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Category: Retirement

Retirement Planning: Before and After

Working with clients, I often find that retirement planning can be an ambiguous idea for many, with numerous factors and circumstances to consider, when many of us are just trying to get through the next year…or even the next week!  We plan for retirement because we know that we likely do not want to have to work forever, and we know that there are steps we should be taking now when time is on our side to ready ourselves for that freedom of “making work optional”. 

Once clients reach retirement, there is still often a significant change of thought process.  I often get questions from clients… “What do we do now?  How do we convert our accumulated assets into monthly spendable income? 

With your input, we endeavor to devise a plan that puts you on the road to financial security.  The result is designed to leave you with sufficient assets so you can maintain your desired lifestyle or pursue new interests that you may develop in retirement.

We can help you with the numbers.  But first, let’s ask some basic open-ended questions.

  • What are your values?
  • How do you feel about money?
  • What goals do you have for retirement?
  • When would you like to retire?  Full retirement or change of employment with reduced income for a time?
  • What would you like to do in retirement?
  • How would you spend your days?
  • Do you enjoy traveling?
  • What are your hobbies?
  • Do you want to stay in your home or are you considering a smaller place?
  • Would you like to live in a different location?
  • Would you move closer to family or kids?
  • Or would you choose a location based on climate or quality of life?

Your goals are your goals.  They are not mine.  They are not your family members’ goals, and they are not your friends’ goals.  Your personal values and goals play a big role in your retirement planning picture.

BEFORE RETIREMENT (Already retired?  You can skip ahead or read anyway and tell your friends!)

Retirement sounds great, but can’t we balance those savings with enjoying today as well?  Yes, and we should!  Here are some general retirement planning guidelines:

  1. Set aside six months of expenses in an emergency fund. While skyrocketing interest rates have hampered stock market performance over the last year, savers can currently earn 5% or more risk-free. We’d be happy to point you in the right direction.
  2. Save up to 15% of your income in your company’s 401k. If zero to 15 in one paycheck leaves you short of breath, start small and ratchet it up over time.  You won’t miss the cash. But if it turns out that 15% is too difficult or interferes with other financial goals, at least always capture your company’s match.  It’s free money!  Why leave any behind?
  3. Build a “Life Account”. Make sure your savings are not solely in your retirement account.  “Life” will likely happen prior to you reaching age 59 ½.  Build a comfortable level of funds in a taxable investment account that you can access without tax penalties when needed prior to retirement age.
  4. Get out of debt. This includes student loans, credit cards, and auto debt.  We can talk about whether you should try to pay down your mortgage in a timelier manner…it depends.
  5. Max out IRA/Roth IRA and HSA. Consider fully funding an IRA or Roth IRA account and max out your health savings account if it’s offered as a part of your health coverage.
  6. Are you 50 or older? If so, consider catch-up contributions for retirement savings.  For an IRA, you may contribute up to $7,500 in tax year 2023. The 401(k) contribution limit for 2023 is $22,500 for employees.  If you’re 50 or older, you’re eligible for an additional $7,500 in catch-up contributions.
  7. Diversify within asset classes and among asset classes. When you are young, a diversified portfolio that leans heavily on the equity side of the allocation is probably your best choice.  Dollar-cost averaging through regular contributions allows you to take advantage of market dips. As you near retirement, you will likely want to gradually reduce risk by shifting to fixed income investments and reducing your exposure to stocks.
  8. Leave room for fun. It is certainly important to set goals and to make a plan to achieve those goals.  It is also important to live a little!  Saving everything and living on sardines alone is not fun for most of us.  Retirement planning allows us to put our savings into perspective and to know where we want to go and what it will take to get there.  Once we have that picture, we can evaluate the tradeoffs of saving more and retiring earlier or spending more in retirement, or retiring later and being able to spend more either now or in retirement.  I believe there can be freedom in a healthy balance between saving for the future and enjoying life now.  It really is all about a personal plan to challenge you to define and to live your One Best Financial Life®.

AFTER RETIREMENT

Our retirement planning work is not done just because we reached that long-awaited goal of retirement!  The direction of our work and our questions pivot to maximizing this period of your life. 

