Retirement Savings Strategies – Financial Freedom Made Simple

Commitment to saving as a top priority, and approaches like debt avalanche reduction, can get you there.

An annuity that provides lifetime income can be useful if your interest doesn’t keep up with inflation. Annuities are just one example of the idea, and they also come with risk.

Investing for Retirement

Investing is an especially effective way of augmenting your savings, and starting early really pays off. Research conducted by Ya Anna Dai, assistant professor of finance of Western Carolina University and her colleagues shows that those who saved more in their 20s and 30s could expect total withdrawals from portfolios of approximately four per cent in retirement.

A financial adviser with expertise can also help you structure how much you will spend and when, and decide on your withdrawal strategy, depending on your circumstance and on more tax-efficient investments. It might also be a good idea to start shifting gradually between stocks and safer instruments, as you get older.

Maintain an emergency fund of three months’ expenses.Get life, disability and trauma insurance to mitigate financial risk.Develop a debt pay-off plan using debt snowball or debt avalanche methods.With these things done, you will be on your way to achieving your ‘set your children up for life’ type goals.

Creating a Budget

The first step is to look at what you are currently budgeting to cover all the expenses (housing, food and insurance costs, if relevant); the second is to determine where any of those categories might increase (say, if downsizing or moving, or decreasing, if some hobby/travel plans/payment of debt, or in some other way.

Figure out your other income sources including Social Security, pensions, part-time work and investment dividends. Then calculate how much money you’d like to withdraw from your portfolio each month, allowing for market fluctuation.

The order in which to draw down retirement accounts can have a huge impact on taxes and retirement income longevity, so confusing this in any way can have dire consequences. An advisor can help you devise a good withdrawal strategy based on your situation – including an emergency fund and liquid reserves that provide short-term cash flow. Consider a withdrawal rate that is likely to allow your savings to outlive your retirement horizon (given what you know today).

Tax-Advantaged Retirement Accounts

An important internal element of their retirement plan is lowering lifetime taxes, perhaps by using tax-deferred and tax-free savings and investment accounts, such as 401(k)s and traditional IRAs, where the contributor gets to put in the money before taxes up front and then pay taxes on them only at retirement withdrawal.

Post-tax accounts like a Roth IRA and a health savings account give you an opportunity to invest on an after-tax basis now with a chance for tax savings later, especially if you couple them with a smart withdrawal strategy that keeps RMDs low during retirement.

While paying attention to the tax benefits of these accounts is essential to maximising your retirement savings, a diversified portfolio is also imperative. There may be years when you have higher taxes, which means that you could benefit by relying more heavily on your taxable accounts. This scenario could help balance out other assets that did not grow untaxed, when just leaving tax-free vehicles alone will make sense.

Creating a Portfolio

For retirees planning for the long term, inflation’s compounding effects become an important factor, particularly if one is in a situation where expenses continue to rise and might double in a little less than 35 years. To pay for increasing needs, the retiree needs to predict expenses accurately and figure out where to find a source of income – a new twist to household budgeting and a new way of looking at what types of assets can be a source of income.

Retirement savers with many working years ahead of them should emphasise stocks for capital growth. Those further towards the end of their investment career might want to tilt more towards stocks to mitigate longevity risk, but, with the years ticking by, they should gradually shift their goals from growth to income and capital preservation.

Even debt instruments such as bonds can offer precisely this balance of safety and growth. The regular delivery of interest payments and the assurance of principal repayment at maturity reduces market volatility amidst an uncertain landscape, and lowers the riskiness of the entire investment.