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Category: Retirement Planning

Where Will Your Retirement Money Come From

For many people, retirement income may come from a variety of sources. Here’s a quick review of six primary sources:

 

Social Security

Social Security is the government-administered retirement income program. Workers become eligible after paying Social Security taxes for 10 years. Benefits are based on each worker’s 35 highest earning years. (If there are fewer than 35 years of earnings, non-earning years may be counted in the calculation.) In mid-2018, the average monthly benefit was $1,413.[i],[ii]

 

Personal Savings and Investments

These resources can also provide income during retirement. Depending on your risk tolerance, time horizon and goals, you may want investments that offer steady monthly income over vehicles giving you the potential for double-digit returns. A quick chat with a financial professional can help you understand your risk tolerance as you approach retirement.

 

Individual Retirement Accounts

Traditional IRAs have been around since 1974. Contributions you make to a traditional IRA are commonly deductible. Distributions from a traditional IRA are taxed as ordinary income, and if taken before age 59½, may be subject to a federal income tax penalty. Once you reach age 70½, these accounts require mandatory withdrawals.[iii]

 

Roth IRAs were created in 1997. Contributions you make to a Roth IRA are non-deductible, as they are made using money that has already been taxed. Sometimes, only partial Roth IRA contributions can be made by taxpayers with six-figure incomes; some especially high-earning individuals and couples cannot direct money into Roth IRAs at all. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Roth IRAs do not have any required minimum distribution rules.3

 

Defined Contribution Plans

Many workers are eligible to participate in a defined-contribution plan such as a 401(k), 403(b), or 457 plan. Eligible workers can set aside a portion of their pre-tax income into an account, and the invested assets may accumulate with taxes deferred, year after year. Generally, once you reach age 70½, you must begin taking required minimum distributions from these workplace plans.[iv] Some plans may also include an option to contribute after tax income.

 

Defined Benefit Plans

Defined benefit plans are “traditional” pensions – employer-sponsored plans under which benefits, rather than contributions, are defined. Benefits are normally based on specific factors, such as salary history and duration of employment. Relatively few employers offer these kinds of plans today.[v]

 

Continued Employment

In a recent survey, 68% of workers stated that they planned to keep working in retirement. In contrast, only 26% of retirees reported that continued employment was a major or minor source of retirement income. Many retirees choose to continue working as a way to stay active and socially engaged. Choosing to work during retirement, however, is a personal decision that should be made after considering your finances and personal goals.[vi]

 

To speak to a CapSouth advisor about retirement planning contact our office at 800.929.1101 or visit our website at http://capsouthwm.com/services/financial-estate-planning/

 

Utilize our free financial calculator at https://capsouthwm.com/resources-guides/financial-calculators/

 

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.

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. 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.

[i] https://www.waddell.com/explore-insights/market-news-and-guidance/planning/9-facts-about-social-security

 

[ii] https://www.cbpp.org/research/social-security/policy-basics-top-ten-facts-about-social-security

 

[iii] https://www.cnbc.com/2018/07/30/roth-vs-traditional-iras-how-to-decide-where-to-put-your-money.html

 

[iv] https://www.fool.com/retirement/2018/11/21/the-most-important-401k-rules-for-maximizing-your.aspx

 

[v] https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp

 

[vi] https://www.investopedia.com/articles/personal-finance/101515/planning-retiring-later-think-again.asp

 

Social Security: By the Numbers

Social Security has been a pillar of retirement life for several decades, but how much do you really know about it? Here are a handful of facts that might surprise you:

 

The Social Security trust fund exceeds the gross domestic product of every country in the world except: China, the United States, India, Japan, Germany, Russia, Indonesia, and Brazil.[i]

 

For 61% of retirees, Social Security is a major source of income.1

 

Benefits are subject to federal income taxes, but it wasn’t always so. Amendments to the Social Security Act made benefits potentially taxable beginning in 1984.1

 

Benefits are determined by your average earnings during a lifetime of work, based on your 35 highest-earning years.1

 

If you receive Social Security, you no doubt welcome cost-of-living-adjustments (COLAs) to your benefits. Did you know that Social Security COLAs once required an act of Congress? That was the case before 1975, when they were finally pegged to advances in the Consumer Price Index.1

 

In the middle of 2018, more than 1 in 6 Americans were collecting Social Security benefits. Older Americans constitute about 80% of Social Security recipients, and their average monthly benefit in June 2018 was $1,413.[ii]

 

When should you begin taking Social Security? That may depend on several factors, but many people choose to claim benefits as soon as they are eligible. You can receive benefits beginning at age 62, but if you take them before reaching Social Security’s Full Retirement Age (67 for those born in 1960 or later), your monthly benefit will be fractionally reduced. You can wait until age 70 to claim your maximum potential benefit.

There are many factors to consider when determining the age at which you should begin taking benefits. We believe this decision should be made in conjunction with your overall financial planning process.

 

We would welcome the opportunity to discuss this further or to begin a conversation regarding your financial plan and how Social Security benefits fit into the plan.  Contact CapSouth at 800.929.1001.  For more information about CapSouth visit our website at www.capsouthwm.com 

 

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.

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. 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.

[i] https://www.waddell.com/explore-insights/market-news-and-guidance/planning/9-facts-about-social-security

 

[ii] https://www.cbpp.org/research/social-security/policy-basics-top-ten-facts-about-social-security

 

The Investment Risk No One’s Ever Heard Of

 

Knowledgeable investors are aware that investing in the capital markets presents any number of risks – interest-rate risk, company risk, and market risk. Risk is an inseparable companion to the potential for long-term growth. Some of the investment risks we face can be mitigated through diversification.[i]

As an investor, you face another, less-known risk for which the market does not compensate you, nor can it be easily reduced through diversification. Yet, it may be the biggest challenge to the sustainability of your retirement income.

This risk is called the sequence-of-returns risk.

The sequence-of-returns risk refers to the uncertainty of the order of returns an investor will receive over an extended period of time. As Milton Friedman once observed, you should, “Never try to walk across a river just because it has an average depth of four feet.”[ii]

Sequence of Returns

Mr. Friedman’s point was that averages may hide dangerous possibilities. This is especially true with the stock market. You may be comfortable that the market will deliver its historical average return over the long term, but you can never know when you will be receiving the varying positive and negative returns that comprise the average. The order in which you receive these returns can make a big difference.

For instance, a hypothetical market decline of 30% is not to be unexpected. However, would you rather experience this decline when you have relatively small retirement savings or at the moment you are ready to retire – when your savings may never be more valuable? Without a doubt, the former scenario is preferable, but the timing of that large potential decline is out of your control.

Timing, Timing, Timing

The sequence-of-returns risk is especially problematic while you are in retirement. Down years, in combination with portfolio withdrawals taken to provide retirement income, have the potential to seriously damage the ability of your savings to recover sufficiently, even as the markets fully rebound.

If you are nearing retirement or already in retirement, it’s time to give serious consideration to the “sequence-of-returns risk” and ask questions about how you can better manage your portfolio.

 

Visit www.capsouthwm.com for more information about CapSouth Wealth Management.

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.

 

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. 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.

[i] https://www.kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html

 

[ii] https://quotefancy.com/quote/868218/Milton-Friedman-Never-try-to-walk-across-a-river-just-because-it-has-an-average-depth-of

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