retirement planning

Do You Have a Retirement Plan, or Just a Bunch of Uncoordinated Accounts?

There’s a difference between having a portfolio of investments, savings and other assets and understanding why you have them and what purpose they are serving in your overall retirement plan.

Inflation hit a 40-year high of 8.5% in March. Some people don’t factor in inflation when doing their retirement planning, but the significant spike in prices recently should be a trigger for all of us to look at inflation with more scrutiny.

Because the cost of everything is going up, that may mean that you have less money you can save for retirement. So, the question becomes, how can you generate more income to offset inflation?

What many people don’t consider is how inflation would affect them in retirement if it went above 2% or even higher for long stretches of their retirement years. It’s important now to take a look at the next 10, 15 and 20 years with the possibility of inflation being higher than normal and determining how that would affect your financial situation. How could you do things differently with your money? How can you better prepare your current asset allocation for higher inflation?

The taxation angle is another consideration as you plan for retirement. Income tax rates were reduced in the Tax Cuts and Jobs Act of 2017, but they’re going back up when the legislation expires at the end of 2025. There have been other proposals to increase taxes, such as the capital gains tax and the income tax rate on the highest earners.

Therefore, you need to ask yourself this question: If your tax rates were to increase, how would that affect your retirement planning? If a spouse passes away, the surviving spouse will no longer be in a married, joint-filing tax bracket but rather in a higher, single-filer tax bracket. And looking at the debt our country is accumulating, including the trillions in stimulus spending in the last two years, many people think an increase in taxes is on the way.

Whatever happens the next few years in terms of inflation and taxation, there are some financial factors you can control. But a lot of people are unaware of them. That’s because too many people are failing to properly prepare. And failing to prepare for retirement can mean preparing to fail.

A portfolio is not a plan

We feel that a carefully thought out and organized retirement plan includes looking at all sources of income, the structuring of investments, healthcare, taxation and legacy. It also includes knowing how your accounts should be managed according to risk tolerance, taxes, etc.

A portfolio is not a plan. Too many people just have a bunch of accounts but not a coordinated plan about how those accounts can work together and complement one another in order to provide potential growth and stability, especially during volatile times.

Let’s say I’m looking at a person’s portfolio, which might include retirement accounts like an IRA or a 401(k), a pension if they’re lucky, an annuity, savings and brokerage accounts. But often, when you ask them why the money is being managed a certain way, they don’t know.

It’s time to know. And one fundamental way is to reverse engineer the plan. Ask these questions:

  1. What is your cost of living now?
  2. How much income do you actually need presently in your working years?
  3. What will your cost of living be in retirement? Remember, you might spend more than you think, especially early on, because in retirement, every day is Saturday.
  4. How much income will you need when you retire?

Once you figure out the income numbers, then you have to add inflation on a yearly basis. That will give you a starting point for income you’ll need the year you retire and for the subsequent years of retirement.

Taxation, along with its effects on your money in retirement is another good reason to get with a professional planner to assess ways you may be able to lower your tax burden. One avenue to consider is converting some of a traditional IRA or a 401(k) into a Roth IRA or Roth 401(k). Roth withdrawals are tax-free when withdrawn after the age of 59½, as long as assets have been in the Roth for at least five years. Keep in mind though that when making a Roth conversion, you are taxed for the amount you convert in the years that you do so.

A few more considerations

Here are other areas to focus on as you build your retirement plan:

  • Social Security. Figure out the best options for your specific situation. If you’re married, when should each of you start taking benefits? How much of Social Security will meet your monthly expenses?
  • Personal assets. These include savings, your home, stocks, retirement accounts, cash value of life insurance policies, rental properties, annuities, etc. Regarding investments, it’s important to gauge how many years you have left before retirement to determine how the money can be managed in terms of risk tolerance.
  • Healthcare, including Medicare choices and long-term care planning. Longer lifespans and rising healthcare costs are key factors in retirement planning. Health savings accounts are becoming an important component of retirement savings plans.

Rising inflation has always been a reality, but its rapid increase is a reminder of why inflation must be accounted for in your retirement plan. Taxes in retirement catch some people by surprise. Additionally, it’s possible that we will go through more recessions and market corrections.

The bottom line to all of this is that having a plan helps better prepare you against the factors that are out of your control and helps give you financial peace of mind. You don’t want to spend your remaining working years, and especially your hard-earned retirement years, worrying about what you should do. By then, it might be too late.

Dan Dunkin contributed to this article.

Fee-based financial planning and investment advisory services are offered by Wolfgang Capital LLC, an Investment Advisor in the State of California. Insurance products and services are offered through Wolfgang Financial Group LLC dba Wolfgang Financial and Insurance Agency (CA LIC # 0K07551). Wolfgang Capital LLC and Wolfgang Financial Group LLC are affiliated companies. Neither Wolfgang Financial Group LLC or Wolfgang Capital LLC provide legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Wolfgang Capital LLC, Wolfgang Financial Group LLC are not affiliated with or endorsed by the Social Security Administration or any government agency.

About the Author

Zachary W. Herzog, Investment Adviser Representative

CEO, Wolfgang Capital

Zachary W. Herzog is an Investment Adviser Representative and the CEO of Wolfgang Capital, an Investment Adviser registered in California. Zach is dedicated to helping retirees and pre-retirees protect their finances as a licensed life and health insurance agent (CA LIC# 0H085434) with Wolfgang Financial and Insurance Agency, an insurance planning firm in the greater Southern California area.

Fee-based financial planning and investment advisory services are offered by Wolfgang Capital LLC, a Registered Investment Adviser in the state of California. Insurance products and services are offered through Wolfgang Financial Group LLC dba Wolfgang Financial and Insurance Agency (CA LIC # 0K07551). Wolfgang Capital LLC and Wolfgang Financial Group LLC are affiliated companies. Neither Wolfgang Financial Group LLC or Wolfgang Capital LLC provide legal or tax adviceYou should always consult an attorney or tax professional regarding your specific legal or tax situation. Wolfgang Capital LLC, Wolfgang Financial Group LLC and Zachary Herzog are not affiliated with or endorsed by the Social Security Administration. This content is for informational purposes only and should not be used to make any financial decisions.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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