Make A Plan For Your Retirement

We all envision some version of retirement and while your wants and needs change during your “Golden Years”, everyone would like to have a bit of comfort associated with their retirement. Most financial professionals advise their clients to budget for withdrawals of no more than 5% of their portfolio each year to ensure that their portfolio will continue to support them throughout their lifetime. Larger withdrawals may jeopardize the portfolio's longevity causing financial anxiety in later years. It takes planning and discipline to save enough for a comfortable retirement and while there is plenty of time for you to implement a plan to meet your retirement plan goals, you also have to be flexible enough to adjust to “life’s little disappointments” that can derail those plans.

Did you know that if you begin saving $100 toward retirement each month beginning at age 25 rather than age 35, by age 65, you’ll save $100,000 more for retirement? That’s right, $12,000 over ten years yields $100,000. Save more each month and you’ll generate even greater savings. I know that when you just begin working, it’s easy to put off retirement savings because you’re, well, young and you want to experience life without the overbearing eyes of your parents but with adulthood comes responsibility and in order to enjoy some of those near term and long term experiences, it takes planning and savings. Even if you’re not starting out but you have problems “getting ahead”, saving toward retirement can be as easy as skipping a restaurant once or twice per week, bypassing Starbucks, and learning to cook. In 2022, the average person spent $3,639 going out per year so with inflation increases of 9% since then, the average American spends about $330 per month eating out. Millennials and those earning between $50,000 and $60,000 spend 12 - 15% of their income dining out! Learning to cook and making your own coffee will allow you to easily save an extra $100 or more per month toward retirement, the price of a house or paying down debt sooner.

While there will be further direction on how to realize your dreams, the one thing you cannot ignore is writing your dreams down and posting it where you (and your partner if there are two of you) can see it every day. Your dreams are more likely to become reality if it becomes a central theme in your life.

If you are not comfortable with your investment knowledge, find an experienced financial advisor that has a track record of managing through market corrections. Ask for a historical record of portfolio returns or at least a 5-year average for your risk category. A good financial advisor is not ashamed to admit they lost value in a market correction – we all do. The question is: How much did they lose and how long was the recovery period?

While saving sufficient funds for retirement is important, there are a variety of retirement products that can help you get there. The most common vehicle that applies to everyone is a basic Individual Retirement Account (“IRA”) and / or a Back Door Roth IRA but there are income restrictions which may affect your tax deductibility.

If you are an employee working for a corporation, you will probably have access to a 401k plan but if you work for a non-profit or government agency, you may have access to a 401(k), a 403(b) plan, and / or a 457 Deferred Compensation Plan. These are commonly referred to as Defined Contribution Plans. You may also have access to a company sponsored Defined Benefit Pension Plan or, as a Union worker, perhaps a Taft Hartley Pension Plan.

If you are self employed as an independent contractor or as a Partner in a partnership, you might have access to a 401k plan, but it’s conceivable that you will have to set up a solo 401k plan, or a Simplified Employee Pension Plan (“SEPP” or SEP-IRA”), both defined contributions plans, and / or a Cash Balance Plan, which is similar to a Defined Benefit Plan.

Living Ledger also keeps track of your Health Savings Account so we can review the tax advantages of all these accounts and help you understand their importance in reducing tax liabilities.

One of the most important developments in retirement planning has been the development of the tax advantaged Roth IRA, and its subsequent cousin, the Roth 401k. Roth retirement vehicles allow you to contribute funds into either an IRA or 401k that is not tax deductible, but whose earnings are tax free forever. The creation of the Roth allows individuals to manipulate their current income higher in the promise that upon retirement, the tax free benefits will far outweigh the initial cost of the contribution. There are some guidelines but basically, you should participate in the Roth if you are under age 50 or believe that your tax rates, either by bracket creep or by action of Congress, will be higher in the future. If you are an Independent Contractor / Partner or possess an S-Corp, there are additional strategies which can employ to amplify your tax advantages.

Social Security and Medicare are government sponsored retirement and health care vehicles for retirees over age 65. You can sign up for Social Security (“SSA”) as early as age 62 while Medicare begins no earlier than age 65.

While no one should rely solely on Social Security for their retirement income, SSA does provide a bit of a cushion for many workers who got a late start on retirement savings. SSA provides supplemental income to you during retirement in accordance with your average annual earnings and the number of years that you’ve worked. Spousal benefits are also included and disabled individuals can participate sooner if necessary.

Medicare pays for basic medical benefits during retirement but with additional premiums, will provide supplemental health and drug benefits. There are some income strategies that you can employ to reduce your annual premiums, especially before you actually qualify for Medicare.

If you get married, divorced, have kids, or change jobs, these events can change your financial welfare, perhaps substantially, so its best to plan for these changes.

Married individuals typically are more sound financially and generate more tax advantages than single individuals. Sharing income and household expenses along with more advantageous tax brackets are the prime reasons but you may have to put up with snoring that isn’t your own.

Having a child can be very rewarding until they figure out how to take off their soiled diaper and use it for fingerpainting but while each child comes with their own $2,000 annual tax credit, the costs of raising a child can amount to $250,000 each up to age 17 and that does not include college! Needless to say, with college costs ranging from $100,000 to $600,000, the costs are daunting and planning for such a major expense is not without a small amount of courage and sacrifice.

Divorce is a dream shattering event that I still believe no one plans for. It always disrupts couples and families and adds no small expense to operating separate homes. Involving less scrupulous attorneys can not only create more animosity but will cost couples in substantial fees.

Job change is generally an event where increased income is the outcome but changes in career – perhaps for those dreams - can mean smaller paychecks that affect overall spending. Additionally, time in the home can be affected by altered commutes, more or less work, and increased or decreased travel meaning that child care expenses can be affected.

Unless you like to take sea-faring cruises every other week, your retirement years are typically marked by less spending than during your working years. Fidelity Investments has determined that couples will spend about 55 – 80% of their working year expenses during their retirement years. Living Ledger analyzes your savings along with other sources like pensions or expected social security benefits to compute your potential annual income during retirement. This will provide a gauge for you to determine whether you’re on target for your retirement or need to make some savings adjustments. Who knows? Maybe you can retire early!

During retirement, there are strategies you can employ to minimize your tax bite while still receiving your necessary living expenses. Perhaps it’s better to delay your social security benefits? Maybe you can consider living off savings for a year so you can reduce your Medicare premiums? What do you do when you must take out your retirement asset Required Minimum Distribution (RMD”) at age 73? Living Ledger can help you with these decisions when the time comes.

By utilizing Living Ledger to determine your retirement income needs and reduce your tax liabilities, you also compile a ready made summary of net worth to utilize when you prepare your Estate Plan. While estate plans are generally put together after you attain a sizable net worth, the danger of paying estate taxes is minimal as the estate tax exemption in 2024 is only assessed on net worths over $13.6 million. What is important in an estate plan is the documentation of where you wish to transfer your assets upon death. To have a written plan for this transfer is invaluable as the absence of such plan could result in a dreaded process called probate, where a judge determines who gets what.

While building up a net worth takes time, it doesn’t mean that you shouldn’t prepare a simple Will in the event of your unanticipated early demise. Preparing a will is a simple as writing down a list of assets and whom you want to receive them. That immaculate collection of Cabbage Patch Dolls or your baseball card collection? Write it down on a piece of paper, appoint an Executor, and have three witnesses sign the document and voila, you have a Will.
What is probably most important to decide is setting up a guardianship for your underage children and their assets in the event you pass away prior to their attainment of age 18.