Are you carefully preparing your retirement investments so that they’re aligned with your needs and goals? Curt Vorachek, of Sikich LLP, suggests a few ideas for successfully planning your retirement.
“Go confidently in the direction of your dreams. Live the life you have imagined.”
We frequently reference this Henry David Thoreau quote when speaking with recent high school or college graduates, but it’s relevant at every age and stage – particularly when we envision our lives in retirement.
As the next wave of baby boomers nears retirement, an increasing number of people shift from investment planning to retirement planning and look for ways to maximize their retirement savings. Regardless of your exact age, it’s important to have a concrete strategy in place that allows you to retire at your desired age with a sum of money that enables you to live the life you want.
And, it’s critical to develop this strategy as early as possible.
Analyze your assets, then be realistic about your desired lifestyle
Many people reach retirement age with few assets other than some minimal savings and their home equity. As the cost of living can outpace salaries today and retirement distributions tomorrow, it’s crucial that you consider the following:
Review your sources of present and future income and analyze how longevity and other factors could affect retirement savings. Then, make realistic assumptions. For example, it’s unlikely that inflation will remain under 2 percent for the next 30 years.
Identify your desired lifestyle and determine whether it’s feasible for potentially several decades of retirement living. Assume you’ll live to 92, even if that’s above the current average life expectancy of 84.
Market volatility is a fact of life, so diversification across asset classes is key to reaching your retirement goals. Once you ultimately reach retirement, you may want to consider a shift of your asset allocation away from growth securities and instead toward income-generating securities, such as dividend-paying stocks, high-quality bonds and T-bills.
Understand the tax implications during retirement. You cannot keep retirement funds in your account indefinitely, and you generally have to start taking withdrawals from your IRA or retirement plan account when you reach age 70.5. Roth IRAs do not require withdrawals until after the death of the owner.
Maximize your retirement contributions, even if you work only a few more years
Even if you are in your late 50s, you should make the most of retirement accounts. Here, contributions can grow tax-deferred, and every dollar makes a difference. Take advantage of health savings accounts (HSAs), which can offer the most effective ways of saving for retirement health care expenses. It’s a smart move to take individual retirement accounts (IRAs), deferred compensation, tax-deferred annuities and other tax-advantaged savings vehicles into consideration as well. Finally, many people fail to consider the advantages of a Roth 401(k) or a Roth IRA over a traditional version. The Roth IRA is a good choice if your tax rate during retirement won’t be lower than your current rate, since it allows you to pay the taxes now and receive tax-free distributions when your income tax rate is higher.
If you’re 50 or over and not contributing more to your 401(k) than you did at 49, you may be able to take advantage of catch-up opportunities to potentially increase your retirement income. For example, max out your 401(k) with up to $17,500 in an annual pre-tax contribution – plus $5,500 in catch-up contributions. This makes a tremendous difference, and you’ll see almost immediate results.
As taxes continue to rise, speak with a trusted financial adviser about balancing investments between tax-deferred retirement accounts and taxable accounts. You need to be proactive to protect your hard-earned retirement savings. An adviser can help you determine the appropriate approach, given your current assets and long-term goals.
Overall, a comprehensive retirement strategy arms you with a targeted roadmap that clarifies your vision, keeps you on track and provides your loved ones with peace of mind and a greater sense of security. Most important, it empowers you to not only dream big, but to turn those dreams into a reality.
Curt J. Vorachek is the managing director and partner of Sikich LLP’s wealth management services practice. Vorachek has more than 25 years of experience in the wealth management sector, with specific expertise in investment management, personal trust, private banking and insurance services to high net worth individuals and nonprofits.