Six Retirement Strategies You Should Know About

Despite most people recognizing the need for retirement planning, nearly three-quarters of Americans agree that the country is facing a retirement crisis. This retirement crisis may be the result of several changes over the years. According to the Money Guide, a married woman who has just turned 65 has a 50% probability of living over the age of 90. Earlier, an average person retiring at 66 years would expect to live until the age of 79. This implies that a general retirement period would now last nearly 25 years compared to the earlier retirement period of 13 years. A good retirement nest egg consists of savings for two decades or more through effective retirement strategies that help ensure your money lasts longer. However, with low bond yields and the present coronavirus health crisis, you might need to rethink your retirement investment strategies to earn a double-digit return.

The current retirement crisis may also owe itself to the diminishing pension schemes in the U.S and insufficient Social Security funds. In 2020, the average Social Security paycheck was only $1,500, which is not enough to cover your retirement needs. Further, even after the inadequate income from pension and Social Security benefits, most retirees are not replacing their pensions with defined contribution plans like a 401(k) account. As per a 2019 Vanguard report on How America Saves, nearly 33% of the workforce does not have a savings vehicle of any kind.

So, to have the retirement that you have always wanted, you must create an infallible retirement plan with the right retirement strategies. Sound retirement strategies can help you create a financial cushion that will fund all your goals as well as any emergencies that may occur. A comfortable retirement requires planning from an early stage. Financial security in retirement comes from planning for your retirement in advance and being committed to your financial plan to build a large corpus over your working years.

Here are some of the top retirement strategies that you should know about:

1. Maximize your 401(k) plan contributions:

   401(k) retirement strategies work to your advantage. A 401(k) plan is one of the most popular retirement savings plans in America. More than 80 million people actively participate in a 401(k) plan, and over $5.7 trillion worth of assets are held within this retirement account, as reported by the American Benefits Council. Essentially, a 401(k) is an employer-sponsored retirement savings tool that allows you to make a defined contribution from your payroll. The employer also makes the same or a percentage of your 401(k) contribution. A prime reason for the growing popularity of a 401(k) account is the upfront tax advantages. You can make tax-free contributions that reduce your income tax liability for a specific year. Moreover, the growth in a 401(k) account is tax-free until the money withdrawal. These accounts do attract tax charges upon withdrawal of funds during retirement. However, since your retirement taxes will likely be much lower than it is now, you can maximize your 401(k) contributions to save a hefty sum for your golden years. For 2021, the maximum contribution limit for a 401(k) plan is $19,500. If you are 50 years or older, you can contribute a maximum of up to $26,000. In the case of joint contributions (employer and employee), the contribution limit is $58,000 for 2021. For those 50 years or above, the limit is $64,500 for 2021. Irrespective of whether you are beginning your career or are a seasoned retirement planner, it is best to maximize your 401(k) contributions to minimize your taxable income in the present by delaying taxes into the future when your tax bracket will most likely be lower. This way, you benefit from tax-free growth over the years, enabling you to create a large retirement corpus for a comfortable, secure, and fun retirement. Companies that offer a 401(k) plan also allow you to contribute to a Roth 401(k). The contribution limits for the Roth 401(k) are the same as a traditional 401(k) plan. A Roth 401(k) has similar features to a traditional 401(k) but with some added benefits. This account allows you to make after-tax contributions (in contrast to a 401(k)) up to a definite limit and provides tax-free distributions in retirement. A Roth 401(k) is best suited for you if you believe you will be in a higher tax bracket during retirement. In both a 401(k) and Roth 401(k) plan, your employer chooses your investment options. These generally comprise of bonds, stocks, and balanced-funds.

2. Consider investing in an IRA or Roth IRA:

   If you are concerned that you do not have access to a 401(k) plan and 401(k) retirement strategies, you can still contribute to an IRA (Individual Retirement Savings Account) or a Roth IRA. An IRA is a tax-advantaged account set up at an authorized financial institution, such as banks, trust companies, brokerage companies, federally insured credit unions, or any other institution authorized by the Internal Revenue Service (IRS). You make pre-tax contributions to an IRA, and your funds potentially grow tax-free until withdrawn. You can also get tax-free withdrawals from an IRA, subject to some conditions. Alternatively, investing in a Roth IRA is also a feasible choice. In a Roth IRA, you contribute after-tax dollars, and your funds grow tax-free in the account. At the time of withdrawal, you are not liable to pay any taxes because you paid them while contributing. Both IRAs give you several investment options to choose from as per your risk tolerance and financial goals. You can choose to open an IRA if you expect your retirement tax bracket to be lower than the present one. However, if you determine that your retirement taxes may be higher than now, it is beneficial to opt for a Roth IRA. The annual contribution cap for 2021 is $6,000. If you are aged 50 or above, the contribution limit is $7,000. These are collective limits for all IRA accounts in your name. That said, you also have an option to rollover your 401(k) plan into an IRA to benefit from the wide investment choices, lesser rules, lower taxes during retirement, and lower fees and costs.

