing no longer reaps the rewards seen in decades before, however, one thing that does remain is diversification. Retirees should not be afraid of making certain risks but having a diversified portfolio, like diversifying your best players is a great tactic to employ. Using diversified retirement strategies like hybrid fixed annuities, IRAs, Roth IRAs, and the strategies mentioned here for retirement will spread out your best players.
This was drilled into us by our coaches and by making sure everyone was playing their position and role within the defense.
What’s interesting is that this exact same philosophy applies incredibly well to retirement and the need for utilizing tools within your retirement that all play a certain role. Just as you wouldn’t have an entire football team made up of 11 running backs, for most retirees they shouldn’t have an entire retirement nest egg made of high risk/high reward equities.
Have a good defense
As we’ve all heard many times: a good offense is a great defense. This also applies to retirement. The most prized asset in your financial portfolio is a Plan B. In other words, always prepare as much as possible. Your knowledgeable advisor is your best defense against making decisions based on misguided or incorrect intel. They should have the answers to your burning questions because they’ve played the game a lot more than you have! So don’t be afraid to confer with your coach.
With the help of your advisor, there are ways to implement safeguards that can help you grow and keep your money. In the words of Mr. Johnson, these advisors are a crucial way to keep all your “eggs” intact:
Going back to the “bend but don’t break” mindset, this is what sent many retirees looking for a part time job or caused them to delay retirement back in 08-09. Essentially their nest egg “broke” when the market was cut in half.
There are a number of tools available to help[s] create a sustainable base for income through retirement that help shield retirees from this risk – think of them like the offensive linemen on a football team, they don’t get much glory, but no football team could survive without them!
Like Brad Johnson, a financial advisor can help coach a retiree into strategizing the best retirement plan that will help them score a “touchdown” as Johnson puts it. At the end of the day, it is your retirement, your game so to speak; but with a keen knowledge of the playing field and a strong supporting team, a retiree can get to their end zone with a win.
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While having plenty of money at your disposal during retirement is a goal for many, it’s not the only secret to happiness and fulfillment during your retirement years. Findings from the 2010 Health and Retirement Study Survey found that life satisfaction for retirees goes beyond income and wealth to include health, retirement decisions, and the quality of their social life.
Making retirement decisions early and working towards these goals could just be the path to happiness for many retirees. Here are some important things to consider when planning your post-retirement career:
Prioritize Your Career
If you managed to set aside a few million dollars through savings and investments during your retirement years, you may not want to explore jobs or a new career. However, if work fulfills you in some way, you will want to secure a position you are interested in and get paid well for given your years of expertise and experience. Results from a Merrill Lynch study found 72 percent of people over the age of 50 want to work in retirement and 37 percent of pre-retirees who want to work in retirement have already taken steps to prepare for their post-retirement career.
Consider Your Earning Potential
If you plan on working full-time during retirement to cover your bills and expenses, you’ll need to evaluate how much you need and what your income potential is based on the current job market. This can be stressful for some — especially if you have been out of the job market for a while — so doing some research, interviewing for different positions and setting some income goals can help you make a decision that’s right for you.
Factor in Socialization Opportunities
Opportunities to socialize may be limited if you end up working from home or stay out of the job market altogether. If you are a surviving spouse and live alone, you may need to be even more proactive about maintaining a healthy social life. Experts say retirees need to participate in social activities to maintain a healthy and meaningful life through retirement and reduce their risk of death. If you aren’t meeting up with friends regularly or staying active in your community in some way, you may be compromising your health and missing out on some valuable opportunities to connect with people. Make sure an active social calendar is part your post-retirement plans.
Review Your Financial Portfolio
Whether you were a diligent saver or an ambitious stock investor during your working years, now is the time to enjoy the fruits of your labor. Meeting with a financial advisor or retirement planner can help you determine whether you are managing your wealth effectively and how to distribute funds. You may be able to buy annuities, make additional profitable investments, and save money with some smart financial moves before and during retirement.
Take Care of Your Health
You may already be taking care of health and medical issues and seeing a physician regularly for checkups. Make sure you’re also taking steps to take care of your health in natural ways, by eating a well-balanced diet and getting regular exercise. Take care of vision exams on schedule, keep up with dental visits, and explore natural health or alternative health remedies to manage stress. Your retirement years will be more fulfilling when you have the physical and mental abilities to enjoy it all. Be proactive about your health, talk to your doctor about wellness plans and take medication on schedule to set yourself up for a healthy lifestyle throughout retirement.
Mapping out your post-retirement plans can be overwhelming but there are several things you can do to set yourself up for years of happiness and satisfaction. From reviewing your financial portfolio to re-entering the workforce, use these tips to set some goals for yourself during your retirement years.
When planning for retirement, it’s essential to consider multiple sources of income. Social Security may not be as beneficial as expected, particularly after taxes. Outside of pouring money into savings, pre-retirees should look into options for non-taxable income well before the time comes to call it quits.
Here are four ways to start building towards a tax-free future in retirement.
One of the best options for retirees looking for tax-free income is the Roth IRA. Unlike most other retirement plans, a Roth IRA grants a tax break on withdrawals rather than contributions. Direct contributions can be withdrawn at any time, without worry of tax or penalty. Earnings can be withdrawn tax-free as well, after a five-year period, and for individuals 59 and a half years of age or older.
The Roth IRA has advantages over alternative tax-free options such as municipal bonds. Though munis have no income limit, the interest they pay is generally less than taxable bonds, and they may be subject to state income taxes. Also, municipal bonds may be counted as a source of income for early recipients of Social Security, potentially hurting their pay if they make $15,000 or more.
Unfortunately, the Roth IRA has income limits that disqualify some people from making contributions. Many people hold off until after retirement when they enter a lower income bracket, though financial experts advise making contributions as early as possible for greater benefits down the line.
