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Advisor Perspective

Advisor Perspective

Planning for Retirement: Making it Last

Marcus Velasco

Advisor, CPWA®, CFA, CFP®
Marcus enjoys sharing the tools and resources, as well as his experience, that help clients build and stick with their financial plans. Clients know they can count on him to face important decisions in life with confidence and clarity.

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This article is the second of a three-part series on planning for retirement. The first article discussed “Are you Ready” for retirement. Here we will cover maximizing the value of your retirement assets to provide for the retirement you hope and deserve to have. The final article will be on estate planning and is forthcoming.

Congratulations! You have made the decision to retire.  You have discussed it with your spouse, and you have agreed to your future lifestyle.  You built out your budget and your nest egg.  But how do you make sure you will have the cash flow you need to last through your golden years?

What does your income look like?

Most of us are familiar with Social Security.  It has been part of that deduction in your paycheck for as long as you can remember, but now it’s time for you to collect.  Generally speaking, it is best to delay claiming Social Security. Though there are reasons that claiming early may make sense, by delaying beyond full retirement age your benefit increases by 8% each year.  Social Security can be significant, with the maximum benefit being over $50,000 per year ($4,194 per month) in 2022.

You may be able to rely solely on the interest and dividends from your portfolio to meet your cash flow needs, or you may need to realize the future appreciation of your portfolio to help supplement your cash needs.  In today’s low interest rate environment, the focus should be on the total return of the portfolio.  If you have traditional IRAs or 401(k)s, the government will aid with your cash flow by forcing you take required minimum distributions (RMDs) from these accounts.  More on these below.

Don’t forget to consider the distribution options on any pensions or annuities you may have.  These can vary widely and should be looked at alongside your other income flows.

What is the risk in your portfolio?

Investment risk is often thought of as the volatility of your portfolio returns; one year it is up 10%, the next year it is down 13%.  As your time horizon decreases you should reduce the volatility by holding more fixed income and less equity in your portfolio. But this may expose you to another risk – the risk that you deplete your assets.  Retirement can last 15, 20 or more years, so your time horizon is still quite long.  There is still the need for growth (in the form of stocks) in the portfolio to make sure your assets last.  Having the right asset allocation during retirement is just as important as your allocation while saving for retirement.

Taxes still matter

Throughout your working career, taxes may have been your single largest expense and may continue to be in retirement:

  • Up to 85% of your Social Security benefits may be taxed.
  • RMDs from your IRA and 401(k)s are taxed as ordinary income, as high as 37%. In 38 states RMDs are also subject to state income taxes.
  • Long term capital gains and qualified dividends can be federally tax free if you have little income or be taxed by as much as 23.8% (still lower than ordinary income).
  • If you have a Roth account, any withdrawals you make are tax free.

The type of account you withdraw from and managing the timing of income, even in pre-retirement, can have a significant impact on what is available for other spending.  Your taxable income also determines how much you pay for Medicare, and if you retire early, may determine the health insurance subsidies you may receive.

How you manage your assets, distributions and taxes throughout your retirement years can have a significant impact on the lifestyle you have.  If you would like to have a conversation about planning for and during retirement, please call your JMG advisor.

The contents of this article may or may not be directly applicable to your situation. In either case, we encourage you to pass this along to someone who may find it helpful.


Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this writing, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this writing serves as the receipt of, or as a substitute for, personalized investment advice from JMG Financial Group, Ltd. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. JMG is neither a law firm nor a certified public accounting firm and no portion of the content provided in this writing should be construed as legal or accounting advice. A copy of JMG’s current written disclosure statement discussing advisory services and fees is available for review upon request.