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 >Control Your Assets
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Retiring? Take Control of Your Assets
After years of saving and investing, you can finally see the big
day -- retirement. But before kicking back, you still need to
address a few matters. Decisions made now could make the difference
between your money outlasting you, or vice versa.
Calculating Your Retirement Needs
First, figure out how much income you may need. When retirement
was years away, this exercise may have involved a lot of estimates.
Now, you can be more accurate. Consider the following factors:
- Your home base -- Do you intend to remain in your current home?
If so, when will your mortgage be paid? Will you sell your current
home for one of lesser value or "trade up"?
- The length of your retirement -- The average 65-year-old man
can expect to live about 18 more years; the average 65-year-old
woman, 20 more years, according to the National Center for Health
Statistics. Have you accounted for a retirement of 20 or more
years?
- Earned income -- The Bureau of Labor Statistics estimates that
by 2022, 23% of people aged 65 or older will still be employed,
almost twice the proportion that prevailed in 2002.1 If
you continue to work, how much might you earn?
- Your retirement lifestyle -- Your lifestyle will help determine
how much preretirement income you'll need to support yourself. A
typical guideline is 60% to 80%, but if you want to take luxury
cruises or start a business, you may well need 100% or more.
- Health care costs and insurance -- Many retirees underestimate
health care costs. Most Americans are not eligible for Medicare
until age 65, but Medicare doesn't cover everything. You can
purchase Medigap supplemental health insurance to cover some of the
extras, but even Medigap insurance does not pay for long-term
custodial care, eyeglasses, hearing aids, dental care, private-duty
nursing, or unlimited prescription drugs. For more on Medicare and
health insurance, visit Medicare's consumer website
(www.medicare.gov).
- Inflation -- Although the inflation rate can be relatively
tame, it can also surge. It's a good idea to tack on an additional
4% each year to help compensate for inflation.
Running the Numbers
The next step is to identify all of your potential income
sources, including Social Security, pensions, and personal
investments. Don't overlook cash-value life insurance policies,
income from trusts, real estate, and the equity in your home.
Also review your asset allocation -- how you divide your
portfolio among stocks, bonds, and cash. Are you tempted to convert
all of your investments to low-risk securities? Such a move may
place your assets at risk of losing purchasing power due to
inflation. You may live in retirement for a long time, so try to
keep your portfolio working for you -- both now and in the future.
A financial professional can help you determine an appropriate
asset allocation.
| Robber Baron: Inflation |
| Here's how a 4% inflation rate would erode $400,000 over a
25-year period. Because inflation slowly eats away at the
purchasing power of a dollar, it's important to factor inflation
into your annual retirement expenses. |
 |
| This example is hypothetical and for illustrative purposes
only. |
A New Phase of Financial Planning
Once you've assessed your needs and income sources, it's time to
look at cracking that nest egg you've built up. First, determine a
prudent withdrawal rate. A common approach is to liquidate 5% of
your principal each year of retirement; however, your income needs
may differ.
Next, you'll need to decide when to tap into tax-deferred and
taxable investments. The advantage of holding on to tax-deferred
investments (employer-sponsored retirement plan assets, IRAs, and
annuities) is that they compound on a before-tax basis and
therefore have greater earning potential than their taxable
counterparts.2 However, earnings and deductible
contributions in tax-deferred accounts are subject to income tax
upon withdrawal -- a tax that can be as high as 37% at the federal
level. In contrast, long-term capital gains from the sale of
taxable investments are taxed at a maximum of 20%.3 The
key to managing taxes is to determine the best strategy given your
income needs and tax bracket.
Also, tax-deferred assets are generally subject to required
minimum distributions (RMDs) -- based on IRS life expectancy tables
-- after you reach age 72. (This age was increased from
70½, effective January 1, 2020. Account holders who turned
70½ before that date are subject to the old
rules.)4 Failure to take the required
distribution can result in a penalty equal to 50% of the required
amount. Fortunately, guidelines do not apply to Roth IRAs or
annuities.2 For more information on RMDs, see IRS.gov or
call the IRS at 1-800-829-1040.
A Lifelong Strategy
A carefully crafted retirement strategy also takes into account
your estate plan. A will is the most basic form of an estate plan,
as it helps ensure that your assets get disbursed according to your
wishes. Also, make sure that your beneficiary designations for
retirement accounts and life insurance policies are up to date.
If estate taxes are a concern, you may want to consider
strategies to help manage income while minimizing your estate tax
obligation. For example, with a grantor retained annuity trust
(GRAT), you move assets to an irrevocable trust and then receive an
annual annuity for a specific number of years. At the end of that
period, the remaining value in the GRAT passes to your beneficiary
-- usually your child -- generally free of gift taxes. Another
option might be a charitable remainder trust, which allows you
and/or a designated beneficiary to receive income during life and a
tax deduction at the same time. Ultimately, the assets pass free of
estate taxes to a named charity.