Roth 401(k), 403 (b):
Plans such as the 401(k) can accumulate huge savings as the employer will match whatever the employee contributes. The IRS also allows for Roth contributions to 401(k) and 403(b) accounts. While the Roth IRA has an annual contribution limit of $5,000 or $6,000 (depending on age), the limits on Roth 401(k) contributions are much higher and are not restricted by income eligibility.
Regardless, pre-retirees should look to max out their contributions to company-sponsored plans each year. It will pay off in the future.
Health savings account:
Some employers offer an HSA-qualified health plan, allowing employees to contribute tax-deductible funds that roll over and accumulate each year. These funds can be withdrawn at a later date to pay for various medical procedures, some of which may not be covered by health insurance.
A health savings account can eventually become a useful source of tax-free retirement income as the funds can be used as reimbursements for past medical expenses, or to pay for current Medicare premiums and health costs. Withdrawals are not subject to income taxation if made for qualified medical expenses.
Though most people look at life insurance as something that will only be of benefit after they pass on, it can also become a potential source of retirement income.
A life insurance retirement plan (LIRP) allows owners to contribute funds beyond that required by the plan’s premiums and later withdraw the excess cash tax-free.
According to expert Kevin Kimbrough of Saybrus Partners, these funds accumulate similar to an annuity but come with an added benefit.
“Unlike the annuity, you’re able to take your basis out first and that comes out tax free,” said Kimbrough to ThinkAdvisor. “When you get into the gains, you’re able to switch over and start taking policy loans against the income-tax-free death benefit.”
This method is usually better suited for higher earners, due to the fees associated with such an investment. It’s highly advisable that pre-retirees examine their portfolio, research and adopt a plan best suited for their particular circumstances.
“There are only two options in retirement: You can be working for your money or your money can be working for you. You have to be realistic and ask yourself if you really can retire when you’d like,” said finance advisor Christopher Kimball to Turbotax. “During retirement, it is critical to monitor your investments and current tax law. You should be positioned to take money from whatever ‘bucket’ is most beneficial at the time.”
Did you know that you will probably live longer than you think? Average life expectancy has grown by three months every year from 1840 to 2007 and shows no signs of slowing down. Family history is also not necessarily indicative of how long someone may live. Lifestyle choices such as diet and exercise can have a dramatic impact on the length of life.
Longer lifespans mean we have more time to enjoy the things and people we love most. But they also pose a unique challenge. What is the best method to save enough money to retire and live comfortably and worry-free?
In order to help you choose the best options for you, we have put together information on the pros and cons of some of the most popular, “tried and true” retirement investment strategies and highlighted their effectiveness in today’s life changing times.
Fixed and Hybrid Annuities
Annuities are a great way to save for retirement because they can potentially generate interest over a fixed time on a principal amount that is guaranteed. Because you are not required to annuitize—to receive payments at a regular interval from the annuity—certain kinds of annuities also offer the flexibility to leave money for your heirs.
- Straight Life
This is the simplest, least expensive annuity. It pays benefits until the death of the annuitant—the person receiving the funds—without an option to appoint a beneficiary.
- Life with a Guaranteed Term
This somewhat more expensive option allows the annuitant to designate a beneficiary. If the annuitant dies within the guaranteed term, the beneficiary will receive the remainder of the annuity in one lump sum.
- Substandard Health
This type of annuity is advantageous for someone with a serious health condition. Although the annuity will cost more the less the annuitant is expected to live, the payouts are larger than in an annuity in which the annuitant is expected to live a long time.
- Joint Life with Last Survivor
This annuity allows the annuitant to select a beneficiary who will receive payments regardless of whether the annuitant dies within a certain term. However, because of the added insurance component of this product, this is the most expensive fixed annuity.
- Hybrid (a.k.a. Fixed Indexed)
Fixed indexed annuities are known as hybrids because they invest your principal in the market, allowing for higher rates of return, but still guarantee the principal amount. Therefore, even if the annuity does not generate any additional interest because the market tumbles, your initial investment remains safe.
Traditional and/or Roth IRAs
Investment retirement accounts are an excellent, tax-efficient tool for setting funds aside.
People who contribute to a traditional IRA are able to deduct the contribution from their annual federal and state income taxes. However, once they withdraw funds in retirement, the withdrawal will be taxed as income. Conversely, contributions to Roth IRAs are not tax deductible but future withdrawals won’t be taxed.
Choosing the right IRA depends on several factors. Roth IRAs have strict and specific income requirements. Additionally, depending on the difference between the current and potential future tax rate, one type of IRA may be more advantageous than the other. Finally, traditional IRAs require you to take mandatory taxable distributions beginning at age 70½ whereas Roth IRAs do not require you to take any money.
A 401(k) is an employer-sponsored retirement fund that invests your money in order to generate more. This savings strategy may yield excellent benefits but may also be the riskiest option.
The amount of your annual contribution to your 401(k) is tax deductible. Additionally, many employers will match your contribution up to a certain amount—usually 3% of your annual income—essentially giving you “free” money.
First, the IRS sets caps on the annual amount you can put into your 401(k).
After you retire, withdrawals are taxed as income and may be taxed at a higher rate than your present tax rate. You may also not be able to withdraw your employer’s contributions until after the vesting period concludes.
Additionally, should you find yourself in need of money before the age of 59½, you will be subject to a 10% withdrawal fee.
Finally, 401(k)s grow your money by investing it in mutual funds. Whenever money is invested in such fashion, there is a risk that stocks can crash and that your 401(k) will lose significant value. Fortunately, you have full control over how your money is invested, so this risk can be minimized with some education about the market and less risky investment strategies.