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Importance of Comprehensive Planning to Ensure a Prosperous Retirement

Retirement can last longer than expected for most people. According to the Social Security Administration, a healthy 65-year-old would likely live another 19-21.5 years. Further, a third of the total number of 65-year-olds are expected to live up to the age of 90, and from this one in seven could live beyond the age of 95. These numbers clearly show a sharp improvement in the life expectancy numbers. While this is good news for those prepared for their retirement, it might be challenging for those struggling to cope with their finances. However, a comprehensive retirement plan, modified as per each life stage, can ensure a comfortable retirement for all.

Here is why comprehensive planning is important to secure a prosperous retirement:

  1. Take rational financial decisions
  2. In your retirement, several things can impact your ability to remain financially secure. Hence, it is critical to plan well for your retirement to ensure you can make sound financial decisions that ultimately secure your future. Efficient retirement planning can help you make decisions regarding the following:

    • When should you take Social Security withdrawals?
    • How long should you delay your Social Security?
    • How much will your portfolio generate when you retire?
    • How much would you need to remain financially secure during the non-working years of your life?
    • Which retirement accounts should you withdraw from first?
    • Which retirement plans should you opt for to save more?
    • Should you consider a Roth conversion?
    • What should you do in case of a recession or a market downturn?

    All these decisions can have a significant impact on your financial health during retirement. For example, if you take your Social Security benefits at 68 (which is one year post the official retirement age for those born in 1960 or after), you can potentially maximize your returns up to 108% of the total monthly benefits. Further as per research, you can get 132% of the monthly benefit if you choose to delay withdrawals until the age of 70. Delaying your Social Security benefits will also defer your tax liability to a time in the future when your income will likely be lower.

  3. Create a sound investment portfolio
  4. The average Social Security check in 2020 was only about $1,500, which is considerably low to maintain the pre-retirement standard of life for most individuals. Hence, your investment portfolio becomes one of the most dependable financial sources for the non-working years of your life. Sound retirement planning can help you create an investment portfolio that can withstand market volatility and still offer you potentially high average returns in the long-run. Moreover, such investment portfolios are tailored to adapt to your life stage, risk tolerance, and financial requirements. Comprehensive retirement planning can help you change your investment portfolio with each life stage so that your asset allocation aligns with your financial objectives at all times. Experts recommend retirees to shift their portfolios towards more conservative investments as they approach their retirement. This can help them preserve their savings, and save taxes during retirement. For example, investing in municipal bonds can help you lower taxes as they are free from federal taxes. Moreover, capital gain offsetting strategies can enable you to reduce your capital gains taxes and ultimately save more.

  5. Opt for efficient withdrawals
  6. A prosperous retirement requires adequate financial support. You might be saving appropriately for your golden years, but if you do not apply wise retirement planning strategies to design your retirement account withdrawals, your non-working years could take a financial hit. Thus, it is advisable to know which retirement accounts to tap first and how to structure your withdrawals to maximize returns, minimize taxes, and avoid penalties. For example, delaying Social Security benefits can help you garner more returns. Alternatively, in the case of a 401(k) account, if you draw money before the age of 59.5, the IRS (Internal Revenue Services) will charge a 10% penalty on the distributions. That said, you cannot keep your money in a 401(k) account for an indefinite period. The IRS mandates retirees to take RMDs (Required Minimum Distributions) from specific retirement accounts at a certain age. As per the 2019 SECURE Act, RMDs from an IRA or a similar workplace retirement plan should be made at the age of 72. If you fail to take the RMD by December 31st of each year post the age of 72, the IRS will levy a penalty. The penalty can be as high as 50% of the sum not withdrawn on time. However, the CARES Act 2020 removed the RMD conditions for 2020 owing to the COVID-19 pandemic.

  7. Optimize tax management
  8. Taxes can consume a big part of your current income as well as your retirement savings. However, with smart retirement planning, it is possible to reduce your tax burden and draft a tax plan to ensure you pay minimum taxes. Your tax strategy for retirement essentially begins during the working years of your life. But these strategies change as you retire. When you are working, your earnings are relatively stable, and you can control your income sources. This is the time when you can reduce your tax burden by building your retirement savings and making contributions to your 401(k). In case you do not have an employer-sponsored plan, you can opt for an IRA (Individual Retirement Account) and contribute up to $6,000 in 2021, and $7,000 if you are above the age of 50. With a comprehensive retirement plan, you can also secure a tax-free savings corpus with a Roth IRA, back-door IRA, etc. That said, the stronger your control is over your finances, the more efficiently you can reduce your taxes during retirement. Moreover, retirement planning can help you maintain three competent income sources from a tax standpoint. These can include:

    • Tax-deferred sources like pension plans, Social Security benefits, pre-tax IRAs, etc.
    • Tax-free sources, such as Health Savings Accounts (HSAs), municipal bonds, etc.
    • Tax-efficient sources like index funds, etc.

  9. Create a comprehensive estate plan
  10. Estate planning is not only for the rich. Instead, it is a critical need for all retirement planners. However, there are numerous rules, tax laws, and other complications that must be accounted for to create a comprehensive estate plan. A good retirement plan can help you stay updated on your estate plan. Typically, estate planning includes all financial aspects. This comprises wills, trusts, assets, portfolios, life insurance policies, healthcare covers, inheritance, etc. As a prudent planner, it can be beneficial for you to review these aspects from time-to-time and ensure they align with your present goals and support your long-term retirement needs. With proper retirement planning, you can easily prepare your will, deploy lucrative investment tools, streamline foreign assets, keep a check on estate taxes and penalties, assign a power of attorney, set-up a trust, and ultimately make sure your estate is governed and distributed as per your desires when you are alive and even in your absence. Besides, a holistic estate plan helps to reduce the tax burden for your heirs.

To sum it up

Given the increasing life expectancy numbers, complex retirement account rules, and the demanding needs of the present, the need for comprehensive planning for a prosperous retirement is indisputable. It may be helpful to engage with a professional financial advisor to make sure you adequately secure the golden years of your life. You can use our free tool to compare up to 3 financial advisors and find the best advisor for you that meets your needs.

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