Just like spring and summer always lead to fall and winter, we know winter is coming and another recession is on the horizon, we just don’t know when. If you have a leak in your roof, when’s the best time to fix that leak? Before it rains, because once the rain comes, it’s too late.
We’ve seen this movie before — sky-high real estate prices coupled with sky-high stock market prices — and we have our own ideas on how it’s going to end. Some retirees may be concerned about going through another 2008-type of crash again at this age now that time is no longer on their side. I’m 48 years old, so I have 20 more years before I even need my money. However, my retired clients are living off their money today.
I believe retirees should consider being more disciplined and risk averse in the good times so you can take advantage of the bad times and not lose more than you’re comfortable with when the bad times do come.
For retirees who are no longer working, their tolerance for risk at this age and stage of life has gone down. They’ve typically switched from the growth stage to the distribution stage, where they want to help preserve their wealth and generate income from their retirement assets.
When’s the right time to make sure your financial house is protected? Before the winter storm.
Our brain is designed to think that if you keep doing the same thing that worked during the good times, those things will work forever. However, last year was a reminder that’s just not the case.
The financial adviser and investment strategy that got you to retirement might not be the right person and strategy to get you through retirement, as your goals might have changed now that you’re in retirement.
Since 2009, the S&P 500 has been going up almost every year for the past 14 years! Do you think the next 10 years in the economy will look like the last 10 years? We don’t.
2022 was a rough year for both stocks and bonds:
2022 reminds us that markets don’t go up forever.
The definition of insanity is doing the same thing over and over again and expecting a different result. You want to have the right retirement plan for you, right now. Let’s look at some important retirement planning and tax planning considerations and strategies for a retiree.
1) How much risk do you want to take in your retirement plan, and how much do you have right now?
It’s of utmost importance to figure out how much risk you’re comfortable with at this age and stage of life. It’s also important that as a retiree you’re not taking more risk than you should. We at Kirsner Wealth Management use Riskalyze Software Program, which helps calculate exactly how much risk you want to take and how much risk you have in your portfolio now. It will also show you exactly how much you could lose if you’re faced with another crisis like in 2008.
If you actually lost more money in 2022 than you’re comfortable with, you might have more risk than you should. Most of our retired clients are no longer comfortable with too much risk at this age and stage in life.
2) How much are you paying in fees in your retirement plan?
You will want to consider tuning up your retirement plan on a regular basis with the amount of risk you’re comfortable with and fees that are as low as possible. Fees can considerably slow down the performance of your retirement plan and will potentially add up to a lot of money spent over time, so it’s important to evaluate how much in fees, published and hidden, you’re paying.
Two types of investments that might have higher fees include mutual funds and variable annuities. If you own either of these, you might want to get a second opinion to be certain your fees aren’t surprisingly high.
Also, make sure you’re not paying your financial adviser too much in fees either.
3) Help minimize your taxes!
As IRA professional Ed Slott says, your IRAs are ticking tax time bombs. Taxes might be the biggest expense you have for the rest of your life, especially if you’ve accumulated a large IRA. This is especially true because the current tax cuts expire in 2026, so we have a limited time to take advantage of today’s lower tax rates. The fact is with your IRA it’s either pay taxes now, or pay taxes later. Wouldn’t it be better to pay lower taxes overall, if possible?
If you were a farmer, would you rather pay taxes on your penny seeds or your million-dollar wheat harvest? Clearly, most people would rather pay taxes on the pennies, not the dollars, and that’s why a Roth IRA could be a helpful strategy. This is especially important with the elimination of the stretch IRA, as I discussed recently when I was interviewed on the Today show.
If you have an IRA, these are four reasons you might want to consider doing partial Roth IRA conversions each year in conjunction with your accountant:
- Tax rates are going up in 2026, so you want to take advantage of today’s low tax rates.
- If you’re a married couple, you’re now in a joint tax bracket. When one of you passes away, the surviving spouse will be in a single tax bracket and could pay higher taxes. If the surviving spouse has a Roth IRA instead, the spouse can use that Roth IRA money to live on without having to worry about taxes, as those taxes were paid when you were joint taxpayers.
- The stretch IRA is gone! Your children will have to completely empty your IRA you leave them within 10 years of your death. An additional reason to consider converting to a Roth, as I wrote in the article Financial Advice for Millionaires: 5 Strategies for 2022, your children might have to pay higher income taxes than you, as they probably will still be working when they inherit your IRA money. Additionally, if your children live in a state that has state income taxes, they will have to pay those extra state income taxes as well! The Roth IRAs will help alleviate these issues if they arise.
- To help preserve your assets you leave your children, you might want to consider using a dynasty trust. For tax purposes, you may want to consider leaving Roth IRAs to those dynasty trusts rather than regular IRAs. This is true whether you use a trust or not — see the strategy below about dynasty trusts for reasons you might prefer to use a dynasty-trust-based estate plan.
We use a software program called Holistiplan, which will help you determine the optimal amount of partial Roth conversions you can consider doing each year. We’ll work in conjunction with your accountant to implement this plan.
4) Cut your expenses in retirement.
Here are some ways you can cut your expenses in retirement:
- Downsize your home. Perhaps it’s time to simplify your life?
- Do you need a second home? With websites such as Airbnb, you can rent a home anywhere in the world. Again, simplify.
- Do you need a second car? With Uber, you might not.
- Cancel your home phone and only use a cell phone.
- Cut your home television cable costs by looking at Internet-based alternatives.
Typically, my clients are “the millionaires next door.” You’d never know they have substantial wealth. They’ve lived below their means their entire life, which they learned from parents who went through the Great Depression, and having done that, their savings compounded over decades, allowing them to accumulate the millions they have.
5) Make sure you’re protected during retirement at the right price.
Review your long-term care, umbrella liability insurance, and life insurance policies to make sure you have the right protection at the right price.
In my retirement planning books, I ask that clients consider having an inexpensive umbrella liability insurance policy to help protect themselves in case of a lawsuit. You can add an umbrella liability insurance policy onto your homeowner’s insurance or on your auto insurance policy.
If you own a life insurance policy that’s more than 10 years old and qualify health-wise, you may be able to upgrade it to a newer life insurance policy at a lower cost. People are living longer, and as a result, many modern insurance policies could be lower in cost for you.
6) Consider modernizing your estate plan with an estate planning attorney.
Most of my clients have children and grandchildren whom they love dearly. We have relationships with great estate planning attorneys who can set up a dynasty revocable trust designed to help protect your assets that you leave your children and grandchildren from potential divorces, lawsuits, and creditor claims, and help ensure your assets stay in your family bloodline.
You also want to consider modernizing your health care surrogate for emergency medical decisions; durable power of attorney to take care of your finances in case you’re disabled; and a modern living will, which is your “pull the plug” wishes.
My father, who started our business in 1972, often said when it comes to estate planning, you either buy cheap and cry forever, or buy expensive and cry once. That’s true for estate planning and many things in life.
These strategies could help set you on your path to retirement. The bottom line is to help create the greatest protection possible against loss due to economic downturns. Be prepared for winter in the summer — the time to repair your roof is before the next storm.