Are you at the age where retirement is a real possibility? Are you looking at the size of your retirement accounts and figuring you are all set? If you are going to retire in the next few years there are some areas that you need to consider in addition to your retirement assets. Retirees need to consider not only the amount that they have accumulated in their accounts but must also consider the market cycles, expenses that will be incurred in retirement and your possible tax bracket in your retirement years.
First one does indeed need to have enough saved in 401(k) plans, IRA’s and brokerage accounts to support them in their golden years. That is a given regardless of what else is occurring at the time. Let’s face it without having substantial savings retirement will be difficult to achieve. But timing is also important when you are going to retire. If, as we have been experiencing the last few years, we are in a bull market at some point there is going to be a correction or a full blown bear market that will affect your retirement accounts. If you are heavily invested in equities a change in market conditions could have sever impacts on the overall value of your assets. If you are worried about bear markets or sever market corrections and are considering retirement it is not a bad idea to have several years’ worth of expenses on hand to avoid having to sell assets when the price is depressed.
Which lead to the tax consequences of selling or making withdrawals from accounts. If you are dealing with ROTH IRA’s or 401(k) accounts these funds will not be taxed. However, if you are dealing with Traditional retirement accounts these withdrawals will be treated as ordinary income. If you do have any assets in brokerage accounts the gains on these assets will be capital gains that are considered either short or long term in nature. It is best to try to go into retirement with a little in each of these asset classifications as you are able to take from one when the tax advantages are in your favor and in others when it is in their favor. It is best to consult a tax specialist or a financial planner to maximize your accounts and the tax advantages of each.
Expenses are another component that you need to consider when you are planning to retire. Most people project what they will be required to replace income wise in their retirement years. While it is true your assets are designed to replace the income you are losing by retiring another way to calculate this is by figuring out expenses you will no longer have to pay. Hopefully if you are retiring you will not be paying a mortgage payment so that should be an expense that is not required to be paid. Also if you are not working you will not be paying taxes in the form of income or social security, again expenses you do not need to replace in retirement. If you remove the expenses that you are not required to replace in retirement and consider your social security payments when you decide to start taking payments you may see you only have to replace between 60% and 80% of your income.
Retirement is more than your savings. It is a combination of savings and wise planning. As I hope you can see one without the other is simply poor planning and will lead to a retirement where you may run out of funds before you die. It is best to save and consider many aspects of your retirement before you actually retire. It may be wisest to seek the help of a financial planner to ensure you are in the best possible position you can be in prior to retiring.
