Watch Out for These Planning Mistakes
Posted on Monday, July 02, 2018 Share
Retirement planning is a formidable task. First, you have to accumulate sufficient funds for retirement. Then, you need to make withdrawals sufficient to support your desired lifestyle without depleting those assets before you die.
To increase your chances of meeting those goals, avoid these mistakes:
Reducing your exposure to stocks too significantly. You don't want to run the risk that a major stock market decline will wipe out much of your retirement nest egg. However, if you keep too little invested in stocks, you run the risk that your portfolio won't keep pace with inflation, forcing you to reduce withdrawals in the later years of your retirement. Even though you are retired, your time horizon for investing is probably still long -- many retirements will last at least 20 to 30 years. Thus, you still want to maintain a substantial investment in equities.
Not considering all assets in your asset allocation decisions. When reviewing your asset allocation between stocks and fixed-income investments, don't overlook Social Security and defined-benefit pension benefits. Those income streams are a form of fixed-income investment and may impact how much you allocate to stocks.
Making withdrawals based on a percentage of your pre-retirement income. Don't just assume you'll need a certain percentage of your pre-retirement income, perhaps 70% or 80%, without carefully analyzing your retirement plans. If you retire with investments sufficient to fund 70% of your pre-retirement income, but then find you need 90% to 100% to support your desired lifestyle, you're probably going to have to make drastic changes to your plans or go back to work for a while. Better to review your expenses and plans before retirement to make sure you can retire to your desired lifestyle.
Not calculating your tax bracket. It is typically assumed that income tax brackets will be lower after retirement due to decreasing income. However, if a substantial portion of your retirement income is coming from defined-benefit pensions, 401(k) plan withdrawals, and withdrawals from deductible individual retirement accounts (IRAs), much of your income will be taxed at ordinary income tax rates. You may find that your tax rate is the same or even higher than before retirement. That can have a significant impact on the amount you have left to spend.
Not carefully assessing how to make withdrawals from retirement assets. Many retirees have several types of retirement vehicles, including taxable investments, 401(k) plans, and deductible and Roth IRAs. The order in which you deduct those funds can have a substantial impact on how long they last. Assess all tax considerations before deciding how to withdraw those funds.
Posted in Tax Topics For Individuals
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