It's easy to become overwhelmed by all the financial decisions
that you must make at retirement. The most important part of the
process is to consult a qualified financial professional, a tax
advisor, and an estate planning attorney to make sure that you're
prepared for this new -- and exciting -- stage of your life.
| How Much Can You Withdraw? |
| This chart can give you an idea how much you could potentially
withdraw from your retirement savings each year. For example, if
you begin with $400,000 in assets and expect an average annual
return of 5% over a 25-year retirement, you could potentially
withdraw $18,000 per year. Withdraw more than that each year and
you may outlive your money. Also consider: This chart doesn't take
income taxes into account, which can range from 10% to 37%,
depending on your tax bracket. |
 |
| Assumes 5% average annual return, and that withdrawal rate is
adjusted for annual 4% inflation rate after the first year. This
example is hypothetical and for illustrative purposes only.
Investment returns cannot be guaranteed. |
1Source: Labor Force Projections to 2022, Monthly Labor Review, U.S. Bureau of Labor Statistics.
2Withdrawals from tax-deferred accounts prior to age 59½ are taxable and may be subject to a 10% additional tax. Neither fixed nor variable annuities are insured by the Federal Deposit Insurance Corp., and they are not deposits of -- or endorsed or guaranteed by -- any bank. Withdrawals from annuities may result in surrender charges.
3A 3.8% tax on unearned income may also apply.
4The CARES Act waives certain 2020 required minimum distributions (RMDs).
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This is the approximate amount your estate could pay in estate taxes. Keep in mind that your estate may also incur state and local transfer taxes and possible generation-skipping transfer taxes. Estate planning is a very complex topic with many governing laws, so you should consult a qualified tax or legal professional for advice.
The profit earned from the sale of a capital asset, such as real estate or stocks. A capital gain is not "realized" until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on the owner's income tax return for the year in which the asset was sold.
An agreement in which a grantor transfers assets to a trustee for the purpose of benefiting one or more beneficiaries.
Net gains on assets sold more than 12 months after purchase; taxed at a maximum rate of 15% for most taxpayers and 20% for higher-income taxpayers. In addition, a 3.8% Medicare surtax is added for most taxpayers earning more than $250,000 if married or $200,000 if single.
The owner of an estate who sets up a trust.
A contract between an individual and an insurance company in which the individual pays money into an account in exchange for a guaranteed payment at or during retirement. Annuities offer tax-deferred growth potential. There are two types: fixed and variable.
An investment vehicle representing a loan to a corporation, government entity, or municipality. Bonds typically pay a fixed interest amount on a predetermined schedule and return their investment principal at maturity. Bonds issued by the U.S. government are backed by the full faith and credit of the United States. Other bonds are backed by the financial strength of their issuers and carry varying degrees of credit risk.
A trust that allows you to leave assets to a charity and receive income and tax benefits at the same time. You can receive income from the trust for a specified period of time, after which all remaining assets are transferred to the charity.
The process of dividing investments in your portfolio among different kinds of assets, such as stocks, bonds, real estate, and cash, to try to meet a specific objective.
One who receives the proceeds of a trust, retirement plan, or life insurance policy.
A federal program that assists people aged 65 and older by helping to pay for health care expenses. The traditional program has three parts -- Hospital Insurance (Part A), Supplementary Medical Insurance (Part B), and Prescription coverage (Part D). Medicare Advantage (Part C) offers a range of alternatives to traditional Medicare.
A loan used to finance the purchase of a home or other property. The borrower gives the lender a lien on property as security for the repayment of the loan. The borrower has full use of the property, and the lien is removed when the obligation is paid in full. Mortgage repayment periods generally run between 10 and 30 years.
A legal arrangement that gives a trustee control over select assets and cannot be modified once it is established.
A retirement account to which you may be able to contribute up to a specific maximum amount each year (the maximum amount is determined by Congress). Individuals aged 50 and older may also make additional annual catch-up contributions (up to a specified amount as determined by Congress). Contributions are not tax deductible, but any growth is tax free and qualified withdrawals may be tax free. Certain holding periods and income restrictions apply.
Graduated federal tax imposed upon a person who gives assets of more than $15,000 in any single year to a recipient. This amount may be indexed for inflation in future years. Each individual also has an $11.7 million combined lifetime gift tax and estate tax exclusion in 2021. This limit may be adjusted annually for inflation.
Preparing for the orderly administration, management, and distribution of a person's assets and liabilities during one's lifetime and upon death. In addition to a will, an estate plan may include trusts, insurance, and other elements intended to carry out the wishes of the estate owner and improve the estate's after-tax value.
A share of ownership in a company, typically traded on one or more exchanges. Owners of stock usually receive voting rights on issues affecting the company and may receive a portion of the company's profits in the form of dividends.
An individual insurance policy for retirees that can help pay medical expenses not covered by the Medicare system.
Content is provided by Wealth Management Systems Inc. as a service to Wells Fargo. Copyright © 2021, Wealth Management Systems Inc. All rights reserved.
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