Retirement planning has evolved over the years, and one of the fundamental rules guiding it – the 4% rule – isn’t set in stone anymore. In this blog, we’ll explore why the safe withdrawal rate is no longer 4%, along with some key insights about this rule that you may not be aware of. We’ll also discuss the importance of personalized retirement planning and why relying solely on the 4% rule may not be the wisest approach.
The 4% Rule: A Starting Point
The 4% rule was once a common starting point for retirement planning, but it’s no longer the definitive guide. William Bengen, the rule’s creator, initially proposed it in 1994, suggesting that retirees could withdraw 4% of their portfolio each year. This blog delves into the reasons why this rule is no longer fixed and explores its limitations. I also recommend you check out this video to help pick where the 4% rule leaves off.
Limitation 1: Neglecting Investment Fees and Taxes
One of the critical shortcomings of the 4% rule is that it doesn’t account for investment fees or taxes. It assumes that any fees or taxes incurred will be covered by the withdrawn amount, potentially impacting the net spending amount during retirement. High investment fees can significantly reduce your available funds, making it essential to consider these costs in your planning.
Limitation 2: Allocation to Stocks Matters
The 4% rule’s success is closely tied to your portfolio’s allocation to stocks. While the original rule suggested a range between 50% to 75% allocation to stocks, Bengen later pinpointed the optimal allocation at 63% in 1996. Your asset allocation choices directly influence how much you can safely withdraw in retirement, so it’s crucial to consider this factor when planning.
Expanding Beyond the Two-Fund Solution
In the rule’s early days, it relied on a two-fund solution, typically involving the S&P 500 and intermediate US Treasury bonds. However, Bengen later expanded the rule to include a broader range of asset classes like international stocks, cash, and small-cap stocks. This evolution underscores the need for flexibility and adaptability in your retirement strategy.
The 4% Rule Becomes the 4.7% Rule
The 4% rule has been updated to the 4.7% rule by William Bengen. This revision is a response to the inclusion of additional asset classes like US micro-cap and small-cap stocks, which significantly increased the withdrawal rate. It’s important to keep this updated figure in mind when planning for your retirement.
Time Matters: The 30-Year Limitation
The 4% rule is designed for a 30-year retirement period. If your retirement extends beyond this timeframe, you may need to adjust your withdrawal rate accordingly. Studies have shown that for a 20-year retirement, a withdrawal rate as high as 5.4% can still be successful, highlighting the importance of personalized planning.
The Reality of Changing Expenses
The 4% rule assumes constant spending throughout retirement. In reality, retirees often spend more in the early years and less in later years, even as medical expenses may increase. Your expenses and withdrawal planning should be dynamic, reflecting the changing nature of your financial needs.
Sequence of Returns Risk
The 4% rule’s outcomes vary widely depending on the year you retire. This is due to the sequence of returns risk, which can be mitigated with proactive planning and ongoing strategies. Understanding this risk underscores the need for a customized approach rather than relying solely on a rule of thumb.
Seek Professional Guidance
The 4% rule, while a useful starting point, should not be the sole basis for your retirement plan. To optimize your retirement withdrawal strategy and tax reduction strategy, consider consulting a Certified Financial Planner (CFP) who specializes in retirement planning. Personalized guidance can help you achieve your retirement goals more effectively.
TL;DR Tthe 4% rule has evolved and is no longer a one-size-fits-all solution for retirement planning. Personalization, careful consideration of fees and taxes, and a dynamic approach to expenses are essential. Seek out expert advice to create a retirement plan tailored to your unique circumstances. Reach out to us at Streamline Financial for assistance in crafting the ideal strategy for your retirement. Your retirement should be as unique as you are.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content. Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you. Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
Retiring is a significant milestone in life, and to ensure a successful retirement, there are four essential shifts that you need to make. In this blog post, we’ll break down each of these shifts and provide insights into why they matter for your financial planning.
Shift 1: Trading Time for Money to Trading Money for Time
Retirement means transitioning from trading your time for money to trading your money for time. In other words, you’re buying your time back. The challenge with this shift is that many people feel a loss of self-worth when they stop working because they no longer believe they’re contributing to others. This transition can be emotionally challenging.
Advice: Don’t stop contributing in retirement. Find ways to create value for others, even if it’s not a 9-to-5 job. Your life experience, creativity, and strengths can still make a significant contribution to others’ lives. This is a vital part of fulfillment in retirement.
Shift 2: Shifting from a Saving to Spending Mindset
For most of your working life, you’ve likely been saving diligently for retirement. However, in retirement, you need to shift your mindset from saving to spending. This transition can be challenging, especially if you’ve ingrained the habit of continually saving.
Advice: Recognize that it’s time to break the saving habit and embrace spending as part of your retirement lifestyle. While it may take some adjustment, you should feel comfortable enjoying the fruits of your labor.