There are many factors that can derail your retirement picture – investment risk, inflation risk, catastrophic illness, long-term care, and taxes to name some.  A comprehensive retirement planning process should account for stress testing these obstacles to provide confidence in the probability of your success under these scenarios. 

Below are some general concepts to evaluate during this period of life:

  1. Think of retirement in phases. Our ability to enjoy our retirement years often wanes over time due to our health.  This is sometimes referred to as your go-go years, your slow-go years, and your no-go years.  You may decide that you want to continue to work part-time in the early years of retirement.  You may want a larger travel budget that reduces over time.
  2. Increase your reserve fund. While six months’ expenses may be an adequate emergency fund during working years, you may want to extend that to a year’s worth of expenses during retirement.  This comfort level is certainly different for each client, however the objective is to not have to liquidate funds in a down market.  This consideration will also factor into recommendations of investment allocations across various accounts or “buckets” of money.
  3. Systematize and Keep It Simple. We generally recommend evaluating your regular living expenses and your current income sources, and then setting up an automatic, once per month transfer from an investment account to your checking account for the difference.  For you, there is still a systematic income each month that resembles the paycheck you received prior to retirement.  Your overall investment allocation can be set up so that the account those transfers are coming from is invested with about a year’s worth of funds at a conservative risk level.  This account is then replenished periodically from other accounts based on market conditions and tax strategies.  The goal is for you to be able to enjoy life, and for us to manage that income flow for you.
  4. Consider Social Security carefully. Various timing strategies are available for claiming Social Security benefits.  Many times clients are eager to begin drawing their benefits as soon as they can – after all, they have been paying into them for years.  However, claiming early can have significant impacts on your total benefit.  Though you can begin drawing at age 62, you will receive a reduction of 5/9th of one percent for each month you draw earlier than your full retirement age (FRA) up to 36 months, and 5/12th of one percent for each month thereafter.  For example, drawing at age 62 when your FRA is age 67 will result in about a 30% reduction in your benefit. Delaying Social Security after your FRA has benefits worth considering.  You receive a guaranteed 8% increase for each year you defer your benefit from your FRA to your age 70.  This is in addition to any cost of living adjustment. For married couples, the timing of Social Security claiming is of particular importance for the spouse with the higher benefit amount.  After the death of the first spouse, the surviving spouse will get the higher of the two benefits.  The lower benefit amount will then cease. It is also of note that a divorced individual who was married to their previous spouse for more than ten years has the right to claim on the former spouse’s benefit without affecting the former spouse’s personal benefit. When should you file?  The answer will depend on your specific circumstances and the greater context of your financial plan, including the consideration of your health and family longevity.  A greater Social Security benefit is helpful if you or your spouse are alive to receive it.
  5. Don’t Forget Taxes. Tax planning is arguably more important than ever in retirement.  The timing and order of withdrawals from various types of accounts can have significant tax consequences – negative and positive. For clients with no concern over beneficiaries, maybe withdrawing from taxable accounts first, then tax-deferred, and finally tax-free accounts is best.  However, even in this example, consideration should be given to current and future tax rates and brackets, and the impact of Medicare IRMAA charges and Social Security taxation on a surviving spouse. Clients who expect to leave funds to their children or other heirs should add particular consideration to substantially appreciated assets that might be better held and passed at death to obtain the step-up in basis for the heirs. Roth conversions can be utilized to take advantage of lower income years or lower tax rates, moving assets from tax-deferred to tax-free growth going forward. Charitable goals can increase the benefit of sound charitable planning.  Utilization of batched giving, a donor advised fund, or maintaining tax deferred funds for future qualified charitable distributions after age 70 ½ are some valuable strategies that may apply.
  6. Remember that your plan knows about those dollars, too. Clients sometimes mention spending accumulated funds held in outside accounts on splurge purchases with a comment like, “But those were from my funds in my other account.”  Or, “those funds came from the sale of that investment property I had”.  It is very important to remember that your plan has likely accounted for those funds, too. 

