TIMONIUM, MD / ACCESSWIRE / August 23, 2021 / Save, grow, generate income, and pay little in income taxes is what most people would like to do and have happen with their retirement savings.
Many people do a good job of saving, even increasing their savings to their retirement plans annually. Growing that savings over time, though, often becomes a struggle. Besides the ups and downs of the markets, there is the emotional rollercoaster that ensues. When the markets are advancing, all seems well. A downturn, though, can get many to question their investments and how much risk they are taking. Then over time, as the savings accumulate and one nears the time to consider retiring, the questions start regarding how to turn this accumulated savings into income. With that comes the income taxes most likely due on the retirement income.
There are ways to help you continue the savings process, but while considering a re-alignment of these savings to eventually accumulate income tax free monies. This could be accomplished without changing the amount you save, just repositioning it over time. The volatility and emotional plays of the markets and trying to grow your savings over time can be addressed by exploring active money and risk management. Potentially growing money by minimizing the downturns and having non-emotional decision triggers can be utilized. This can then lead to looking at ways to generate your retirement income, turning the savings into income, all while minimizing the income tax impact.
We term the savings and accumulation phase as "climbing up the mountain". Mount Everest is our example. You are doing the best you can; trying to save as much as possible; climbing up the mountain. Your hope is to earn a certain rate of return on your money and grow it over time. Focus is on growing your money and asset allocation; your Accumulation Phase.
This is where you can look at ways to reposition your savings, or a portion of it, to accumulate money that will be income tax free upon withdrawal. The use of Roth accounts and cash value in properly structured life insurance policies can be explored. Discussions would center around your current income tax situation and where you see it being in the future. The differences between tax deferral and tax free can be examined. For example, if you are saving $10,000 per year into your retirement account on a pre-tax basis (your regular 401(k), 403(b), TSP, etc. contributions) and you are in a federal and state tax bracket of, say, 25%, then you are ‘deferring' $2,500 per year in taxes. That does not mean taxes will not be due. They will indeed be due when you start withdrawing money from your built-up savings and its growth. Perhaps that income tax may well exceed your deferred tax of $2,500. Of course, a calculation of the time value of money would be needed. However, in general terms, as you may have heard, the question is would you rather pay tax now on the seed or taxes later on the crops from that seed?
As you continue your climb up the mountain and start to get near the top, the summit, you will typically start thinking ‘what will my retirement income be?'. You can do a good, even a great, job of accumulating savings, generating an understanding of what your number is or will be. The next step, though, is determining how to turn that number into income.
You want to continue your income coming into the household. However, where will it come from? This is your descent down the mountain; your Distribution Phase. This period of time can last just as long or even longer than your climb up. You want to survive (more people have perished on the descent of Mount Everest than the climb up). You will plan for this by exploring your sources of income and understanding the risks involved.
Sources of retirement income include Social Security income, perhaps a pension, and withdrawals from your accumulated savings accounts. The risks to consider are:
- Longevity risk - as people live longer, not wanting to outlive their savings and run out of money. This also results in the potential for health risks over time.
- Stock and bond market risk - the volatility, ups and downs, of your investments.
- Sequence of returns risk - how your investments perform over time, not just as you accumulate, but as you take income from them.
- Withdrawal rate risk - how much or what percentage can you take out of your savings annually (5%, 4%, 3%), but still have your money last.
- Inflation risk - the risk that the cost of goods and services will increase over time and your ability to have sources of income to keep up with that.
- Tax risk - understanding the income taxes due on your retirement income and consideration of any potential estate taxes due.
You will then want to consider your legacy. Will income continue coming into the household if something were to happen to you? What will it be for your spouse? Do you want to keep money in the family and continue its growth over time?
No matter what your age or where you are on the mountain, you can take control of your savings and retirement income, while looking to minimize your taxes.
Connect with Andrew J. Paladino on his website www.paladinofinancialgroup.com or on social media to learn more.
Andrew J. Paladino is an investment adviser representative of, and securities and advisory services are offered through, USA Financial Securities Corp. (Member FINRA/SIPC). USA Financial Securities is a registered investment adviser located at 6020 E Fulton St., Ada, MI 49301. Paladino Financial Group is not affiliated with USA Financial Securities.
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Company Name: Paladino Financial Group
Contact Person: Andrew J. Paladino
Address: 1954 Greenspring Drive, Suite 500 | Timonium, Maryland 21093-4130
Phone Number: 410.252.7630
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Website Link: http://www.paladinofinancialgroup.com
SOURCE: Paladino Financial Group