The Complete Retirement Planner

notepad with "retirement plan" written in it on a table next to pen and calculatorPlanning for retirement is crucial, yet roughly one-quarter of Americans have nothing saved for this time in life.

And that’s not the only concern! Saving enough money isn’t the only strategy of retirement planning. It’s also important to understand how to manage that money, how taxes affect your nest egg, how much risk you’re taking, how much you’re likely to receive in Social Security benefits and how this all affects what you’re able to leave behind when you’re gone.

Overall, retirement planning should leave you poised for a future you want to live in. Lack of retirement planning can leave you scrambling as you enter your Golden Years.

To help reverse this trend, we’ve created this complete retirement planner: A guide covering the major retirement planning steps. Review each step and reach out to a Sonoma County wealth advisor at Montgomery Taylor Wealth Management for more information for your specific situation. 

Chapter 1

Retirement Planning

The first primary goal of retirement planning is figuring out your retirement goals. You can’t possibly know how much money you’ll need in retirement until you know how you want to spend your time. Do you want to travel extensively once you’re no longer working? Or do you finally want to be free to practice hobbies like golf or gardening in your hometown? Are your goals the same as your spouse’s? 

If you plan with goals in mind, you can align your saving, investing and management of your retirement funds to achieve those goals. If you don’t, you may save too little to achieve them – or, conversely, save too much, perhaps depriving yourself of other, non-retirement goals in the process.

The second primary goal of retirement planning is determining how much to save. The earlier you start, the more time your money has to grow. A monthly contribution of $500 started in your late 20s can wind up totaling more than $1 million 40 years later, assuming stock market returns annualize to 7 percent – a figure less than the historical average.

If you have access to a matching defined contribution plan at work, such as a 401(k), be sure to take advantage of it. Your employer matches your contribution up to a certain percentage – that’s like free money in your retirement account!

As you draw closer to retirement (say a decade or so out), it’s prudent to draw up a retirement budget. See if you can comfortably live on the amount you’ve determined. If you can’t, talk with a financial advisor about ways to adjust the budget.

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Chapter 2

Risk Tolerance

Once you have saving for retirement firmly in mind, it’s important to determine your risk tolerance. You don’t want to run the risk of losing money in your retirement accounts, but you want to maximize yearly returns as well. 

Any investment has risk, but knowing how much risk you’re comfortable with can make a big difference. 

Portfolio allocation is the chief method of risk management. It means determining what asset classes to invest in and what percentage to place in each. The major asset classes for most investors are bonds and cash instruments, and stocks.

The risk profile of each is quite different. Bonds and cash instruments are the least risky, seldom dropping in principal and providing steady yields. Stocks are volatile and fluctuate in value, but offer higher returns. 

Assess your risk tolerance for each. It’s possible, of course, to invest entirely in bonds and cash instruments. However, bonds and cash currently return just 1 to 2 percent yearly, so the value of your portfolio would creep very slowly ahead. It wouldn’t keep pace with inflation, which runs from 2 to 3 percent annually.

As a result, most investors’ portfolio allocation is divided between bonds and cash (for safety) and stocks (for maximum appreciation potential). 

With the right risk tolerance, you gain the benefit of both asset classes – safety and appreciation. With the wrong risk tolerance, you can lose money you can’t make back and live with more stress than you’re comfortable with. 

Your risk tolerance should factor in both portfolio allocation and your age, as you’ll likely want to become more conservative in investments as you draw closer to retirement.

Risk Tolerance Vs. Risk Capacity- and What it Means for Your Investments

Chapter 3

Tax Reduction Plan

Retirement savings plans are intimately tied up with taxes and tax-reduction strategies. The U.S. government, via the Internal Revenue Service (IRS), has provided tax advantages for most retirement savings plans.

It’s vitally important to manage your tax situation as part of managing your retirement funds. If you do, you can save on taxes in the years you contribute and minimize taxes in retirement itself. 

If you don’t manage these concerns, you can lose out on tax savings as you contribute and end up paying more taxes than necessary when you withdraw. You could also be assessed penalties by the IRS.

Again, if you have access to a defined benefit contribution plan at work, such as a 401(k), use it for considerable tax savings. Savings in Traditional 401(k)s are taken out pre-tax, which lowers your taxable income for the year.

