The Basics of Retirement Planning
It’s never too early to start planning for retirement.
The benefits of an early start are significant, and the rewards far outweigh the costs. However, many people neglect to save for retirement, leaving them vulnerable to financial stress during their senior years.
Whether you are planning your retirement or looking for ways to enhance your existing plan, we’re here to provide you with valuable insights to help you achieve your retirement goals.
Read More: How to Stick to Your Financial Goals
Understand Your Retirement Goals
What’s your plan for retirement? How will you spend your time?
This is the starting point for creating a plan that caters to your needs.
At Triune, we encourage our clients to sit down and intentionally consider their transition to what’s next. Rather than a life of pure leisure, we believe in creating a life of purpose. We see retirement as a time of your life that’s “work optional.”
Figure Out How Much You’ll Need
Determining how much you’ll need for retirement can seem like a daunting task. Many people take the approach of estimating how much you’ll need to save for retirement as a whole, but we take a different approach.
Instead, we determine a relevant number based on your anticipated lifestyle and healthcare needs. For instance, if (in today’s dollars) you live on $8,000/month + retire before medicare kicks in, we can determine what maintaining a similar lifestyle may look like (plus other goals like travel, etc.). We’ll factor in assumptions for inflation and investment returns, and then work backwards to a savings rate. Your savings rate will vary depending upon when you’re starting and what your goals are. That said, the academic world suggests saving 15% of your gross income, starting early, in order to “be on-track” for sustaining your lifestyle in retirement.
Maximize Your Retirement Savings
Regardless of what your retirement plan is, we encourage our clients to maximize retirement savings as much as they can.
Here are ways you can do that (in order of importance):
Max-out your employer match: Let’s say your employer matches 50% of your contributions to your 401(k), up to 10 percent of your total income. If you make $100,000, that’s $5,000 of free money going toward your retirement savings each year. That’s the only free lunch in town! Be sure your 401k or 403b contribution rate allows you to receive the maximum match from your employer.
Read More: Why You Need a Second Opinion Service for Your 401(k) Plan
Max-out your Roth IRA: If you don’t have a Roth IRA, it may be worth looking into getting one. For those of you who have one, be sure to max it out every year. Check with your financial advisor to see how much you can put in, as the limit might change depending on your age, tax filing status, and income. In 2023, you can put in $6,500 if you’re under 50 and $7,500 if you’re over 50. In order to take full advantage of the allowable maximum contribution, single tax filers must have a modified adjusted gross income (MAGI) of less than $138,000 in 2023. If married and filing jointly, your MAGI must be less than $218,000 in 2023.
Max-out your 401(k) to the IRS limit: Again, the amount you can input into this account will depend on any recent changes to regulations around this and your age. In 2023, you can put $23,500 into your 401(k) if you’re under age 50, and $30,000 if you’re 50 or older. Your employer matching contributions do NOT count against this maximum, so think of this is the most YOU can put into your 401k or 403b via payroll deduction.
Max-out your Health Savings Account (HSA): If you’re covered by a high deductible health insurance plan, you qualify for an HSA. This is an account you can use to pay for qualified health expenses with tax-free dollars (in other words, you get a federal income tax deduction for your contribution amount!). In 2023, you can contribute up to $3,850 for employee only plans, and up to $7,750 for married couples and/or family coverage. Those who are over the age of 55 can contribute an additional $1,000.
Fund a taxable brokerage account: Once you’ve maxed-out (or contributed the amount your Financial Life Plan needs in order to be on track) the above accounts for retirement, then consider funding a taxable brokerage account. Unlike IRAs, 401k’s, 403b’s and HSAs, there is no tax deduction for contributions, and it doesn’t come out tax free like Roth accounts. But, the gains in this account are taxed at capital gains rates (which are lower than current federal income tax rates so long as you hold your underlying assets for > one year). Realized gains when you sell investments held less than one year in a taxable brokerage account are taxed at ordinary income rates.
If you follow the steps above, you’re likely well on your way towards a comfortable retirement.
Evaluate Your Investment Options
There’s a lot of advice out there about how to go about investing. We work with our clients to understand what works for them and their Financial Life Plan.
