I'm a CPA: Control These Three Levers to Keep Your Retirement on Track

Retiring confidently comes down to pulling three levers throughout your working life:

• Time. Time is on your side — time in the market vs. timing the market
• Savings. The more you save and the more consistently, the better
• Risk. The longer the timeframe, the greater the risk that can be taken

These three levers are connected. The longer and the more you save, the better off you will be in retirement. However, the ways you use those levers in retirement are different — your mindset needs to change once you're there.

Risk and savings before retirement

The amount of money you may be willing to risk investing varies according to your earnings and financial obligations at different points in your working timeline.

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Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

If you have lots of time and have surplus to save, being aggressive can work in your favor for the long term. The principle of dollar-cost averaging can work in your favor over long periods when preparing for retirement.

Retirement becomes not just possible, but a reality, when sustainable withdrawals from your properly balanced financial assets — along with income from any pensions and Social Security — can comfortably meet your retirement lifestyle needs.

If you want to shorten the time to your retirement, you'll need to adjust the second lever (saving) and/or third lever (risk).

Saving more requires greater delayed gratification while you accelerate getting to your destination — retirement. Watch out, though: The earlier you retire, the more surplus you might need.

Many forget that early retirement brings extra expenses to plan for, such as medical costs while you wait for Medicare eligibility.

Increasing risk to reach retirement faster can have its own pitfalls — it might help you retire sooner, but it could just as easily make the journey longer. You can't control the markets.

How risk can affect retirement outcomes

Here's an example of how different levels of risk can affect your retirement savings.

Scenario 1: Moderate risk (8% growth rate)

Let's say someone is saving $20,000 a year for 30 years and their compound annual growth rate is 8%. They would have a little more than $2.2 million to add to Social Security income.

Scenario 2: Higher risk (10% growth rate)

Now, let's say that person takes more risk, and it pays off with a compound annual growth rate of 10%. Then they would have about $3.3 million — about 50% more than in the first example — to add to Social Security income. But remember: It could go the other way, as taking more risk doesn't guarantee greater returns.

Scenario 3: Lower risk (6% growth rate)

If this same person gets 6%, they would have only $1.6 million.

That's a large range based on returns, and it means your retirement lifestyle can look different if you can't adjust your retirement timeline lever.

Put time on your side

The biggest advantage of time is that the earlier you start saving, the more powerful the effect of compounding is. The Rule of 72 is indeed a powerful thing. It tells you how quickly money doubles: The higher the rate of return, the less time it takes to double. The lower the rate of return, the longer it takes.

For example, if I get a 7% return, my money will double in about 10 years. If I get a 10% return, my money will double in about seven years. This "Rule of 72" is all about the relationship between those two levers: time and risk.

The lever we have the most control over is savings. The challenge for all people is delayed gratification — to save as much as possible during their working life to pay their future self.

Don't forget the bonus lever

The bonus lever is being smart about taxes along the way — an element often overlooked — to set yourself up for a better and lower tax experience in retirement, or at least provide yourself more insulation from potential tax increases later.

This bonus lever requires long-term and strategic thinking more than any of the others.

After all, we spend after-tax dollars, not pre-tax dollars, and tax breaks are only helpful if you take advantage of them.

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Every situation is different, and there are some scenarios where deferring income can make sense.

However, people often defer taxes to a distant future, without knowing what the tax rates will be when it's time to pay. If tax rates go up — a real possibility — it's often not a good deal.

The levers look and feel different in retirement

Once you reach retirement, you're at a new starting line. Utilizing the levers of training, nutrition, rest and body maintenance for an endurance athlete allows them to not just prepare for a race, but to begin the race, enjoy it and finish well. That's what we all want in retirement, too.

So, you've done the hard work of preparing. Now what?

Retirement, though not a race, still requires endurance and sustainability to enjoy it, do it well and finish well.

First, you need to think differently, and that usually means taking some risk off the table. You need to know that you can get through the downturns when they come.

You have to pull the risk lever depending on how you think about money — setting yourself up so that you can endure a prolonged downturn, should one occur in retirement, is crucial. We don't know when or why a downturn will come, or how long it will last.

The only way to confidently retire is to know you have a plan to make it through the inevitable pullbacks.

Think about it in terms of how many years' worth of funds you don't want impacted by market swings — 10, 15 or even 20 years — so you can use the funds to live on. This allows your other funds in stocks to recover and grow again.

While there is always the risk of inflation, it is important to recognize that the likely greater risk is losing money through investment risk in retirement.

That's because you can't easily make up those losses without enough time, and it's likely you won't want to go back to work or have a reduced lifestyle.

Adjusting your levers during retirement

Time is not on your side in retirement. If you retire earlier, say, around 60, you've got more challenges to navigate, more time to make your money work for you, and more ups and downs to get through.

You can't be withdrawing funds from money that's down. That's destructive. It's the opposite of adding savings in downturns by buying stocks on sale.

To stay out of that scenario, you've got to consider adjusting risk. If you have saved and invested well and have a surplus in retirement, ask yourself:

• Why would you keep taking unnecessary risks?
• Who are you taking risks for?
• Is it for you or for others?

For those we work with who are mostly in the surplus scenario, the conversations are very different. They become about another lever, and it's the opposite of saving. It's the lever of deploying more of your wealth during your life.

This can mean more dream trips, helping your family and helping others generously. When you have the confidence that you have what you need and are structured correctly with the right risk level, it's possible to deploy your hard-earned retirement funds when you want, for what you want and for whom you want.

Using your timing, saving and risk levers in the right way can set you up for a retirement that's lower on stress and higher in enjoyment. Just make the necessary adjustments to your thinking and investments when you're approaching the starting line.

As for that bonus lever — being smart about taxes — it doesn't end when you begin retirement. It's important to continue taking advantage of available tax breaks throughout.

Dan Dunkin contributed to this article.

Appearances on Kiplinger.com were obtained through a paid public relations program. The author received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way. Some media features/ appearances are advertisements paid for by Boomfish Wealth Group LLC to promote the business.

The information contained herein is for educational purposes only. It is not intended to provide, and should not be relied on for, any tax, legal or investment advice. You are advised to seek the advice of a qualified professional prior to making any decision based on any specific information contained herein. The specific tax consequences of any investment or strategy will depend on your specific tax situation.

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