Shift 3: Moving from Fear to Confidence with Spending
Having enough money for retirement isn’t the only consideration. Some retirees, even those with substantial savings, still experience fear and worry. To address this, you need to shift your mindset from fearing potential negative outcomes to anticipating positive ones.
Advice: Identify the major risks in retirement and apply strategies to mitigate them. Consider different scenarios and focus on looking forward to positive outcomes. A daily practice of acknowledging small wins can help strengthen this optimistic mindset.
Shift 4: Prioritizing Health over Money
Your health becomes the top priority in retirement. Without good health, nothing else matters. With more time on your hands, you can allocate resources to maintain and improve your well-being.
Advice: Invest in your health with activities like gym memberships, personal trainers, or healthier, albeit slightly more expensive, food choices. The goal is to extend the number of healthy days you have in retirement.
These four essential shifts are fundamental to making your retirement experience fulfilling and worry-free. While transitioning into retirement can be challenging, embracing these shifts can help you make the most of this exciting life stage. If you found this information valuable, don’t forget to share and like the video to help others on their retirement journey. And if you need a team of retirement specialists, you can reach out to experts who can guide you in your retirement planning.
Your retirement should be a time of fulfillment, enjoyment, and good health. By making these essential shifts, you can ensure that it truly becomes the next best stage of your life.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
The Retirement Freedom Account (RFA) is often misunderstood, but it offers a range of benefits that can significantly impact your financial future. In this blog, we’ll delve into the seven key advantages of the RFA and how to maximize them.
1. Unlimited Contributions During Peak Earning Years
One of the unique features of the RFA is the absence of contribution limits, unlike traditional retirement accounts like IRAs and 401Ks. This allows you to invest as much as you want during your peak earning years, potentially increasing your financial security and expediting your journey to financial independence.
2. Zero Withdrawal Penalties
The RFA offers flexibility in accessing your funds without worrying about withdrawal penalties. Whether you find a better investment opportunity or face unexpected expenses, you can withdraw money from your RFA without incurring penalties.
3. Preferential Tax Rates
The RFA provides preferential tax treatment when managed strategically. By holding investments for over a year, you can qualify for long-term capital gains tax rates, which can be as low as 0% or a maximum of 20-23%, depending on your income. This is significantly lower than ordinary income tax rates, which can be as high as the upper thirties.
4. Freedom in Investment Choices
Compared to employer-sponsored retirement plans like 401Ks and 403Bs, the RFA offers more flexibility in investment choices, allowing you to tailor your portfolio to your preferences and financial goals.
5. Legacy Planning Benefits
If leaving a financial legacy to your family is important, the RFA can help you do so tax-efficiently. When your heirs inherit your investments from the RFA, the capital gains tax liability is often eliminated or reduced, ensuring they receive the full value of the assets.
6. Bridge to Early Retirement
For those planning to retire before age 59 and a half, accessing funds from IRAs or 401Ks typically results in penalties. The RFA can serve as a bridge to provide income until you reach the age when you can access your other retirement accounts penalty-free.
7. Tax-Efficient Roth Conversions
One of the most powerful RFA strategies involves paying the minimum tax amount while moving money into a tax-free Roth IRA. During the Roth conversion sweet spot, which occurs after you stop working and before you start withdrawing Social Security or taxable IRA income, the RFA can supplement your living expenses with less taxable income. This allows you to convert money from your 401K or IRA into a Roth while keeping tax rates low.
Tax Benefits to Heirs
When the RFA is passed on to your heirs, they can potentially receive the assets without incurring additional taxes, thanks to current laws. This underscores how the RFA can be used to protect your other retirement accounts and maximize their tax benefits.
Charitable Giving Strategies
The RFA can also be a valuable tool for charitable individuals. By giving directly to charity from the RFA, you can avoid paying taxes on capital gains, benefit the charitable cause, and maintain cash for your own use. Additionally, if you are in a high-income year, you can consider pre-funding multiple years of charitable gifts to take advantage of tax deductions during high-income years.
Tax Loss Harvesting
The RFA allows you to implement a strategy known as tax loss harvesting, which involves selling investments at a loss to offset gains in other well-performing funds. This can result in significant tax savings when executed correctly.
Consulting a Certified Financial Planner (CFP)
It’s important to note that many of these strategies involve complex rules and nuances. Therefore, consulting a Certified Financial Planner (CFP) who specializes in retirement planning is advisable to ensure that you navigate these benefits effectively and avoid costly mistakes.