3. Create a sound retirement portfolio:

   As per experts, you require nearly 60-80% of your pre-retirement monthly income for a comfortable retirement. If you plan to retire early, you will need a much larger retirement corpus. Moreover, given the rising rate of inflation and steeply climbing medical expenses, you need effective retirement investment strategies to bridge the income gap during retirement. One effective way to do so is by creating a portfolio that offers lucrative returns and simultaneously aligns with your risk tolerance and financial goals. Every retirement portfolio is different and depends on your investment horizon, risk appetite, and retirement goals. However, irrespective of the type of portfolio, it is advisable to invest in different assets to ensure optimal diversification and returns for a safe retirement. You can consider creating an investment portfolio that holds securities across mutual funds, an Index Fund, certificates of deposits (CDs), and individual stocks and bonds. You can rent out a property to generate a good income stream for retirement. The objective is to create a well-balanced portfolio that can generate significant returns as per your risk preference. For instance, if you are a risk-averse investor, you could consider including safer assets like bonds, but currently with interest rates so low bonds may not get you to your goal. However, if you have many years left to retire and can afford to take a little more risk, we recommend investing in low risk stocks. Building a global portfolio of very high quality companies with strong balance sheets and exceptional management teams will help you reach your retirement goal while minimizing risk.

4. Plan for healthcare expenses in retirement:

   Healthcare expenses will consume a large share of your retirement income unless you plan for them effectively and early on in life. As per research by Fidelity, an average 65-year-old couple retiring in 2021 will need $300,000 (after tax and as per the present dollar value) to cover their medical expenses during retirement. This number does not account for long-term care expenses, which a 65-year-old person has a 70% chance of requiring, as per the U.S. Department of Health and Human Services. Sound retirement strategies can help you invest effectively in the present to keep your healthcare costs under control and also get significant tax benefits. The first step is to be careful with the Medicare plan you choose. Medicare is a federal health insurance program that pays for your hospital bills and medical care if you are aged 65 years and above. Anyone with a disablement or a health condition like permanent kidney failure can also apply for Medicare benefits. However, the Medicare program comprises four parts – A, B, C, and D. Each of these parts has its coverage. Where Plan A and B come at low premiums, their coverage is also highly restricted. Hence, it is best to opt for Medicare Plan C (Medicare Advantage plan), even if you have to pay a higher premium for it. If you cannot afford the high premiums of Plan C, you can supplement Part A and B with a Medigap Plan (Plan D) that covers a variety of out-of-pocket medical charges. Apart from being wise about Medicare Plans during retirement, you can use other retirement investment strategies. Consider investing in an HSA (Health Savings Account). An HSA allows you to make tax-deductible contributions each year. For 2021, you can pay up to $3,600 for self-only HSA. For a family, the upper limit is $7,200. These limits include both employee and employer contributions. However, if you are above the age of 55, you can contribute $1,000 per year over the maximum limit. You can invest in an HSA sponsored by your employer or a separate plan altogether. An HSA allows tax-deductible contributions, tax-deferred growth of funds, and tax-free withdrawals for qualified medical expenses. Apart from this, it is also good to invest in long-term care insurance that can support you if age, injury, illness, or cognitive loss makes it hard for you to take care of yourself.

5. Develop a strategic withdrawal plan for your retirement savings accounts:

   Each retirement saving account, like an IRA, a 401(k), Roth IRA, etc., has its withdrawal terms and conditions. You can withdraw funds from your IRA or 401(k) only after the age of 59.5. Any withdrawals before this age will incur a 10% penalty along with any applicable taxes. However, you also cannot leave your funds lying in these accounts for a lifetime, as this will result in RMD penalties. Required Minimum Distributions (or RMDs) refers to the amount one must take out of their employer-sponsored retirement plan such as an IRA or 401(k) to avoid tax consequences. RMDs commence by April 1 of the year you turn 72 years. If you do not take your RMDs, you could end up paying penalties (up to 50% of the RMD shortfall). Alternatively, you can withdraw more than your RMD, provided you are above the age of 59.5. You also have to be careful of the Social Security withdrawals. You can start withdrawing your Social Security benefits from the age of 62. However, delaying Social Security withdrawals can improve your returns. An average retiree can add more than 50% to the Social Security cheque by delaying their withdrawals until the age of 70. It is recommended that you create withdrawal retirement strategies keeping these factors in mind. The objective is to ensure you pay minimum withdrawal taxes and penalties while also maximizing your returns. A foolproof withdrawal plan will also make sure you do not outlive your savings. As per experts, you should only take 3-5% of your funds in a year to not outlive your savings. You can achieve this by creating a budget, limiting your expenses, and being strategic about aligning your withdrawals with your needs.

6. Have a comprehensive tax plan:

   Taxes affect your retirement savings in the present and even after you retire. In the present, you pay taxes on your income, portfolio earnings, and retirement contributions to accounts like a Roth IRA. Further, when you retire, your taxes are dependent on where you live, how you withdraw your funds, employment status, etc. Effective retirement strategies allow you to plan effectively and minimize taxes in the present and even during retirement. For instance, you can reduce taxes in the present by contributing towards an HSA and retirement savings accounts like an IRA or a 401(k). Inversely, if you feel your retirement tax bracket will be higher, you can reduce your taxes by contributing to a Roth IRA or a Roth 401(k). You may consider shifting to a tax-friendly state in the U.S to spend your retired years. Moreover, effectively structuring your retirement income from different sources (such as retirement accounts, Social Security benefits, pension, etc.) can reduce your taxes in the present, as well as during your retired years.

To summarize

Apart from following these six retirement strategies, it is important that you keep a long-term view and start planning for retirement early in life to benefit from the power of compounding. If you begin planning for your retirement at a later stage in life or if you are just about to start, you can always take advantage of these retirement strategies to ensure you make the most of the opportunities available. The ultimate objective is to create a solid retirement financial cushion and use it smartly and efficiently to minimize taxes and ensure your savings last for your lifetime. If you find retirement planning intimidating or complex, you can always consult a professional financial advisor to help you create a sound plan for a comfortable and secure retirement.

To further understand the most suitable retirement strategies that are suited to your financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.