Retiring in a Volatile Market: Control What You Can

Retirement during a volatile market is unsettling. Whether you are on the cusp or have already made the leap, a market downturn’s impact on your savings will be felt now and potentially for years to come. How do you keep your plan on track and your desired lifestyle in place?

If you can’t control income, you’ll need to control expenses. And that means budgeting and taxes. You can deploy tactics and strategies to optimize these factors no matter what stage you are in on your retirement journey.

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Mistakes are Expensive: A New Generation Embraces Financial Planning at the Mid-Stage

Financial planning has evolved beyond investing assets. The old model limited comprehensive planning to a wealthy few with high levels of manageable assets. For many people, their first engagement with a financial advisor was when they needed to create a retirement income plan.

The new fee-only model allows financial advisors with experience and knowledge to assist across the landscape of financial life. And a new generation with very different goals is taking advantage of all the elements to create plans that work for them.

  • Retire early, create “work optional,” or work part-time
  • Save for kids’ college
  • Enjoy life now – and save for the future
  • Invest in a second home or rental property

This generation has created high income and realizes they do not have to wait another 20 or 30 years to have the lifestyle they truly want. They understand that financial planning is all about tools, tactics, and strategies that can be deployed in tandem to help them keep more of what they make and actively grow their wealth.

It’s about understanding the options, making the right choices for a highly individual path forward, and solving problems.

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Is a Self-Directed 401(k) Right for You?

Contributing regularly to a 401(k) plan is the foundation of retirement savings for many people. You determine the percentage of each paycheck you want to contribute, and you either select a target-date fund based on your expected year of retirement or pick from a relatively limited selection of mutual funds.

But what if you had more control? Suppose you’re a do-it-yourselfer in other areas of your investment plan. In that case, the limited options in a 401(k) can be very constraining – especially when it is often your most significant investment pool. If you prefer to have someone else manage your investments, you may be able to find an advisor that will make recommendations inside your plan, but again, they will be limited.

If you have multiple plans from different employers or a concentrated stock position, it can be difficult to line your 401(k) investing up with your risk tolerance and overall financial picture.

There is another option for investors whose employers offer the ability to self-direct your 401(k).

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It’s Not About Inflation, It’s About Volatility

Inflation is driving the headlines and wreaking havoc on budgets. But for long-term investors – mostly everyone – short-term inflation isn’t the biggest risk to financial plans. Volatility is. It’s being fueled by the Federal Reserve’s efforts to balance bringing down inflation with keeping the economy out of recession.

The Fed is raising the key short-term interest rate to slow economic growth. This makes money more expensive, which you know first-hand if you have a credit card account or you’ve tried to buy a home or refinance an existing mortgage.

The reason this is generating volatility is that markets hate uncertainty. Markets are forward-looking and attempt to price into stocks and bonds today, things that will likely happen in the future. The issue is that the Federal Reserve can’t tell the markets in advance exactly how much and when they will raise interest rates because it’s a delicate task depending on a lot of ever-changing economic data. And let’s be honest, probably some guesswork.

Fed Chairman Powell, and the Fed governors, have been examples of message discipline. They’ve been doing everything they can to reassure markets. But while markets may be rational, investors aren’t.

So, as an investor, how do you cope with volatility? We have some pointers.

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Financial Fitness – Mid-Year 2022 Check-In

Summer will officially be here soon, but before kids get out of school and all the vacation planning you did begins to come to fruition, it can be a good idea to take stock of your financial picture and make updates where necessary. Below are a few things you should consider to keep your plan in shape. We’ve organized them by life stage, from having small kids to being closer to retirement. We’ve also included charitable giving, as that happens at every stage.

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Tax Planning For Retirement: The Long Game

Tax planning for retirement is different from the strategies you deploy to minimize taxes while working. You’ll be using your investments for income, and the way they are taxed is different depending on the type of account you hold assets in. In addition, at age 72, you’ll begin taking required minimum distributions from your tax-deferred accounts, and these amounts can quickly push you into higher tax brackets.
Does it matter? According to research done by Morningstar, tax planning can add up to 4% to retirement income.

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Avoiding the Medicare Surcharge: What You Need to Know About IRMAA

Reaching Medicare eligibility solves one of the most expensive retirement problems for many retirees: healthcare. Once you’ve made the adjustment and selected all the various Parts and plans, the convenience and affordability of Medicare are one of the benefits of turning 65. However, Medicare is means-tested. If you make over a certain amount of income, surcharges on the Medicare Part B and Part B premiums kick in.

Making it a little more painful, it’s not a flat increase. The surcharges go up as incomes get higher and at the highest level can amount to hundreds of dollars a month in additional costs.

The key to avoiding or minimizing the surcharge is to control income levels. In early retirement, this may be reasonably easy to do. But if you’ve amassed a retirement nest egg in a traditional tax-deferred 401(k) or IRA account, once you hit 72 and required minimum distributions (RMDs) kick in, you can find yourself with a very hefty bill.

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Cash Flow Planning When You’re Thinking About Retirement

Pre-retirement planning is one of the most challenging stages of your financial journey. You’re still fully engaged in your career, but you’re also looking ahead to a not-distant future when your life and your source of income will radically change.

Retirement means you’ll be making choices about where you want to live, what your retired life will look like, if it will include work, travel, charity, a hobby – all the things you always wished you had time for will now be yours to choose from.

But you’re also going to need to ensure you have enough saved to fund the retirement you want, and that the income stream you’ll be able to generate from all your sources of income in retirement is tax-efficient.

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Planning for 2022: The IRS Has Increased Several Key Deductions and Exemptions

The spike in inflation we’ve seen this year has impacts beyond having to pay more for goods and services. The IRS uses consumer price inflation (CPI) to determine certain increases to exemptions and deductions for federal tax purposes. These are automatic and calculated from the rise in CPI. That means that the increased inflation this year may actually end up saving you money. While the changes are for 2022 and you won’t be paying the associated taxes until 2023, it’s a good idea to be aware of the new limits.

You may be able to make changes as you go that can help you maximize the benefit. For example, the amounts for Flexible Spending Accounts (FSAs) and the commuter benefit increased, so you may want to have more taken out of your paycheck. This saves you money by paying with pre-tax dollars.

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Small Business Retirement Plans — SIMPLE, SEP-IRA and SOLO 401(k)

Small companies shouldn’t forgo retirement savings just because a 401(k) plan can be expensive to set up and maintain. There are options specifically for smaller businesses: a Savings Incentive Match Plan for Employees (SIMPLE) plan, a Simplified Employee Pension (SEP) plan, and a SOLO 401 (k).

If your company has more employees than just you and your spouse, you may want to consider either a SIMPLE IRA or a SEP-IRA. The plans have similarities and a few differences that must be considered when deciding between the two. Knowing the details of each type can help you decide which is the best choice for you, or which to offer your employees if you own a small business.

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