People planning to retire in the near future, those already retired, and some transitioning to life after work are more concerned about their investments than ever.
geopolitical events, the surge of inflation and expected increases in interest rates are causing people to worry about where their money is going and whether it will grow enough to meet their retirement needs. But they must not let external forces beyond their control overwhelm their ability to prioritize, adapt and invest wisely.
Here are six tips that can reduce anxiety and add more certainty to your investment strategy as you near or retire:
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1. Don’t give in to knee-jerk reactions
Disable mainstream media financial news programs and random Google searches. They are meant to stir up fear because fear wins over viewers and readers. If you listen long enough or read a lot of negative financial news, there’s a greater chance that you’ll end up making an ill-advised and ill-timed decision about your investments. Instead, let curiosity about the media lead you to seek personalized advice.
2. Differentiate your money between short-term and long-term
People tend to treat all their money the same. The financial industry organizes it in this way in the training of advisers. For example, some advisors will tell people that if they have $1 million, they can withdraw a certain percentage of that money each year and all is well. But this approach leads retirees to think of it as a single pot of money that works the same way no matter what type of account they used for their savings and how the account is invested.
This creates an incomplete picture because in reality they will use some money in the short term and some in the long term. To begin, simply by separating the money into these two time limit can help build a smarter investment and income distribution strategy.
3. Strengthen your sources of income
The transition from work to retirement is understandably uncomfortable. Before retirement, you were getting a steady paycheck from work, but in retirement, you want your money to do the work of the paycheck so you can go play. Consolidating retirement income streams gives retirees the comfort of knowing that they are receiving a certain amount each month and each quarter. This security can change their entire emotional outlook in retirement. This can be the key to having more confidence to do the things they want to do.
It might help to think differently about a retirement income stream. Instead of viewing this as a percentage drawdown from accounts, consider devoting resources over different time periods.
For example, you might have a segment of assets to use in the short term that aren’t dependent on the stock market, such as cash-like instruments that work like a CD, money market fund, or bond. Stock volatility is discussed every night on the news and can cause retirees to react emotionally to their investments and income based on ups and downs. If you have separate income streams from the stock market, you are not beholden to market whipsaws.
4. Invest in quality companies for the long term
Because of inflation, longevity, expenses, and all the things you want to do in retirement, your money needs to grow over the long term. An enjoyable retirement largely depends on achieving steady investment growth; therefore, retirees should be invested in a certain amount of stocks.
Investing in quality companies can build investor confidence in retirement because the investor knows what they have. Time has shown that the valid and sustainable approach to investing can be to focus on companies with a sustainable competitive advantage, strong management, fair value for money, and a long, proven track record of navigating economic cycles.
5. Focus on tax efficiency
The “bucket” of assets you take money from and the potential tax consequences of when you take it to meet your retirement income needs should be factored into your overall retirement plan. Being tax efficient could make a big difference to your usable dollars. In fact, the amount of money you can use after taxes might matter more in retirement than the amount of money you have or how much it grows.
To be tax efficient, you need to allocate your money wisely into three different categories:
- The tax-free portion (including Roth accounts and life insurance), which is not taxed at all when withdrawn.
- The tax-deferred portion (IRA and 401(k) accounts, etc.), which are taxed at your ordinary tax rates.
- Taxable slices (brokerage accounts), where gains are taxed at capital gains tax rates.
You should consider investing differently in each of these funds based on the tax implications of the accounts and develop a strategy for withdrawing money from each to maximize tax-efficient withdrawals.
6. Let integrated planning help you make informed decisions
A solid investment strategy is not limited to the contents of your portfolio and its percentage return; it should be integrated into your overall income, your investments and your retirement tax system. This is where the added value of an advisor can be realised. Most advisors do not do integrated planning and therefore tend to miss opportunities to maximize income withdrawals, investment efficiency and tax minimization.
The tendency of advisors is to sell a product and simply gather assets to manage a portfolio, leading many to conclude that a portfolio balance or investment prospectus is a blueprint. The characterization of a product, whether life insurance, annuities, mutual fund or individual stocks, does not collectively constitute a plan. An integrated plan examines five essential dimensions of retirement design: income, investment, taxes, protection and inheritance. It’s one thing to just talk about planning and it’s another to have integrated planning that weaves all the pieces together.
When the paycheck from work is gone, your wallet has to support the work for you in retirement. It’s worth reviewing your investments at regular intervals to make sure you’re taking advantage of income, investment and tax opportunities that may be available to you.
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