Video Update: Your 4-Step Retirement Survival Plan
Welcome to my video presentation for today. In the article below, I provide greater detail.
Just reading the headlines is enough to make you gnash your teeth. A bitter presidential contest, a deadly pandemic, worsening Sino-American trade tensions…the list of dangers is long. The latter half of 2020 promises to be volatile and uncertain.
You must take common-sense measures today, to ensure your family’s financial security. Let’s step back from the daily gyrations of the markets to examine timeless investing principles.
Below is a four-point checklist of steps that will protect your portfolio, net worth and kids’ future.
1) Set a Retirement Date
It’s important to have a specific date in mind for when you plan to retire. This should be based on multiple factors.
If you enjoy your job, would you prefer to keep working (and saving) a little longer? It’s tough to get back into the working world once you’ve left it behind.
Are you slated to get a defined-benefit pension from your job? Are you fully vested? If so, you may not need to make significant changes in your investments.
Make an assessment of your future spending needs. Will you sell your home and move to a lower-cost area? What are the tax consequences of this? After you set a specific target, you can start formulating your strategy for getting there.
2) Reduce Your Social Security Expectations
Among the many political norms shattered since the presidential election of 2016 has been the notion that Social Security is untouchable. For those lacking a strong investment portfolio, it doesn’t bode well.
The non-partisan Congressional Budget Office (CBO) currently projects that the federal budget deficit will hit $1.015 trillion this year. Federal deficits are expected to average $1.3 trillion per year between 2021-2030. Politicians are seizing on the data as an excuse to cut Social Security. The popular program is likely to survive, but probably in curtailed form.
Social Security outlays totaled more than $1 trillion in 2019 (estimated), for about 5% of U.S. gross domestic product (GDP). The CBO predicts an increase in Social Security outlays of up to $1.8 trillion in 2029, which would amount to roughly 6% of projected GDP (see chart).
When are you eligible for full Social Security benefits? This varies depending on when you were born. If it was in 1960 or later, you will have to wait until age 67. If you start to collect your benefits earlier, your monthly payments will always be lower than if you had waited.
3) Create a Withdrawal Plan
It’s usually best to let your wealth compound tax-free for as long as possible. The greater variety of accounts you have, the more opportunities to diversify your tax savings.
As a general rule, you should withdraw cash from taxable accounts first. Later on, focus on tax-deferred accounts such as traditional Individual Retirement Accounts (IRAs) and annuities.
Leave accounts with tax-free withdrawals for last. An example of such an account is the Roth IRA, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free.
Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all.
Early in your retirement, converting currently taxable assets to spending money makes sense because little or no additional tax likely will be due.
First, take dividend income and any mutual-fund distributions in cash instead of reinvesting them. You pay tax on these payouts even if you reinvest them, so this step won’t cost you anything.
Next, sell investments with no cost basis or the highest basis and therefore no or low taxable gain.
Assets with no cost basis include money funds and bank CDs as well as Treasury bills and various types of bonds held to maturity. Bond funds likely carry a high basis compared with your sale price, and therefore low tax liability.
Ideally, you’ll be more passive in taking long-term gains and more active in “harvesting” your tax losses.
Continuing to hold profitable, long-term investments in a regular account is a form of tax deferral. If you sell losing investments, you offset your tax liability on any gains you’ve taken with other investments.
4) Shield Inheritance
If you don’t take measures ahead of time, Uncle Sam will take a huge bite out of your inheritance via the capital gains tax.
One of the few ways to sidestep the substantial capital gains tax is to make a gift of property to a charitable organization. When you do so, you may take a deduction based on the full fair market value of the property, rather than just its cost.
The tax savings will largely depend on the amount of appreciation. In turn, you can reap greater income by investing these tax savings.
The most popular types of charitable giving plans are the annuity trust, revocable trust, pooled income fund, gift annuity, and life estate agreement. Consult your tax accountant for details, to find the plan that’s precisely right for you. But do it now.
Editor’s Note: I’ve just discussed ways to manage your retirement money. But what about making the pie bigger? Consider the advice of my colleague Nathan Slaughter.
Nathan has made it his business to understand merger and acquisition (M&A) activity and he sees it picking up in coming months.
As chief investment strategist of Takeover Trader, Nathan is adept at digging up the inside data on pending takeovers. Along those lines, he recently went on camera to reveal a startling development. If you watch his presentation and follow his advice, you could reap huge market-beating gains.
Nathan lifted the curtain on the one hidden asset that’s about to attract $4 trillion of cash from America’s richest CEOs. These powerful insiders have pinpointed a future bonanza and they’ve decided to go “all in.” This is your chance to join them. For immediate access to Nathan’s “Project Rainmaker” expose, click here now.
John Persinos is the editorial director of Investing Daily.