To effectively navigate the inevitable economic downturns, retirees should adopt a more disciplined and cautious approach during favorable times.
Similar to the changing seasons, we can anticipate the arrival of another recession, even though the exact timing remains uncertain. Just like fixing a leak in your roof before the rain starts, it’s important to take proactive measures in advance. We have witnessed the repercussions of previous market crashes, such as the 2008 financial crisis, and retirees may harbor concerns about experiencing a similar event at a stage in life when time is no longer on their side.
For retirees who are no longer employed, their risk tolerance tends to decrease as they transition from the growth stage to the distribution stage of their retirement assets. Preserving wealth and generating income become paramount objectives, and protecting your financial well-being is crucial during a storm.
Humans often assume that if a certain strategy worked during prosperous times, it would continue to work indefinitely. The previous year’s events, however, reminded us that this is not always the case. The financial advisor and investment strategy that successfully guided you to retirement may no longer be suitable, as your goals and circumstances have likely evolved in retirement.
Since 2009, the S&P 500 has experienced consistent growth for nearly 14 years. We cannot make the assumption the next decade to mirror the previous one. 2022 served as a challenging period for stocks and bonds, underscoring that markets do not ascend indefinitely.
It is essential to tailor your retirement plan to your current needs in light of this. Let’s explore some vital considerations and strategies for retirement and tax planning.
#1 Assessing Risk: How much risk are you willing to take, and what is your current risk exposure within your retirement plan?
Determining your risk tolerance at this stage of life is of utmost importance, and avoiding excessive risks that surpass your comfort level is equally critical. If your losses in 2022 exceeded your comfort level, it might indicate an excessive risk level. Most retirees no longer find high-risk investments suitable for their circumstances.
#2 Evaluating Fees: How much are you paying in fees within your retirement plan?
Regularly reviewing and optimizing your retirement plan is essential, considering your desired risk level and minimizing fees. Fees can significantly impact your plan’s performance over time, so examining both disclosed and hidden fees is crucial. Mutual funds and variable annuities often entail higher fees, making it advisable to seek a second opinion to ensure your fees are reasonable. Furthermore, it is important to evaluate the fees charged by your financial advisor.
#3 Minimizing Taxes: How can you reduce your tax burden during retirement?
Taxes can be a substantial expense throughout your lifetime, especially if you possess a sizable IRA. Considering the expiration of current tax cuts in 2026, there is a limited time to take advantage of lower tax rates available today. With an IRA, you can choose between paying taxes now or deferring them until later, and opting for lower overall taxes seems preferable.
Most individuals would choose to pay taxes on smaller amounts. Consequently, a Roth IRA could be an advantageous strategy. Consider partial Roth IRA conversions annually in collaboration with your accountant if you possess an IRA. This approach accounts for the anticipated increase in tax rates by 2026, protects surviving spouses from potential higher taxes, and helps alleviate tax burdens for your children inheriting your IRA.
A dynasty trust could be worth considering to safeguard the assets you leave to your children. From a tax perspective, directing Roth IRAs to these trusts instead of regular IRAs is advisable, irrespective of whether you employ a trust-based estate plan.
#4 Managing Expenses: How can you reduce your retirement expenses?
Here are several approaches to cutting expenses in retirement:
- Consider downsizing your home and simplifying your life.
- Evaluate the necessity of owning a second home. Services like Airbnb offer the option to rent properties worldwide, promoting simplicity.
- Assess whether a second car is truly essential. Rideshare platforms like Uber may offer a viable alternative.
- Eliminate your home phone and rely solely on a cell phone.
- Explore internet-based alternatives to traditional cable television to reduce costs.
By living below your means, you allowed your savings to grow over time, ultimately accumulating substantial wealth.
#5 Ensuring Adequate Protection: Are you appropriately protected during retirement, considering the associated costs?
Review your long-term care, umbrella liability insurance, and life insurance policies to ensure optimal coverage at reasonable prices. An affordable umbrella liability insurance policy to safeguard against potential lawsuits. You can add this to your homeowner’s or auto insurance policy. Additionally, if you have owned a life insurance policy for over a decade and meet the health criteria, upgrading to a newer one could reduce costs. With increased life expectancy, many modern insurance policies offer lower premiums.
#6 Getting an estate planning attorney: Should you hire one?
If you have children and grandchildren, safeguarding family assets from divorces, lawsuits, and creditors cannot be overstated. A skilled estate planning attorney can establish a dynasty revocable trust to protect the assets you leave behind. Additionally, updating your health care surrogate, durable power of attorney, and living will ensure your medical and financial wishes are respected.
By implementing these strategies, you can embark on a path toward a secure retirement. The ultimate goal is to fortify yourself against potential losses resulting from economic downturns. Prepare for winter during summer – repair your roof before the next storm arrives.