Last time I summarized the first part of a presentation I gave with Bob Finke at the Scotts Valley Financial Planning Clinic. The second part related to actions to take in retirement will be partially covered in this posting, and completed in the next posting.
What does Retirement Mean?
What does retirement mean to you? Does it mean not working? If so what, exactly, are you going to do with your time? It is a good idea to consider this deeply. Most people expect to stay active in retirement. However unless you understand your interests and have a strategy for following them you may find yourself disoriented, disconnected and uncertain what to do.
Many people opt for partial retirement, working part time. For some this is necessary to have a secure retirement. For others it is a way to stay active and continue doing what they love at a more relaxed pace. Whatever the reason, partial retirement will delay the use of your nest egg and increase the security of your retirement.
Inflation & COLA
Inflation is a major obstacle to a secure retirement, as it was to savings before retirement. As the cost of living rises, the purchasing power of your savings decreases. This is why for most people keeping their savings in cash will actually reduce their security as inflation decreases the real value of those savings. An appropriately diverse portfolio targeted to your personal risk profile is one way to make sure your nest egg grows faster than inflation
Passive Income Streams
Passive income streams that last for life great enhances your retirement security as there is little chance of it ending during your lifetime. Passive means income that is provided without your active involvement in management or production.
Some passive income streams do not increase with inflation. So although the income will continue for life inflation will erode its value. Other types of income include a Cost of Living Adjustment (COLA) which allows them to partially or fully keep up with inflation.
You should also consider whether an income stream can be inherited. Understanding the estate planning characteristics of an income stream is important, whether or not leaving an inheritance is important to you
Here are a few passive income streams and their characteristics:
| Type | Inflation | Inheritance |
| Social Security | COLA | Cannot be inherited directly. Survivor benefit for the spouse. |
| Other Government Pension | Varies. CalPERS and CalSTRS both of annual COLA up to a max and purchasing power protections | Cannot be inherited except through spousal survivor benefits if selected. |
| Private Pension | Varies. Typically does not have COLA | Cannot be inherited except through spousal survivor benefits if selected. |
| Annuity | Typically only if a COLA rider is purchased | Varies by product and annuitization selection |
| Stock Dividends | Increase as company value increases | Can be inherited |
| Real Estate | Increases as property value increases | Can be inherited |
Account Type Strategies
You should consider the tax characteristics of your various investment accounts.
· Roth accounts have tax free earnings. Assuming you follow the rules there is no tax due on withdrawals
· IRA, 401(k) and 403(b) accounts have tax deferred earnings. The full value of withdrawals is taxed as ordinary income at your standard rate
· Taxable accounts are taxed at ordinary income or capital gains rates as income is earned and recognized each year.
In a taxable account Qualified Dividends (QD) and Long Term Capital Gains (LTCG) on the sale of securities held for more than one year are currently taxed at maximum of 15% (0% if you are in the 10% or 15% tax bracket). Note current law has the QD and LTCG rate maximum increasing to 20% in 2013 (10% in the 15% tax bracket).
By optimizing the type of account in which you hold different types of assets you can pay less tax on your earnings overall:
· Roth and Tax Deferred Accounts: Hold bonds, REIT’s and tax inefficient stocks
· Roth Accounts: Hold highly appreciating assets and aggressive stocks
· Taxable Accounts: Hold stocks with qualified capital gains and dividends as well as tax managed funds
Note that this is secondary to maintaining your asset allocation. So you will probably not be able to fully optimize your portfolio. Do whatever you can without subverting your asset allocation.
Next Time: Part 3: Safe Withdrawal Strategies
No comments:
Post a Comment