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Healthy Cells is a local health magazine with most of the articles written by local professionals. People love to read about healthcare from their local health professionals. Each month includes a wide variety of articles on various topics.
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Investment Planning Throughout Retirement

Investment planning during retirement is not the same as investing for retirement and, in many ways, is more complicated.


    Your working years are your saving years. With luck, your income increases from year to year as you receive promotions and pay raises; those increases offer some protection against rising costs caused by inflation. While you’re working, your retirement objective generally is to grow retirement savings as much as possible, and investments that offer higher potential reward in exchange for greater potential for volatility or loss are often the focus for those retirement savings.
    When you retire, on the other hand, spending rather than saving becomes your focus. Your sources of income may include Social Security, employer pensions, personal savings and assets, and perhaps some income from working part-time. Typically, a retiree’s objective is to derive sufficient income to maintain a chosen lifestyle and to make assets last as long as necessary.
   
    This can be a tricky balancing act. Uncertainty abounds — you don’t know how long you’ll live or whether rates of return will meet your expectations. If your income is fixed, inflation could erode its purchasing power over time, which may cause you to invade principal to meet day-to-day expenses. Or, your retirement plan may require that you make minimum withdrawals in excess of your needs, depleting your resources and triggering taxes unnecessarily. Further, your ability to tolerate risk is lessened — you have less time to recover from losses, and you may feel less secure about your finances in general.
    How, then, should you manage your investments during retirement given the above complications? The answer is different for everyone. You should tailor your plans to your own unique circumstances, and you may want to consult a financial planning professional for advice.
    The following discusses two important factors you should consider: (1) withdrawing income from retirement assets, and (2) balancing safety with growth.

Choosing a sustainable withdrawal rate
    A key factor that determines whether your assets will last for your entire lifetime is the rate at which you withdraw funds. The more you withdraw, the greater the likelihood you’ll exhaust your resources too soon. On the other hand, if you withdraw too little, you may have to struggle to meet expenses; also, you could end up with assets in your estate, part of which may go to the government in taxes. It is vital that you estimate an appropriate withdrawal rate for your circumstances, and determine whether you should adjust your lifestyle or estate plan.
    Your withdrawal rate is typically expressed as a percentage of your overall assets, even though withdrawals may represent earnings, principal, or some combination of the two. For example, if you have $700,000 in assets and decide a four-percent withdrawal rate is appropriate, the portfolio would need to earn $28,000 a year if you intend to withdraw only earnings; alternatively, you might set it up to earn $14,000 in interest and take the remaining $14,000 from the principal. An appropriate and sustainable withdrawal rate depends on many factors, including the value of your current assets, your expected rate of return, your life expectancy, your risk tolerance, whether you adjust for inflation, how much your expenses are expected to be, and whether you want some assets left over for your heirs.
    Fortunately, you don’t have to make a wild guess. Studies have tackled this issue, resulting in the creation of tables and calculators that can provide you with a range of rates that have some probability of success. However, you’ll probably need some expert help to ensure that this important decision is made carefully. A technologically savvy investment advisor will have software tools available to do advanced calculations and stress test plans for success.

Withdrawing first from taxable, tax-deferred, or tax-free accounts
    Many retirees have assets in various types of accounts — taxable, tax-deferred (e.g., traditional IRAs), and tax-free (e.g., Roth IRAs). Given a choice, which type of account should you withdraw from first? The answer — it depends.
    Roth IRA earnings are generally free from federal income tax if certain conditions are met, but may not be free from state income tax.
    Retirees who will not have an estate
For retirees who do not intend to leave assets to beneficiaries, the answer is simple in theory: withdraw money from a taxable account first, then a tax-deferred account, and lastly, a tax-free account. This will provide for the greatest growth potential due to the power of compounding.
    In practice, however, your choices, to some extent, may be directed by tax rules. Retirement accounts, other than Roth IRAs, have minimum withdrawal requirements. In general, you must begin withdrawing from these accounts by April 1 of the year following the year you turn age 70½. Failure to do so can result in a 50-percent excise tax imposed on the amount by which the required minimum distribution exceeds the distribution you actually take.
    Next month, we will examine withdrawal strategies for those with an estate and wrap up this topic with principles for balancing safety and growth.
   
    Krista McBeath is a chartered financial consultant, a licensed insurance advisor, a fiduciary, and an experienced tax advisor who specializes in financial planning, investments, taxes and insurance. McBeath Financial Group’s unique Technology Empowered Advisor Method (TEAM) is a financial planning process that integrates the personal touch of a relationship-based advisor with high-tech software tools to assess a client’s current portfolio and then analyze options from a variety of financial vehicles. Phone 309-808-2224, or email This email address is being protected from spambots. You need JavaScript enabled to view it. for appointment information.

    Advisory services are offered through McBeath Financial Group and Motiv8 Investments, LLC. McBeath Financial Group and Motiv8 Investments, LLC. are not affiliated. Insurance products and services are offered through McBeath Tax and Financial Services, LLC. McBeath Financial Group and McBeath Tax and Financial Services, LLC. are affiliated.


 

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