When building a client’s plan, we discuss various resources including retirement accounts, pension incomes, rental property, private investments, etc.  Sometimes those income sources are for limited periods, or they might come in as a one-time future infusion of income.  Your plan factors these income sources in, as well as the growth on those assets once received, to fund your current and future retirement goals. 

Inflation can have a significant impact on your retirement expenses over time.  The longer a retirement period, the greater the impact.  By the time that the long-term care need occurs, the cost will likely be much greater than you might think.  The cost of your current lifestyle will likely cost substantially more twenty years from now.  Funding those future goals generally requires growth of your assets over time. 

It is easy to think of your current expenses and to get too comfortable with those being covered by part-time income, short-term or level pension amounts, etc.  It is important, though, to have a comprehensive retirement plan that keeps everything in perspective and to remember that your plan is counting on those excess funds received to be invested in accordance with long-term investment allocation.

There are no easy roads, but a disciplined approach to retirement planning that emphasizes consistent savings, a modest lifestyle based on your income, and minimal debt should serve you well as you travel the road toward financial security and retirement.  A sound financial plan also provides freedom.  Once you know you have your bases covered for retirement, you can feel more free to enjoy life now as well.

If you have questions about any of these concepts or how they might apply to your situation, please reach out to me or your CapSouth advisor.

To learn more about CapSouth Wealth Management visit our website at https://capsouthwm.com/what-we-do/or Connect With Us to learn more about our process.

By: Scott F. McDowall, CFP®

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material is from an unaffiliated, third-party and is used by permission. Any opinions expressed in the material are those of the author and/or contributors to the material; they are not necessarily the opinions of CapSouth. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Retirement Gets a Boost – 9 Key Takeaways on SECURE Act 2.0

The end of 2022 was wild! I watched my beloved Georgia Bulldogs squeak out a College Playoff semi-final win over Ohio State just as the clock struck midnight in an epic comeback that may have taken several years off my life.  It was a fantastic way for me to say goodbye to 2022 and hello to 2023.  The Bulldogs weren’t the only ones squeaking out wins in the final hours of 2022 though.  Congress finally came together to pass the much-anticipated SECURE Act 2.0 that had been rumored for the last year. 

A little rusty on SECURE Act 1.0? A lot of life has happened since it was passed including living in the midst of a pandemic!  At the end of 2019, The Setting Every Community Up for Retirement Enhancement Act of 2019, popularly known as the SECURE Act, was signed into law.  Now called SECURE Act 1.0, it included provisions that raised the requirement for mandatory distributions from retirement accounts and increased access to retirement accounts.

Two of the most notable provisions from SECURE Act 1.0 was the increase of the Required Minimum Distribution (RMD) age from 70 ½ to 72 and that many Inherited IRAs had to begin using the 10-year distribution rule.  While we’ve been busy updating financial and estate plans over the last few years, Congress has been increasingly focused on trying to enhance the original landmark bill that was enacted barely three years ago.

Tucked inside a just-passed 4,155-page, $1.7 trillion spending bill are plenty of goodies, including another overhaul of the nation’s retirement laws.

[[https://images.thinkadvisor.com/contrib/content/uploads/documents/415/479719/GA_SECURE-2.0-Act-of-2022_Section-by-Section-Summary-FINAL.pdf Dubbed SECURE Act 2.0]], the bill enjoys widespread bi–partisan support and builds on SECURE Act 1.0 by strengthening the financial safety net by encouraging Americans to save for retirement.

Let’s review 9 key takeaways from SECURE Act 2.0.

9 key takeaways on SECURE Act 2.0

1.RMD Age will rise to 73 then 75.

As we reviewed earlier, 1.0 increased the age for taking the required minimum distribution, or RMD,to 72 years from 70½.  2.0 brings an increase again from 72 to 73 then to 75 by 2033.

If you turn 72 this year, the age required for taking your RMD rises to 73 with 2.0.If you turned 72 in 2022, you’ll remain on the prior schedule.

If you turn 72 in 2023, you may delay your RMD until 2024, when you turn 73. Or you may push back your first RMD to April 1, 2025. Just be aware that you will be required to take two RMDs in 2025, one no later than April 1 and the second no later than December 31.

