Renowned investor Warren Buffet reportedly once said, \u201cSomeone\u2019s sitting in the shade today because someone planted a tree a long time ago.\u201d<\/p>\n
Indeed, one of the keys to overcoming retirement concerns<\/a><\/strong><\/span>, and to creating a successful retirement, financial security, and peace of mind, is having a plan.\u00a0 And it\u2019s never too early to start thinking about what you\u2019d like your retirement to look like.<\/p>\n A robust financial plan will include retirement planning as a key element.\u00a0 As part of the process, you\u2019ll want to think about where you\u2019d like to live once you stop working, and how you\u2019d like to fill your days.\u00a0 Perhaps you\u2019ll never fully retire, but just gradually reduce the amount you \u201cwork\u201d.\u00a0 Maybe you\u2019d like to volunteer, or spend time traveling the country or the world.\u00a0 If you have a family, you\u2019ll almost certainly want visit your children and grandchildren.<\/p>\n In the planning<\/strong><\/span><\/a> process, you and your advisor will attach price tags to many of these goals that you\u2019ve created. How much income you\u2019ll need for your living expenses, how much you\u2019d like to spend on travel, and how much you\u2019d like to give to family and\/or charities and other worthy causes.<\/p>\n Another well-known expression is, \u201cSave early, save often\u201d. By getting an early start on saving for retirement \u2013 and for your other financial goals \u2013 you give yourself the best chance of success. That\u2019s due to what\u2019s known as the\u00a0\u201cmagic\u201d of compounding<\/strong><\/span><\/a>.\u00a0 Compounding is what makes even a small sum of money to grow into a large amount, if given enough time.\u00a0 How does it work?<\/p>\n Well, your savings account earns a return.\u00a0 Over time, your account will generate earnings on your old and new contributions, as well as on past earnings you\u2019ve accumulated (\u201cearnings on earnings\u201d).\u00a0\u00a0 As your savings grow, you generate earnings on a bigger and bigger pool of money. It\u2019s like a financial snowball effect.<\/p>\n For reasons that we\u2019ll discuss below, you\u2019ll want to accumulate savings in different types of accounts: taxable, tax-deferred, and tax-free. Taxable accounts include checking and savings accounts, and traditional brokerage accounts. Tax-deferred accounts include employer-sponsored retirement plans like 401(k)s, 403(b)s and profit sharing plans, and traditional Individual Retirement Accounts (IRAs). Tax-free accounts include the Roth versions of 401(k)s and IRAs.<\/p>\n One of the biggest retirement concerns for investors is deciding what to invest in. That\u2019s where \u201casset allocation\u201d comes in to play.<\/p>\n Asset allocation is one of the most basic and important concepts in investing. It refers to the strategy of dividing your investments among different categories of investments, or \u201casset classes\u201d \u2013 such as stocks, bonds, real estate, cash, and cash alternatives.<\/p>\n Your asset allocation is what will determine how risky your portfolio is. If you increase the percentage that you\u2019re investing in risky asset classes \u2013 like stocks \u2013 your returns will fluctuate more. That sounds bad, so why would you do that? Well, because with investing, risk and return are related. Simply put, if you\u2019d like your portfolio to generate more return, you have to increase your exposure to risky asset classes.<\/p>\n Within each of the asset classes you include in your portfolio, you should own as many securities as you can. Why? Because this \u201cdiversification\u201d will eliminate the risk that one underperforming investment can permanently damage your portfolio.\u00a0 The best way to get adequately diversified in an asset class is to use a mutual fund or exchange-traded fund, rather than individual securities.<\/p>\n But what\u2019s the right asset allocation? Well, that will depend on how much return you need from your portfolio. At Springwater, one of our guiding principles is that we prefer to have our clients take as little investment risk as possible, while still ensuring that their plans \u201cwork\u201d. For some, that might mean only 25-30% allocated to stocks, while for others it might mean 65-70%.<\/p>\n So, the starting point for a discussion about what your investment mix should be is what level of return is needed for your plan to succeed.<\/p>\n Once you\u2019ve determined what the appropriate investment mix is for your portfolio, you\u2019ll need to implement it.\u00a0 An important concept to understand when doing so is \u201ctotal return investing\u201d.<\/p>\n When preparing for retirement, some investors worry that they\u2019ll need to use some of the principal for income.\u00a0 What they don\u2019t realize is that generating enough income solely from interest and dividends requires a very large portfolio, and isn\u2019t a realistic approach for most investors. The current low interest rate environment makes this even less practical.<\/p>\n A total return approach to investing is one that recognizes that investors should focus on generating the highest possible after-tax return, for a given level of portfolio risk. They should be indifferent as to the source of the income \u2013 it could be interest, dividends, or capital gain from price appreciation.<\/p>\n As an example, which portfolio would you rather own:<\/p>\n Portfolio A, which is invested 60% in a few stocks that each pay a regular 5% dividend, but don\u2019t appreciate in value much, or Portfolio B, which is invested 60% in a selection of mutual funds that pay a 2-3% dividend, and appreciate by 10% per year?<\/p>\n Hopefully you answered, \u201cPortfolio B\u201d. While its dividend income stream is much smaller, you could sell a bit of your fund holdings each year, pay a little capital gains tax, and have a better after-tax return from a more well-diversified (and likely less risky) portfolio.<\/p>\n The sequence in which you withdraw money from your investment and retirement accounts can have a major effect on how much you\u2019ll keep and the taxes you\u2019ll pay.