According to a recent article from US News, 72% of Americans say that they think it’s important to protect retirement savings. And with more and more headlines reporting market volatility, that number could certainly increase. Safeguarding your nest egg requires an investor to consider both the current financial situation as well as future expectations. Evaluating retirement income needs, understanding risk tolerance, and planning for emergencies and tax liabilities are just a few steps every retirement planner should take.
Here are a few guidelines to help keep your retirement funds safe and available when you need them most.
Develop a Financial Forecast for Retirement
“Nowadays, if you retire at 65, you should have a financial plan for 20 years,” stated Tenpao Lee, a professor of economics at Niagara University in New York.
Estimating withdrawals from a 401(k) and IRA, coupled with Social Security benefits, can help you set a budget for retirement. This goes a long way in avoiding overspending, falling into debt or depleting your savings. When determining a long term investing plan, you’ll have the choice on how to allocate your funds. Some forms of investments carry little risk, while others are considered very risky
“Typically, your risk is higher with a higher rate of return,” Lee said. “In general, stocks have higher potential returns with higher risks in the long term, and CDs have virtually no risk,” he added.
Before choosing a high- or low-risk investment, discuss your risk tolerance with a trusted financial professional who can then help you adjust your investments to align with the level of risk you are comfortable with.
Consider How Soon You Want to Retire
If you have several years before retirement, you might choose to take higher risks with your investments. For example, if you invest in stocks and the market takes a downturn, you will still have time to recover funds when the market rebounds.
“In a very general sense, those with a longer time horizon can usually afford to have a more aggressive portfolio allocation,” said Drew Feutz, a financial planner with Market Street Wealth Management Advisors in Indianapolis. “Those with a shorter time horizon typically need a less aggressive portfolio.”
Have Some Cash on Hand
Unexpected expenses are a part of life. Ideally you can avoid having to take funds from your long-term savings to cover a medical expense or major home repair. Consider keeping some emergency money in a checking or savings account for easy access.
“The last thing you want to do is pay huge penalties for dipping into your retirement accounts early,” said Deacon Hayes, founder of WellKeptWallet.com.
Not only do you lose the money needed to cover the expense (and subsequent fees), but the amount you take out won’t have the chance to earn interest and grow in the coming years too.
Plan for Taxes in Retirement
“The way you invest can impact your current tax returns, but it could impact future ones too,” Hayes stated.
For example, if you put money into a traditional IRA, you can deduct the contributions from your current tax return. When you take money from this account in retirement, you’ll have to pay taxes on it. With a Roth IRA, you will pay taxes on the amount you contribute to the account, but you won’t have to pay taxes on the money when you withdraw it in retirement.
If market fluctuations concern you, you might choose to put some of your funds in accounts that are generally not affected by volatility.
“Use products that only pay interest,” said Christopher Anselmo, president of Anselmo & Company and Brookside Tax & Financial Group in Middleburg Heights, Ohio. This could include savings accounts, checking accounts and CDs at banks. Immediate, fixed and indexed annuities are also an option. “Your money is not directly in the market,” Anselmo said. “It’s in the hands of the bank or insurance company.” Keep in mind that these plans often carry ongoing fees and a lower rate of return than other investment options.
Written by Rachel Summit