In summary, the Retirement Freedom Account, despite not being a traditional retirement account, offers a wealth of opportunities to enhance your financial future – from tax-efficient growth and legacy planning to charitable giving and tax savings strategies. By understanding and leveraging the benefits of the RFA, you can take a significant step towards securing your financial freedom.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
Retirement planning is a crucial aspect of our financial journey, and there’s one significant risk that retirees often underestimate: the sequence of returns risk. In this blog, we’ll explore the key elements of sequence of returns risk, common mistakes retirees make when trying to mitigate it, and an effective strategy to safeguard your retirement nest egg.
Understanding the Sequence of Returns Risk
Sequence of returns risk refers to the danger of experiencing unfavorable investment returns early in retirement. Even if two portfolios have similar long-term average returns, if one experiences poor returns in the first 5 to 10 years of retirement, it can significantly impact the sustainability of your nest egg.
Let’s consider a scenario where we have two portfolios with nearly identical long-term returns. The only difference is the year of retirement. The sequence of returns can make a substantial difference in the outcomes, potentially leading to one portfolio running out of money.
Common Mistakes Retirees Make
When it comes to addressing sequence of returns risk, retirees often make common mistakes that can hinder their financial security:
1. Neglecting the Strategy Behind the Three-Bucket Concept
The three-bucket strategy is a popular approach to managing retirement income, which involves dividing your assets into conservative, moderate, and growth buckets. While this concept provides a quick snapshot of your risk allocation, many retirees miss out on the underlying strategies that make it effective.
2. Inconsistent Rebalancing
Rebalancing your portfolio is a crucial component of managing sequence of returns risk. However, many retirees rebalance infrequently, such as once a year, which may not capture the full benefits. Instead, trigger-based rebalancing, where portfolio positions are adjusted based on predetermined tolerance bands, can yield significantly better results.
Implementing Effective Strategies
To maximize the potential of your retirement portfolio and mitigate sequence of returns risk, consider these effective strategies:
1. Adopt the Three-Bucket Strategy
The three-bucket strategy provides a visual representation of your risk allocation. It offers peace of mind by ensuring you have a conservative bucket to rely on during market downturns. Regularly review and adjust this strategy to maintain a balance between safety and growth.
2. Embrace Trigger-Based Rebalancing
Trigger-based rebalancing is a dynamic approach that recalibrates your portfolio based on preset tolerance bands. This method can capture opportunities for added return during market volatility and help protect your retirement savings.
3. Seek Professional Guidance
Managing your retirement portfolio can be complex and time-consuming. Consider enlisting the help of financial professionals who specialize in retirement planning. They can apply these strategies effectively and ensure your retirement plan is tailored to your unique goals and needs.
TL;DR
Retirement planning is a multifaceted endeavor, and understanding and addressing sequence of returns risk is a critical component. By adopting the three-bucket strategy, implementing trigger-based rebalancing, and seeking professional guidance, you can enhance your retirement security and increase your chances of a financially secure retirement. Don’t let the sequence of returns risk catch you off guard; take proactive steps to protect your nest egg.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
Retirement planning often focuses on financial investments, but there’s more to a happy and fulfilling retirement than just money. In this blog, we’ll explore six crucial investments you should make as you approach retirement or if you’re already retired. These non-financial investments can significantly impact your happiness, joy, peace, and overall satisfaction in your post-working years.
1. Invest in Experiences
The first investment you should make is in experiences. Many retirees tend to be conservative with their spending on vacations and unique experiences, fearing that they might outlive their savings. However, the early years of retirement, often referred to as the “go-go years,” are the perfect time to travel and enjoy life to the fullest. The energy and strength you have during this period make it an excellent time to invest in experiences. Regardless of initial reservations, most people return from vacations with no regrets. Embrace new adventures and cherish these moments.
2. Invest in Books and Learning
Curiosity is the fountain of youth, and in retirement, it’s crucial to actively invest your time and resources in learning and reading. Studies have shown that mental health can deteriorate in retirement if we don’t keep our brains active. Challenge yourself by exploring new subjects, reading books, and engaging in lifelong learning. This investment not only keeps your mind sharp but also adds meaning and purpose to your retirement.
3. Invest in Exercise
A healthy body complements a healthy mind. Investing in exercise pays off in many ways, including reduced physical pain as you age, a lower risk of dementia, and increased independence in daily life. You don’t need an intense gym routine; daily walks and bodyweight exercises can do wonders for your physical well-being. Prioritize regular physical activity to enjoy a more vibrant and active retirement.
4. Invest in Relationships
Retirement often means losing the built-in social connections provided by the workplace. To maintain important relationships, invest time and effort in nurturing them. This might involve traveling to visit friends, treating a friend to lunch, or simply spending quality time together. Isolation and loneliness can harm your brain health and increase the risk of dementia, so make it a priority to stay socially connected.
