3 Key Strategies So You Don’t Outlive Your Money

January 03, 2020

Think back to the last time you tried to put together a jigsaw puzzle.

Yes, a jigsaw puzzle.

Did you feel overwhelmed when you first emptied the box onto the table?

Hundreds, maybe even thousands of pieces staring you in the face, each with a rounded, knobby edge revealing a mere hint of the bigger picture.

On its own, each puzzle piece makes little sense.

But, over time—that piece fits there, those two pieces match up here—and, slowly but surely, the image on the cover of the box begins to emerge and eventually, you put the final piece in place.

This is a lot like retirement planning. There are a lot of pieces that have to fit together and it can feel overwhelming at first. If even one piece is out of place, it can compromise the overall plan and you could end up running your accounts dry before you're through enjoying all that retirement has to offer.

But, tackling each step one-by-one can help you prepare.

Here are three important strategies you can use right now to assemble your retirement puzzle.

1.) Find the proper investment mix

One of the best ways to protect your savings over the long haul is to be well diversified; that is, having the correct mix of stocks and bonds (and other investments, if applicable) that align with your goals, risk tolerance, timeline and income needs.

But there’s a fine line here: owning too much stock can expose your money to too much risk, while not having enough stock may leave you vulnerable to inflation.

Consider this: Assuming a 2.5% average annual inflation rate, a car that costs $25,000 today will cost just under $41,000 in 20 years.

Historically, over the long term, stocks have been the best investment for consistently beating inflation. And, considering we’re all living longer lives – once you turn 65, statistics say you’re going to live at least another 20 years [1] – so becoming overly conservative too early with your investment mix could be bad for your retirement lifestyle.

While bonds are the equivalent of a car’s ‘shock absorbers,’ think of stocks as the engine; sometimes you need to go fast (which is riskier), while other times you need to go slow (which is safer).

When you drive someplace, if you want to make it to your destination, you need to achieve an ideal mix of fast and slow.

2.) Plan your taxes in advance!

Do you realize that different types of retirement and investment accounts have different tax structures?

These differences (and each has pros and cons) are something you need to be thinking about now – not just when you start making withdrawals once you retire.

For instance, with an account like a 401(k), you pay ordinary income taxes on withdrawals. But with a taxable investment account? You pay the long-term or short-term capital gains tax rate when selling gains, which has historically been much more favorable than the ordinary income tax rate. And, yet, withdrawals in a Roth-style account come out completely tax-free, assuming you meet certain criteria.

Why does all this matter?

Two reasons. You can start saving now in different types of accounts to diversify your tax burden once you retire, and then, when the time comes, you can take advantage of a tax planning ‘sweet spot.’

This sweet spot lies between ages 59½ and 72: it’s the span of time between the age at which most retirement accounts allow you to start taking withdrawals penalty free and the age at which the IRS legally requires you to take distributions.

In theory, if you retire at some point during this 12 1/2 year period, you should be in a lower tax bracket, making it potentially advantageous to execute a couple of tax moves. For example:

Completing a Roth conversion, i.e., transferring money from a traditional IRA to a Roth IRA. You’ll pay taxes on any money you convert, but then you’ll get tax-free growth down the road. (Plus, Roth IRAs don’t come with required distributions.)
Selling gains in stocks or taxable accounts. If your adjusted gross income is low enough, you could pay a 0% tax rate on long-term gains.

3.) Strategize your distributions

Once upon a time, it was said that you could withdraw 4% of your retirement savings every year (with adjustments for inflation) and there’d be a good chance you wouldn’t outlive your money.

But this “4% Rule” was popularized in the early 1990s when stocks were returning 10% a year, and a 10-year Treasury bond was yielding 5% (or more) a year (compare that to today’s 2.4%).[2]

And this rule doesn’t even account for fast-rising healthcare inflation.

For today’s retirement, don’t become dependent on a blanket rule.

Instead, your withdrawal strategy should be unique to you and include the tax considerations of all your various investments and income streams – Social Security, 401(k)s, IRAs, taxable brokerage accounts, pensions, real estate, etc.

Unfortunately, if just one component of your retirement plan is out of place, there’s a chance you’ll fall short of your goals.

It would be like your puzzle missing that final, center piece.

Set up a free consultation with one of our retirement advisors so you can start preparing for a rich and meaningful retirement. We'll help you get a better look at your overall puzzle, including strategic approaches to your particular situation, one piece at a time.

[1] https://www.forbes.com/sites/simonmoore/2018/04/24/how-long-will-your-retirement-last/#3c8c905a7472

[2] https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

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