Most people understand that retirement planning is critical to maintaining the lifestyle they want after retirement. Despite its importance, it is not a topic that many people like to discuss because the truth is, talking about money is emotional. Retirement planning is not simply about having enough money saved away to lead a comfortable life when you retire. It is also about attaining that dream of what you want to do when you retire and what legacy you want to leave behind. For some of my customers that means fishing peacefully on a lake, gardening or playing golf with their buddies. Others want to leave their assets tax free to their children, donate to charity or give back to society. Regardless of your goals, having an ongoing conversation with your financial advisor is important because your plans will likely change as your priorities and purpose shift over time.
Your priorities are going to change over time
Retirement plans are sensitive to changing life circumstances and needs to be regularly updated to help you stay on track with your vision. As your priorities evolve and change, it is important that your financial strategies change along with them, which is why I have ongoing conversations with my customers on a regular basis.
I have a client who recently lost a pet he loved dearly. That loss changed his priorities. He decided that he wants to be more involved in his local animal shelters when he retires. So, we start this conversation early and help him plan out what being a regular donor looks like. Another client had a health scare and her priorities shifted to healthcare costs. She wanted to make sure she had enough money set aside to pay for healthcare in her old age, and so we made sure our income strategies took her projected healthcare costs into account.
Sometimes the changes are minor tweaks. I have a lot of specialists on my team who are experts in areas of insurance, estate planning, asset management and tax planning. So, when our clients’ priorities evolve, we can take a comprehensive look at their finances and assets and come up with creative strategies to meet their new vision.
Sometimes our clients have more than they previously thought they would in their old age and don’t need as much in their pension bucket. When that happens, we may shift their funds from their pension bucket to a college fund for their grandchildren or into dividend paying equities or a growth bucket such as stocks. This gives them the potential to continue to grow their assets well into their old age and leave a legacy to charity or to their loved ones.
As your situation changes when you approach retirement age, you may want to rethink your asset allocation relative to your new goals and move your assets into the right allocation and location.
Be tax efficient to keep more than what you set aside
While asset allocation is an important financial planning strategy, it is only one tactic to grow your assets. Another is proper tax management strategy, which determines how much of your assets you and your loved ones will take home after taxes.
Some people make the mistake of doing their tax planning in isolation rather than integrate it with their total financial plan. However, even seemingly simple income streams like investment income have different subcategories that are taxed very differently. For instance, interest income on certificates of deposit become part of your regular income. Similarly, short-term capital gains are taxed at your ordinary income tax rate. Other investment subcategories such as long-term capital gains and qualified dividends will incur a different tax rate. When it comes to retirement income, things get a little trickier. Depending on whether you are withdrawing from traditional IRAs, 401(k)s, annuities or pension, income from these subcategories are taxable whereas withdrawals from Roth IRAs or employer-sponsored plans funded with after-tax contributions are not taxable. And within these subcategories, tax rates differ based on other factors such as income. Understanding the different types of income and having tax management strategies is very important when it comes to maximizing your savings during retirement.
Being tax efficient is important in a strong economy but even more so during a period of economic uncertainty. Due to this global pandemic, many investors saw their previous gains from the stock market either wiped out or severely reduced. It is therefore more important than ever to review your investment portfolio and move assets around for the lowest efficient tax bill. And if you are one of the lucky few who made capital gains during this pandemic, it is equally important to work with a financial advisor to create a three- or five-year plan to manage your gains from a tax perspective.
The world of investments and taxes can often times be complex and confusing. An advisor will be able to consider your entire finances - your regular income streams and investment portfolio - and develop and implement strategies to lessen your current and future tax liabilities. They are also better positioned to help you select appropriate income-generating securities. This in turn can significantly improve your financial prospects in the short and long term.
Leave your mark
My team and I encourage our clients to dream, whether it is to travel the world, have a second home in Florida, or catch a record walleye. It brings me great joy to see them achieve financial stability so that they can feel confident to pursue their aspirations and live their best life. But to come up with a comprehensive financial plan that allows you to live your dream in your retirement age typically involves a team. Having experts such as tax attorneys, accountants, estate planning specialists, insurance experts and asset managers working together can make your portfolio more tax efficient. Having regular conversations with your financial advisor also ensures your finances keeps pace with your changing priorities.
Retirement planning is not just about the practical side of things - the dollars and cents. To many people, talking about retirement planning is extremely emotional because at the crux of it, retirement planning is about crafting the future you would like to have. So, what do you want to future to look like?
Any opinions are those of Todd Guennigsmann and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Raymond James and its advisors do not provide tax advice. Please consult a tax professional in regards to your particular situation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.