When it comes to assessing your investment options, we recommend the following principles:
Broad and global diversification. Diversifying your investments is an excellent way to reduce business risk. The more companies you own in a portfolio, the less impact any single one company can have on your returns. We recommend a widely diversified portfolio for our clients so that they can “own the market”, rather than betting on a single stock, or a single sector (Tech, Healthcare, etc.). Additionally, it’s important to think globally. The US controls ~54% of all corporate capital. This means that ~46% of all available investment opportunities for stock ownership are outside of the US. Having a portfolio that helps you capture ownership of the global markets makes sense.
Allocate based on your personal goals and timelines. We recommend using the “Three Bucket Approach” when investing. This helps you to identify which of your goals/needs occur in the short, mid and long-term. The shorter your time horizon, the less risk and volatility you’d want in the portfolio. See the graphic below: this demonstrates the “time horizons” we assign to each bucket, and the general characteristics investments in that bucket should have.
Align with your risk tolerance. How much risk (defined as “volatility” in your portfolio) are you willing to take? There’s a spectrum of risk tolerance, and it’s important to select the option that most aligns with you.
Rely on academic, market-based research. We look to the academic research to understand and implement the financial science of reliable investing, rather than picking the “flavor of the month” touted by fund managers and Wall Street.
The three bucket approach to saving includes goals that are short term (0-2 years), mid-term (3-4 years), and long-term (5+ years).
Plan for Taxation Issues
How will taxes affect your retirement income? There are a few different things to keep in mind as you consider this. Some accounts have different tax implications, and there are some strategies you can employ to avoid major (bad) surprises caused by taxes.
We’ll start by breaking down the tax implications for these accounts.
Traditional IRA Tax Implications
With a traditional IRA, contributions are tax deductible (often called “pre-tax” because these contributions directly lower your taxable income, thereby allowing you to NOT pay income taxes on those dollars). Because you get this tax benefit up front, the IRS taxes withdrawals from these accounts at ordinary income tax rates. If you withdraw funds before age 59 1/2, the IRS also applies a 10% penalty. The benefit of investing in a Traditional IRA is the immediate tax deduction, but investors must be aware that it’s all taxable when you take it out.
Roth IRA Tax Implications
With a Roth IRA, contributions are not tax deductible (often called “after-tax” or “post-tax” because you’ll still pay income tax on that earned income). However, withdrawals from a Roth IRA are tax free! There are some rules (account must have been opened at least 5 years ago, and you must be age 59.5 or older) to qualify for this tax free distribution of funds. However, there are also some IRS-approved loopholes that make Roth IRAs (but not necessarily Roth 401k plans) uniquely flexible.
Taxable Brokerage Account Tax Implications
Taxable brokerage accounts are subject to federal and state (where applicable) capital gains taxes on the earnings generated by the investment. There is no tax deduction for contributions.
Capital gains taxes are split into two categories… short-term and long-term. Short-term capital gains are simply the gains that have occurred in an investment held for less than one year. Long-term capital gains are gains that have occurred in an investment held for more than one year. At this time, short-term capital gains tax rates are the same as ordinary income rates, and long-term capital gains rates are lower under current tax law.
Because of this, it is generally advisable that assets held in a brokerage account should be held for more than one year to take advantage of the lower long-term capital gains tax rate. Taxes are only paid on realized gains, but they’re owed regardless of whether you actually distributed money out of the account or not.
Tax-Loss Harvesting
Tax-loss harvesting is a tax strategy that involves intentionally selling investments at a loss in order to offset capital gains or income from other investments. This strategy can be used to reduce the total amount of taxes owed on investments that have appreciated or generated income during the year.
Additionally, tax-loss harvesting can be used to reset your cost basis and purchase new investment shares of a similar stock or fund at current market value and use any losses towards future capital gains taxes. Ultimately, tax-loss harvesting can help investors optimize their overall tax bill and maximize potential investment returns.
This is something you want to consider thoughtfully with the help of your CPA.
Before making any big changes to your retirement planning, be sure to check with your financial advisor.
And remember, we’re here to help.
About Triune Financial Partners
Triune Financial Partners is committed to empowering people with life-changing financial counsel. Triune is an independent firm that values clarity, simplicity, and transparency. We're a fiduciary, which means we always put our clients' interests first. In addition to Financial Life Planning for individuals and families, we also serve 100+ businesses, churches and nonprofits to craft powerful 401(k) and 403(b) plans for their organizations. Whether you're working with one of our Financial Life Planners or setting up a 401(k) plan for your organization, Triune is here to help you thrive financially.
Interested in working with us? Get in touch here.