When it comes to retirement, you must put several tactics in place that will be quite different compared to when you were in the workplace. Here we have five planning tactics that can be a benefit to anyone preparing to build their Complete Financial House.
When you stop working, there will come a time where you will have different incomes, which means different income tax rates and planning taxes to maximize their efficiency.
Taxes usually spike around age 70 when you’re about to take your social security, tax qualified assets, and 401k savings. You’re placed in different tax brackets throughout your life, so you may want to take out money from plans such as the 401k first to fill up the 10 or 15 percent tax bracket. Then you can take lower amounts of money in higher tax brackets.
Another strategy that we can look at is the Roth IRA, where money can be converted to make it tax-free during withdrawal. Then make a five-year plan to get your money and minimize taxes. Things can get confusing since there are numerous accounts and numbers to crunch but financial planners often have software to keep your money on track to help set up a proper strategy.
One of the ideal strategies for social security is to maximize it at age 70. Strategically planning when to take out the social security can help in tax planning and can help strategize how money is taken out of investments. Combining this with proper cash flow management and bucket strategies will help you get more in retirement.
Many people make the mistake of taking their social security as soon as they can, however, that’s not the best solution for most. If you delay your social security, the government will give you an 80 percent increase on your benefit, which can grow substantially in the next few years. You can plan the substantial increase in social security with more contributions to help build more money.
There’s also another strategy that the government has started to end. When you’re over age 62, you can get a restricted application, which allows you to take one half of your spouse’s Social Security as free money. It’s still available for many people but the system is on its way out.
When you plan your Social Security properly, it becomes another asset. This is why more often than not, you’re better off spending money from the bank or an investment first and leave social security until age 70 when it’s going to net you a lot more money.
Cash Flow Management
No matter how much money you have, during retirement you’ll likely end up having no more employment income. It might seem scary, but if you have a game plan and a strategy for your cash flow, it’s going to be very easy. Your cash management can be broken down into three different areas:
Needs – Rent, food, and other necessities for survival.
Lifestyle – Travel, entertainment, and things you can change if you wanted to.
Legacy – Things you may eventually want to pass on to the next generation.
It’s about matching up your income to have balance between your expenses and investments. When you’ve planned your pension and Social Security properly, they will take care of your survival needs. From there you can look to your expenses and see how much rate of return you need to make sure that all your other expenses are taken care of. If everything is good, then other investments will be considered legacy expenses you can pass on.
For maximizing Social Security, it’s recommended that it goes into a separate bank account which you can then have a fixed amount move to that bank each month.
For those invested in the stock market, it’s easy to get nervous because the stock market has its ups and downs. The stock market can recover in the span of two to three years but if you have cash reserves that can help you live for the next two to three years, whether it’s in cash or short-term bonds, you won’t need to worry too much about the stock market and let your money recover.
For your long-term strategies, you can then look into using bonds to minimize risk. For people looking to retire early, it means that you want to have the stability of low risk bonds and growth in the form of equities. To properly manage them, there needs to be a long-term cash goal and a shorter-term cash supply which will help us no matter what point we are in our journey.
Once you know how much money you need for needs and expenses, your financial managers will then know how much you can put into a portfolio and create a proper investment model. Some people need to earn five percent from their investments while others will only need 2 percent. One of the first things that needs to be determined for the investment is what rate of return you’re aiming for. This depends on your risk tolerance.
Knowing your limits will allow you to sleep better at night and keep you from making hasty decisions that are based on short term market events. Remember that for every big downturn of the market, it will eventually come back around as it’s done for the past hundred years.
When it comes to planning, it’s best to know what your expectations are and make sure everything is in line with those expectations. You want to have financial peace and know that you can sleep at night even with changes in the economy. Everyone wants higher rates with lower risk but it doesn’t usually work that way, so having a proper plan is the way to go.
All of these tactics are intertwined. One of the best things you can do to implement them is to work with an expert to really specialize and focus on this. Some experts focus on only one of these tactics, but it’s best to find someone who can implement all of them. Since they are intertwined, working with someone who is experienced and educated in these areas can make it much more efficient.