Starting in 2033, the age for the RMD will rise to 75.

Employees enrolled in a Roth 401(k) won’t be required to take RMDs from their Roth 401(k). That begins in 2024.

The new rules recognize that Americans are living and working longer.

2. RMD penalty relief.

Beginning this year, the penalty for missing an RMD is reduced to 25% from 50%. And 2.0 goes one step further. If the RMD that was missed is taken in a timely manner and the IRA account holder files an updated tax return, the penalty is reduced to 10%.

But let’s be clear, while the penalty has been reduced, you’ll still pay a penalty for missing your RMD.

3. A shot in the arm for employer-sponsored plans.

Too many Americans do not have access to employer plans or simply don’t participate. Starting in 2025, companies that set up new 401(k) or 403(b) plans will be required to automatically enroll employees at a rate between 3% and 10% of their salary.

Automatic escalation will also be required for these new plans starting in 2025. Contribution percentages must automatically increase by one percent on the first day of each plan year following completion of a year of service until the contribution is at least 10 percent, but no more than 15 percent of eligible wages.

The new legislation also allows for automatic portability, which will encourage folks in low-balance plans to transfer their retirement account to a new employer-sponsored account rather than cash out.

To encourage employees to sign up, employers may offer gift cards or small cash payments. Think of it as a signing bonus. Employees may opt out of the employer-sponsored plan.

4. Increased 401(k) (and similar plans) catchup provisions.

In 2023, if you’re 50 or older and participating in a 401(k) plan, you’re allowed to make additional catch-up contributions to your retirement accounts. Currently, those catch-up contributions are limited to $7,500 for most workplace plans and $1,000 for Roth and traditional IRAs.

In 2025, 2.0 increases the catch-up provision for those between 60 and 63 from $7,500 in 2023 to $10,000, (the greater of $10,000 or 50% more than the regular catch-up amount).

Starting in 2024, Catch-up dollars are required to be made in Roth dollars if your wages are over $145,000.

5. Emergency Savings Accounts Linked to Retirement Plans.

Beginning in 2024, retirement plans may offer linked “emergency savings accounts” that permit non-highly compensated employees to make Roth (after-tax) contributions to a savings account within the retirement plan.   Employers must match contributions as if they were deferrals made to the employer plan (employer match goes into the retirement plan). Assets must be held in cash or similar investments. Participants must have monthly access to the funds and the first four distributions must be at no cost to the employee.  The distribution will be penalty [MB1] [AK2] free.

Upon termination of employment, any emergency savings account can be converted to another Roth account within the plan or can be distributed to the participant.

6. Disaster relief.

You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Withdrawals can be repaid to the retirement account.

7. Help for survivors.

Victims of abuse may need funds for various reasons, including cash to extricate themselves from a difficult situation. 2.0 allows a victim of domestic violence to withdraw the lesser of 50% of an account or $10,000 penalty-free.

8. Student loan payments will qualify for 401(k) match.

Starting next year, employers are allowed to match student loan payments made by their employees. The employer’s match must be directed into a retirement account, but it is an added incentive to sock away funds for retirement. For those torn between whether they should pay down student loan debt or contribute to a 401(k) plan to receive the company match, this is a welcomed relief.

9. Rollover of 529 plans.

Starting in 2024 and subject to annual Roth contribution limits, assets in a 529 plan can be rolled into a Roth IRA, with a maximum lifetime limit of $35,000. The rollover must be in the name of the plan’s beneficiary. The 529 plan must be at least 15 years old.

In the past, families may have hesitated in fully funding 529s amid fears the plan could wind up being overfunded and withdrawals would be subject to a penalty. Though there is a $35,000 cap, the provision helps alleviate some of these concerns.

Whew!  That is a very highly level recap of 9 key takeaways of SECURE Act 2.0. Keep in mind that the bill is voluminous and had approximately 90 changes!

What Does it All Mean for You?

This bill reminds us that the only constant thing in life is change.  With so many changes over a variety of years, there is a great deal to keep up with in the coming years.  As with most bills, I anticipate we will see additional guidance on various provisions.  Some of the items are immediate while others will be implemented years down the road. 

