How do I safely generate income to replace my paycheck in retirement?
Consider how much money you'll need to cover essentials like housing, food, and healthcare, as well as discretionary expenses like travel and hobbies. Next, identify all income sources and assets. Having a guaranteed income such as a pension or social security provides a solid foundation. Create a tax-efficient withdrawal strategy from your investment assets if your expenses exceed your guaranteed income.
How can I reduce my taxes in retirement?
Roth IRAs, 401ks, HSAs, and taxable brokerage accounts are tax-efficient accounts that can help you manage your tax bill throughout retirement. It is critical to coordinate withdrawals with Social Security and health insurance. Consider charitable giving, relocating to "tax-friendly" states, and various estate planning strategies before and during retirement.
What types of investments should I consider for retirement?
Building a portfolio that can help you retire and stay retired requires choosing the right investments. A financial plan that captures all of your expenses and goals (bucket list) is a GPS navigation of your finances. To avoid running out of money, the financial plan helps identify the returns needed and the appropriate amount of risk. To achieve the needed rate of return, you should consider the right types of investments, such as stocks, bonds, cash, alternatives, real estate, etc.
John and Lisa
- Ages: John (55), Lisa (53)
- Occupations: John is a Sales Executive at AT&T, and Lisa is a registered nurse.
- Children: They have two children, one who is financially independent, one who they are currently supporting in her second year of college.
- Current Net Worth: $1.75 million, including retirement accounts, taxable investments, and their primary residence.
- Debts: They have a mortgage balance of $150,000 on their home.
- Retirement: John and Lisa want to retire comfortably in the next 10 to 15 years while maintaining their current lifestyle. They are unsure about when they should retire and how much they will need.
- Debt Reduction: They want to pay off their mortgage before retiring to reduce their monthly expenses.
- Investment Strategy: They are concerned about market volatility and want a balanced investment strategy that provides growth while protecting their savings.
- Healthcare Costs: Lisa is concerned about healthcare costs in retirement and wants to ensure they have adequate coverage.
- Created a detailed retirement income plan, considering Social Security benefits, pension, and required minimum distributions (RMDs) from retirement accounts. John and Lisa ultimately decided to wrap up work early at 63 and 61 respectively. This was particularly doable for them since they could rely on John’s retiree health benefits from AT&T.
- Retirement Accounts: $900,000 (401(k) and IRAs)
- Developed a mortgage payoff strategy to eliminate the mortgage before retirement, reducing monthly expenses.
- Recommended a diversified portfolio for an overall household mix of 70% stocks, 20% bonds, 5% alternatives, and 5% cash, which was aligned with their risk tolerance and retirement timeline, balancing growth potential and downside protection.
- Recommended they switch to a high-deductible health plan with a health savings account (HSA) until 65.
- Switched 401k contributions to Roth to improve tax diversification between pre-tax and tax-free accounts. Continued to review and optimize tax strategies to harvest losses on the brokerage account.
- Worked with a local estate planning attorney to recommend and create estate planning documents, such as durable powers of attorney, wills, and a Trust.
Robert and Emily
- Ages: John (62), Emily (61)
- Occupations: Robert is a plant manager for Procter and Gamble, and Emily is a physician at a local hospital.
- Children: They have two adult children together who are financially independent. Emily also has a daughter from a previous marriage who has children of her own.
- Current Net Worth: $3 million, including retirement accounts, taxable investments, and their primary residence.
- Investment Concentration: Robert holds a significant amount of Procter and Gamble (PG) stock with net unrealized appreciation (NUA).
- Charitable Inclinations: They have a strong desire to support charitable causes in retirement.
- Retirement: Robert and Emily want to retire comfortably in the next few years while maintaining their current lifestyle. They need to determine the optimal time to retire and how to manage their investments in retirement. They have a strong passion for travel, and want to prioritize this within their first 15 years of retirement.
- Concentration Risk: They are concerned about Robert’s heavy concentration in PG stock with NUA and want to diversify their holdings to reduce risk.
- Income Planning: They are unsure how to structure their retirement income to maximize tax efficiency and ensure they won't outlive their savings.
- Charitable giving: They want to establish a charitable giving plan that aligns with their values and financial resources.
- Estate Planning: They want to ensure their children are fairly accounted for in their estate plans given Emily has a daughter from a previous marriage.
- Created a robust retirement income plan that includes Social Security benefits, tax sensitivity, and withdrawal strategies from retirement accounts.
- Determined the optimal retirement age for both John and Emily based on their goals and financial situation. They ultimately decided to retire at 66 and 65 respectively.
- Developed an annual plan to gradually diversify John's concentrated PG stock position with NUA to spread risk while minimizing tax implications.
- Established a tax-efficient income distribution strategy, which included a combination of withdrawals from retirement accounts, Social Security, and taxable investments.
- Established a donor-advised fund (DAF). This helped them in three areas:
- Unwind their concentration in PG stock
- Reduce taxation by coordinating converting their pre-tax retirement assets to Roth IRAs with their contributions to their DAF.
- Give to charitable organizations that were aligned with their values.
- Worked with Robert and Emily to update their beneficiary designations to ensure all jointly held assets were divided equally upon their passing. Established a life insurance policy on Emily with her daughter from her first marriage as her primary beneficiary to accomplish her goal of ensuring all children were equal beneficiaries of her estate. Helped them draft “love letters” to share their memories, lessons, values, and stories with their children and grandchildren.
Family values run deep within our organization. We view each other and our clients as family. At Anchor Pointe, we believe in leading with education. We strive to help our clients and our community become better informed so that they can feel empowered to live their ideal lives with great confidence!