The biggest expense you’ll pay in retirement


You have spent hard-earned years saving for retirement.

You put a plan in place when you were young, and have had the financial discipline and mental fortitude to follow through. Now it is time to enjoy the fruits of your labor. But, there are still two huge risks to your retirement. One is market risk, the chance that the market turns close to your retirement age and you lose a substantial portion of your nest egg. This risk can be partially hedged through diversification, conservative portfolio adjustments, and strategies that utilize downside protection. The other risk is something that people think about and know about, but sometimes fail to grasp the severity of – taxes.

What tax bracket will you be in when you retire?

It may be difficult to predict, but generally, people assume they will be in a lower tax bracket due to reduced retirement income. But, they often fail to factor in everything that counts as income. Not only does this include withdrawals from your 401(K) or other Traditional retirement accounts, but things like social security benefits, pensions, and annuity payments may bump you into a higher tax bracket.

Where do you think taxes are headed in the future?

While nothing is certain, taxes tend to increase, not decrease. With Trump-era tax cuts set to expire, many may be surprised to be stuck with a hefty and unexpected tax burden in just a few years. Tax hike bills are already in the pipeline, and any future administration may decide to raise them even more. A clear tax optimization strategy could shield a big chunk of your nest egg from Uncle Sam.

How much income does that leave you in retirement?

Conservatively-fiscal retirees, chanting the mantra ‘Hope for the best, prepare for the worst’, may choose to only withdraw 3% of their retirement fund each year – more liberally-minded retirees may choose 4 or even 5%, and then adjust those percentages based on yearly inflation. But, considering a $1,000,000 retirement portfolio, is a yearly income of $30,000 minus taxes enough? Or $40,000? Or even $50,000? Probably not. So what to do?

There are solutions.

The biggest move you can make right now is to start contributing to post-tax retirement savings, such as the Roth IRA or Roth 401(k). Another is to allocate portions of your non-qualified retirement funds to tax-advantaged investments like Municipal Bonds. The last choice is to explore other retirement savings options that grow tax-free. Indexed Universal Life Insurance, if funded correctly, can provide a tax-free income stream in retirement with the added benefit of 100% downside protection in a falling market. Mission Critical FPI specializes in helping people capture the big picture when it comes to budgeting for retirement. Please give us a call today to discuss your goals.  

About the Author

  • Jeff Geraci

    Jeff Geraci grew up all over the world in a military family, and spent 5 years on active duty. While serving, he felt the tug between planning for financial independence with a limited income, and an all-consuming job. That’s when he decided that with a financial plan and a mentor, a service member could be successful in his career and finances! Military members are decisive, family-oriented, and really too busy to keep up with the changing financial world: the psychographics matched, people with military experience were an ideal community to serve!

Jeff Geraci

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