If you are still working and have an employer sponsored retirement plan like a 401(k), pay close attention to the communication your employer provides. It will take some time for retirement plan Recordkeepers such as Empower, Principal and Fidelity to update their technology platforms to implement the provisions such as the Emergency Savings Accounts and the Student Loan Match.  The good news is that these provisions have been rumored for awhile and many of the key players in the retirement industry have been working diligently as they anticipated they would eventually become law.

For those of you that are transitioning to retirement soon, the catch-up provisions will be particularly important to you. It will vary by current age and timing of the law.

Finally, for retirees, the changes to RMD age may create additional planning opportunities as well as some relief if your RMD is not taken in a timely manner.

Regardless of your life stage, it’s more important than ever to be in close communication with your Financial Advisor. 

Final thoughts

With so many major changes, providing only 9 key takeaways for the Secure Act 2.0 may seem inadequate.  I promise that providing many more would be overwhelming – like trying to drink from a water hose.

The one thing I know for sure is that many Americans lack adequate savings, and the just-enacted bill helps address some of the challenges many Americans face as they march toward retirement.  It’s a step in the right direction and encouraging to see Congress working together to further help Americans retire with dignity.

We are always here to assist you, answer your questions, and tailor any advice to your needs. Additionally, feel free to reach out to your tax advisor with any tax-related questions.

by: Jennifer Fensley, CFP®, CRPS®

Sources: [[https://images.thinkadvisor.com/contrib/content/uploads/documents/415/479719/GA_SECURE-2.0-Act-of-2022_Section-by-Section-Summary-FINAL.pdf Secure Act 2.0 Act of 2022]]; [[https://www.fidelity.com/learning-center/personal-finance/secure-act-2 SECURE 2.0: Rethinking Rretirement Ssavings]]; [[https://www.schwab.com/learn/story/congress-passes-major-boost-to-retirement-savings Congress Passes Major Boost to Retirement Ssavings]]; [[https://www.wsj.com/articles/WP-WSJ-0000441889 The 401(k) and IRA Changes to Consider After Congress Revised Many Retirement Laws]]

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results. This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

Retirement Strategies for Women

Helpful Retirement Strategies for Women

Preparing for retirement can look a little different for women than it does for men. Although stereotypes are changing, women are still more likely to serve as caretakers than men are, meaning they accumulate less income and benefits due to their time absent from the workforce. Research shows that 39% of women took a significant amount of time off work to care for loved ones – compared to 24% of men.1 Women who are working also tend to put less money aside for retirement, saving just 7% of their paychecks on average, while men save closer to 10%.2

These numbers may seem overwhelming, but you don’t have to be a statistic. With a little foresight, you can start taking steps now, which may help you in the long run. Here are three steps to consider that may put you ahead of the curve.

1. Talk about money. Nowadays, discussing money is less taboo than it’s been in the past, and it’s crucial to taking control of your financial future. If you’re single, consider writing down your retirement goals and keep them readily accessible. If you have a partner, make sure you are both on the same page regarding your retirement goals.3,4 The more comfortably you can talk about your future, the more confident you may be to make important decisions when they come up.

2. Be proactive about your retirement. Do you have clear, defined goals for what you want your retirement to look like? And do you know where your retirement accounts stand today? Being proactive with your retirement accounts allows you to create a goal-oriented roadmap. It may also help you adapt when necessary and continue your journey regardless of things like relationship status or market fluctuations.2

3. Make room for your future in your budget. Adjust your budget to allow for retirement savings, just as you would for a new home or your dream vacation. Like any of your other financial goals, you may find it beneficial to review your retirement goals on a regular basis to make sure you’re on track.3

Retirement may look a little different for women, but with the right strategies – and support – you’ll have a good start toward achieving the retirement you’ve always dreamed of.

To learn more about CapSouth, visit our website at www.CapSouthWM.com

  1. Pew Research, 2019
  2. Money Talks News, 2019
  3. Forbes, 2019
  4. MarketWatch, 2019

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

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