<\/p>\n Retirees often simply take money from an account that\u2019s most convenient, or sell investments based on speculation about the direction of the market or the prospects for a particular company. But understanding the tax consequences of distributions from different types of accounts can be very beneficial.<\/p>\n You probably already know that you\u2019ll pay income tax on distributions from your traditional IRA and 401(k) retirement account. So, if you\u2019re retired in your 60s, the first account to access for income would typically be your taxable brokerage account. The reason is that money taken from a brokerage account isn\u2019t subject to income tax, because you originally funded the account with after-tax dollars. While you might have to pay some capital gains tax when you sell an investment in a brokerage account, it will almost certainly be less than ordinary income tax rates.<\/p>\n Once you turn age 72, though, the best order for withdrawals will change slightly.\u00a0 That\u2019s because at that age the IRS will require you to start taking so-called required minimum distributions from your IRAs and retirement plan accounts.\u00a0 The dollar amount of those distributions is based on your age and the value of the accounts. Taking your RMDs on time should be your top priority, because there are harsh penalties for not doing so.<\/p>\n Roth IRAs, which are funded by after-tax contributions, should generally be saved for last. Since Roth account withdrawals are free of both income and capital gains taxes, it makes sense to allow these accounts to continue to grow as long as possible.<\/p>\n Each year, your CPA and financial advisor can help you determine how to generate the income you\u2019ll need in the most-tax efficient manner. This is what\u2019s known as income distribution planning.<\/p>\n If you\u2019re not already working with an advisor, you should ask yourself if it would be helpful to do so once you retire. Here are a few questions you can ask yourself, to help you decide:<\/p>\n The responsibility for managing your nest egg is a significant one, and you shouldn\u2019t delegate it to someone without a successful track record \u2013 even if that person is yourself. While investment management isn\u2019t literally rocket science, it isn\u2019t something that everyone can do, either. You would need to educate yourself about the science of investing<\/strong><\/span><\/a>, and keep abreast of changes in the field of financial economics and investment theory.<\/p>\n You may find that you have the aptitude for managing your own investments, but simply don\u2019t enjoy it. If you find yourself dreading the time you\u2019ll need to commit to properly and prudently managing your portfolio, the results will eventually reflect that.<\/p>\n Managing your own portfolio isn\u2019t a full-time job, but it\u2019s much more than a hobby that will only take you a few minutes now and then. If you\u2019ve worked for decades in anticipation of retirement, you may not want to dedicate the time needed to do justice to the management of your portfolio once you stop working.<\/p>\n One of the biggest benefits of working with an advisor is that they can act as a dispassionate filter between your emotional reactions and your portfolio. You should honestly assess your response to the March 2020 stock market correction, the 2007-09 Great Recession and, depending on your age, possibly also the 2000-02 dot com crash. If you let your emotions influence your investment decision-making, it\u2019s probably better to hire an investment adviser.<\/p>\n If you can\u2019t definitively answer yes to all four of these questions, you\u2019ll be best-served by hiring a financial advisor to help you manage your portfolio once you retire, and likely also before then.<\/p>\n You can find a qualified, experienced financial advisor online, and the best places to start your search are the websites for the National Association of Personal Financial Advisors<\/strong><\/span><\/a>, the Financial Planning Association<\/strong><\/span><\/a>, and the CFP Board<\/strong><\/span><\/a>.<\/p>\n In summary, if one of your retirement concerns is the prudent management of your investment and retirement accounts once you retire, you should build a plan, get the right investment mix, understand total return investing, familiarize yourself with tax-efficient distribution planning, and, last but not least, consider working with an advisor.<\/p>\n","protected":false},"excerpt":{"rendered":" Start Planning Early Renowned investor Warren Buffet reportedly once said, \u201cSomeone\u2019s sitting in the shade today because someone planted a tree a long time ago.\u201d Indeed, one of the keys to overcoming retirement concerns, and to creating a successful retirement, financial security, and peace of mind, is having a plan.\u00a0 And it\u2019s never too early […]<\/p>\n","protected":false},"author":2,"featured_media":5151,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_mi_skip_tracking":false,"footnotes":""},"categories":[6,152,7],"tags":[117,118,119,140],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/5150"}],"collection":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/comments?post=5150"}],"version-history":[{"count":0,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/5150\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media\/5151"}],"wp:attachment":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media?parent=5150"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/categories?post=5150"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/tags?post=5150"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Get the Right Investment Mix<\/h2>\n
Understand Total Return Investing<\/h2>\n
Use Tax-Efficient Withdrawal Strategies<\/h2>\n
Consider Working with An Advisor<\/h2>\n
Do you have an aptitude for investment management?<\/h2>\n
Do you have an affinity for managing your investments?<\/h2>\n
Do you have the time for it?<\/h2>\n
Do you know how you\u2019ll respond during a major market downturn?<\/h2>\n