Focus on What You Can Control for a More Secure Retirement

Michelle Brownstein, Vice President of Private Client Services, CFP®

In retirement, the less uncertainty, the better. Unfortunately, some events are impossible to predict, like changes to tax legislation or the direction of the stock market.

But that doesn’t mean you can’t prepare. There are some areas of retirement planning where taking action now can reduce the risk of running out of money later.

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Plan for tax changes

Some taxpayers in high tax states like New York, California and New Jersey might be facing higher taxes because the tax law limits the amount of state, local and property taxes that can be deducted from federal income taxes. As a result, retirees—and soon-to-be retirees—should think carefully about where they want to live.

On the portfolio side, pay close attention to the account types you use for different investments. Your choices can have big tax consequences.

• Tax-sheltered accounts are good for investments that pay dividends and interest because no tax is owed until the money is withdrawn. (If it’s a Roth, you never have to pay taxes on that income).
• Taxable accounts, on the other hand, are better suited for investments such as growth stocks. That’s because those gains, when held in taxable accounts, are only taxed 15% or 20% for most people.

Be smart about income

One of the new tax law’s provisions raises the income level on higher tax brackets. That will help alleviate income pressure in retirement by giving you added flexibility. You’ll now be able to take bigger withdrawals from IRAs and 401(k)s with¬out moving into a higher tax bracket (at least until those changes expire in 2025).

In addition, municipal bonds provide interest free from federal income tax. Bonds from your home state also give you a break on state income taxes.

Strike the right asset balance

Your mix of stocks, bonds and alternative investments, otherwise known as asset allocation, is the top driver of your portfolio’s long-term returns. If your goal is to grow your portfolio for retirement so that it can support you for several decades, you’ll want an asset allocation that’s historically been able to achieve stronger returns. That generally points to stocks.

However, as your age and life circumstances change, you’ll need to tweak your asset allocation. What’s appropriate at 25 may carry too much risk when you’re in your late 50s or early 60s.

The challenge is to find the right balance between an asset allocation that feels comfortable and one that can outpace inflation, so you can maintain your purchasing power throughout your retirement.

Make contingency plans

Retirement planning isn’t just about what you invest in, it’s also about timing. Just ask anyone who planned to leave the workplace in 2008 or 2009. Even those who had an appropriate asset allocation still saw their portfolio values fall due to the severe financial crisis.

Of course, it’s nearly impossible to predict when the next bear market will strike. And that’s why an asset allocation that matches your age and time horizon is just your first line of defense.

Should disaster strike when you have little time to recover your losses, you may need to make other changes to your plan. For example, you might have to consider working longer, reducing your withdrawals, or downsizing your retirement expectations.

Fixed, but flexible

A lot gets thrown at you during the decades you’re saving for retirement. Much of it is out of your hands. Focus on what you can control, but also be aware of the things you can’t. That way, you’ll be ready for anything.

Empower offers free online financial software, mobile apps and personal wealth management services.

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