5. Invest in Healthy Food
Good nutrition is an investment in both your mood and mental clarity. While budget-friendly groceries might seem appealing, consider allocating more of your retirement budget to healthier foods. Think of this as an investment in your body’s long-term well-being rather than an expense. A balanced diet can significantly impact your overall quality of life in retirement.
6. Invest in Challenges
Contrary to the belief that retirement should be free of challenges, investing in hard things and setting goals is essential for maintaining a sense of purpose and fulfillment. Challenges are what make life interesting, and overcoming them adds meaning to your retirement years. Find a new hobby, learn a new language, or set specific goals and deadlines to keep yourself motivated and engaged. Introducing challenges and milestones into your retirement can ensure that your future remains brighter than your past.
A Simple Challenge for a Happier Retirement
To get started on your journey towards a more fulfilling retirement, try a simple challenge for the next five days. Set a daily reminder on your phone, perhaps in the evening around 8:30 or 9:00 PM. When the alert goes off, ask yourself, “What made today better than yesterday?” Reflect on a couple of positive things from the day. Then, consider, “What can I do tomorrow that will make tomorrow better than today?” This small exercise can help you appreciate the present and look forward to a brighter future in retirement.
TL;DR
While financial investments are undoubtedly important for a comfortable retirement, these six non-financial investments can enhance your overall well-being and ensure that your retirement years are filled with happiness, purpose, and fulfillment. Don’t overlook the significance of these investments as you plan for or navigate your retirement journey.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
The concept of “unretirement” is gaining momentum as an increasing number of retirees are choosing to reenter the workforce. In this blog post, we’ll explore the reasons behind this trend, delve into both financial and nonfinancial factors contributing to unretirement, and highlight a common mistake retirees make when planning their retirement. We’ll also provide practical tips on how retirees can achieve fulfillment and purpose during their post-career years.
The Financial Motivation for Unretirement
Recent statistics reveal a surprising trend in retirement. According to T. Rowe Price, approximately 20% of retirees are currently working full-time or part-time jobs. Even more intriguing, a study from Paychex found that one in six retired individuals is contemplating returning to work, and the primary motivator for this group is financial need. Nearly 50% of those considering reemployment cited the necessity for additional income as their primary driver.
The Nonfinancial Aspects of Unretirement
While financial concerns play a significant role in the decision to unretire, there is another critical dimension to this phenomenon: the nonfinancial aspects. Many financially stable retirees, who do not necessarily need extra income, are still opting to return to work. Their motivations revolve around the emotional and social benefits of work.
A remarkable 45% of respondents in a survey mentioned that they return to work to fulfill social and emotional needs that retirement doesn’t satisfy. Loneliness, a lack of purpose, and a diminished sense of community are common challenges retirees face. These issues align with the three Cs of retirement fulfillment: connection, contribution, and creativity.
Fulfilling the Three Cs in Retirement
To combat the challenges of unretirement, retirees can focus on the three Cs:
Contribution: Retirees can donate their time and skills to causes or charities they are passionate about. Using their unique abilities to assist organizations can be incredibly fulfilling. Identifying your strengths is essential, and tools like StrengthsFinder can help pinpoint your skills.
Connection: Maintaining strong social relationships after retirement is crucial. Retirees should make a concerted effort to stay connected with friends and colleagues. Additionally, exploring hobbies and interests can lead to new social connections.
Creativity: Engaging in creative pursuits can provide a sense of purpose. Whether it’s pursuing a long-lost hobby, starting a new artistic endeavor, or exploring a passion, creativity can bring joy and fulfillment to retirement.
The Big Retirement Mistake: Starting Social Security Early
One common mistake retirees make is rushing to start Social Security benefits immediately upon retirement. This decision can backfire when retirees experience unretirement. If retirees exceed an earnings limit (around $21,000 per year), they may have to repay Social Security benefits at a rate of $1 for every $2 they earn.
To avoid this pitfall, retirees should consider waiting a few months before starting Social Security. During this time, they can rely on other savings and investments to cover their expenses while they gauge their interest in returning to work. This approach allows retirees to test the waters of retirement and ensures they don’t inadvertently incur financial penalties.
TL;DR
The rise of unretirement is a multifaceted phenomenon driven by both financial necessity and nonfinancial factors. As retirees consider returning to work, it’s crucial to balance their financial needs with the emotional and social aspects of retirement. By focusing on the three Cs—connection, contribution, and creativity—retirees can find fulfillment and purpose in their post-career years. Additionally, avoiding the common mistake of starting Social Security too early can help retirees navigate the transition to unretirement more smoothly, ensuring their financial security and overall well-being.
Disclaimer: Since we don’t know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Streamline Financial Services, LLC or its members cannot be held liable for any use or misuse of this content.
Affiliate Disclaimer: This post may include affiliate links where we may earn a payment when you click on the links at no additional cost to you.
Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.
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