People can contribute up to $19,500 in 2020 in 401(k)s. If you are 50 or over, you can contribute an additional $6,500. 

If you don’t have a 401(k) or similar plan, talk with a financial advisor about opening a self-directed Individual Retirement Account (IRA). Traditional IRA contributions are tax-deductible in the year of contribution. 

You can contribute up to $6,000 in IRA accounts every year. If you are 50 or older, you can contribute an additional $1,000.

Withdrawals at Retirement

Folks become eligible to withdraw their retirement funds at the age of 59-½. If you withdraw funds before that, the IRS assesses a 10 percent penalty (in addition to taxes at your then-existing tax rate).

Note that the government mandates that you must begin withdrawing a certain amount per year when you reach a specific age. These are called Required Minimum Distributions (RMDs). The age is 70-½ if you if you were born before July 1, 1949, and 72 if you were born on July 1, 1949 or later.

Traditional Versus Roth

If you invest in traditional retirement accounts, the funds are taxed at the then-current tax rate in the year you withdraw them. 

Roth accounts provide no tax advantages in the year of contribution. The tax advantage comes upon withdrawal. Funds from Roth accounts are not taxed when you withdraw them on retirement. This can be a huge advantage, as it can lower your overall taxes in retirement.

As a result, many people plan to divide their retirement savings between Traditional and Roth accounts. 

In addition, Roth accounts are subject to a 10 percent penalty for early withdrawal if you’ve held them for less than five years. There are exceptions to the early withdrawal penalty, such as first-time home purchase, college expenses, and birth or adoption expenses.

The money grows tax-free in tax-advantaged accounts until you withdraw it. 

7 Common Tax Planning Mistakes Made in Retirement

Chapter 4

Social Security

Social Security is also an important factor of retirement, specifically:

  • Your estimated benefit amount
  • How your choice of when to take benefits affects the amount

Taking Social Security benefits at the right time is an important, and often complex, decision. If you align your estimated benefits with your own retirement savings, the total monthly Social Security benefit and the amount you withdraw from your retirement funds should provide you with a comfortable retirement. 

If you don’t plan, you can find yourself receiving less than you expected, either because you weren’t aware of the benefit estimate or you didn’t time your receipt of benefits prudently. 

The Social Security Administration provides a benefit estimate for everyone eligible for Social Security. Benefits rise and fall along with your income, so the estimate may change over time. These predictions do, however, provide a useful benchmark of what you can expect to receive.

Benefit amounts also vary by when you choose to take them. 

You receive your full benefit amount if you retire at your full retirement age. Currently, this is age 66 for those born between 1943 and 1954; the age goes up incrementally to reach 67 for those born in 1960 or later.

However, you become eligible to receive benefits at the age of 62. If you elect to take them at this time, your benefits are reduced up to 30 percent, depending on the time period between 62 and your full retirement age. The reduction is permanent.

You can also increase your Social Security benefits by electing to delay your receipt past your full retirement age up to age 70. Your Social Security benefits climb by roughly 8 percent per year. These increases are permanent too. 

How Much Will My Social Security Benefits Be? Sonoma County Wealth Advisor Explains

Chapter 5

Estate Planning

Another step to retirement planning is a prudent estate plan. Estate plans have several components. 

The first is a will, to bequeath your assets to your heirs and anyone else you want to receive them. 

The second component is setting up powers of attorney. It’s prudent to set up a financial power of attorney and a medical power of attorney. 

A financial power or attorney allows a designated person to perform tasks like paying bills in case you become incapacitated. A medical power of attorney allows a designated person to make medical decisions on your behalf in case you become incapacitated.

There’s little doubt that an estate plan constitutes everyone’s least favorite part of retirement planning. No one likes to think about incapacitation or dying.

But think about what could happen if you don’t set up an estate plan. If you pass away without a will, your loved ones may be unable to access your assets for months or even years, as your estate goes through probate. 

In addition, no one will know where you want your assets to go. If you want to leave them to specific people or an organization, it’s important to specify that in your will.

If you don’t have powers of attorney, the result could be chaos, in both your financial affairs and your healthcare. 

When You Don’t Have an Estate Plan … 

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