To save for a comfortable retirement, many people shoot for a number. If you’re one of them, and you’re diligently saving toward that goal, great! But it takes more than a commitment to your 401(k) to build a financially solid retirement. Along with how much you save, you need to be strategic about the what, when and where of saving.
By taking a more strategic approach, you’ll put yourself in a better position to manage the unknowns of retirement, and there are a lot of them. You don’t know how long you’ll live or how your health may change over time. You can’t predict the ups and downs of the market or when interest rates will rise or fall. There are doubts about the future of Social Security, and who knows what the tax environment will be like by the time you retire.
For all these reasons, it’s important to minimize the risks associated with the unknown, and you can do that by making sure your retirement plan includes these six basic building blocks:
1. Guaranteed Income
Because you don’t know how long you’ll live, you want to be able to cover your essential expenses in retirement with a stream of income you can count on—for life. Guaranteed lifetime income can come from three sources: a pension, Social Security and an income annuity. When you have a foundation built on one or more of these sources of guaranteed income, you’ll sleep better at night knowing these will keep paying no matter how long you live.
2. Investments for Growth
Although you may want to take on less investment risk in retirement (compared to your working years), you’ll still want your money to work hard for you. Just be sure to have a mix of assets—fixed income and equities—in an allocation based on your own personal risk tolerance. With a diversified portfolio, you can reduce your risk of losing everything if a particular type of investment does poorly.
3. Taxable and Non-Taxable Accounts
Having both types of accounts is important for two reasons. First, you don’t know what the tax rate will be by the time you retire, so it may be in your best interest to pay taxes today on at least some of your retirement savings by contributing to a Roth IRA, for example, in addition to your pretax 401(k) contributions. Second, depending on how far away you are from retirement, you don’t know what your income or your tax bracket will be once you get there. By having different types of accounts, you can make withdrawals in retirement in a way that maximizes tax efficiency.
4. Cash Reserves
Regardless of whether your retirement accounts are taxable, the last thing you want to do is make withdrawals from them during a downturn in the market. To help avoid having to take a loss, make sure you have cash available—which could include a savings account or life insurance cash value—to cover an emergency or to make planned purchases.
5. A Plan for Long-Term Care
According to a 2016 report by the U.S. Department of Health and Human Services, 70 percent of people turning 65 today can expect to need some form of long-term care. And because those costs are not typically covered by Medicare or health insurance, a chronic illness or disabling injury can have a devastating impact on retirement income. By proactively planning for the possibility of long-term care, you’ll have time to explore the options for preserving your quality of life and your assets.
6. An Intentional Strategy to Leave a Legacy
Many people feel guilty about spending money in retirement because they want to make sure there’s something to leave behind to their children and/or a favorite charity. As a result, they never quite give themselves permission to enjoy themselves. By making legacy planning an intentional part of your financial strategy, you can be absolved of that guilt and live the lifestyle you envisioned in retirement.
It’s never too soon or too late to get these essential building blocks in place to create a more financially solid retirement. For example, if you’re early in your career, consider contributing to a Roth IRA or 401(k) if it’s available; there are income limits, so this may not be an option for you later in life as your earnings grow. There are also very good strategies that work for people who are 10-15 years out from retirement. And even if you’re on the doorstep of retirement, there are opportunities to turn some of your savings into guaranteed income.
With increasingly complex financial markets and longer life expectancy, working with an investment professional is more important than ever. Take the burden out of financial planning and meet with the credit union’s Investment Services today!
