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As you approach retirement, conventional wisdom is to spend down taxable assets and delay IRA & 401k withdrawals until the Required Minimum Distributions (RMDs) begin at age 72. This can be an effective strategy. Yet, in many situations, it may be better to start early IRA withdrawals.
Counter-Intuitive Advice and Early IRA Withdrawals
When does this counter-intuitive strategy make the most sense? It’s relative to your marginal income tax-brackets over a seven- to 10-year period.
For example, a married couple both age 62 can earn up to combined income $106,150 (gross) before the $25,100 standard deduction and still be in only the 12 percent marginal federal tax bracket. If they have $800,000 in IRA/401ks, they can withdrawal some of that money and still be in a low marginal bracket.
If that couple waits until age 72, those retirement assets with 7 percent growth may double to about $1.6 million, and RMDs would start at $62,800 per year. That RMD income along with $57,000 per year for Social Security would put them in a 25 percent marginal tax bracket in the future. (See table.)
Another trap is related to future Medicare premiums (Part B), which typically begin at age 65. The more income you have in retirement, the more you will pay in Medicare premiums. If your adjusted gross income plus municipal bond interest is more than $176,000 for a married couple, then monthly Medicare can increase from about $148 monthly per person up to $505. Paying attention to the nuances in Medicare rules could save a couple up to $8,500 per year.
Determining the best time for retirement distributions can be complicated. It’s smart to come up with a plan before you hand in your resignation. Your Perspective advisor will crunch the numbers and help you create the optimal strategy.
Excerpted with permission from “5 Investment Lessons from the Pandemic” by Steve Watson, Equity Portfolio Manager at Capital Group.
As a 30-year investing professional, the past 16 months stand out in my career as both intensely painful and incredibly instructive. What has this most unusual time in history taught me?
- Market crises are inevitable. The pandemic-driven stock market crisis led me to think of past market traumas I experienced. I counted 21, including the collapse of the Soviet Union, the bursting of the technology bubble, the global financial crisis, and now COVID-19. This list highlights the reality that market disruptions are a fact of life for investors. My list suggests we get one of these events every 18 months or so.
- History doesn’t necessarily repeat itself in ways you might expect. For instance, I lived in Hong Kong through the dark days of the SARS (Severe Acute Respiratory Syndrome) epidemic in 2003. When COVID hit, I was quick to make comparisons between the two. Yet, while SARS was frightening to live through, relatively speaking, it was a fairly minor event. Drawing false conclusions about COVID based on the SARS experience left many investors unprepared for the extent and duration of this pandemic.
- Diversification holds strong. While “growth” and “value” investment labels are overly broad, I’ll use them to make a point. I lean toward value, but I also have long-term growth-oriented investments. Many are tech-related (semiconductors, e-commerce, etc.) and I like to purchase shares when they’re down and out; I also hang on long enough to let the market catch up with what I think is the true value of the company. In hindsight, my selection of growth-oriented tech stocks saved my skin during the worst days of 2020.
Click here for a PDF of Watson’s full article. Investing Lessons Learned from the Pandemic
Habits – both good and bad – are something we all have. They’re part of our everyday routines, something we often do without any thought. Yet, we can all benefit by giving our habits more thought. As a financial planner, I love the idea that there’s a correlation between compound interest and habits.
“Habits are the compound interest of self-improvement,” wrote James Clear in his best-selling book, Atomic Habits*.
This idea really resonates with me.
I understand the benefits of how investments compound interest (we essentially earn interest on our interest). The opposite is also true. If we get into debt and owe interest on the interest that is owed, that negative compounding is a detriment.
Good and bad habits work the same way. Years ago, I was in the habit of eating a bag of chips every day at lunch. I love potato chips, but eating them daily wasn’t a great habit. A good friend knew I was trying to lose some weight, and he suggested I substitute the chips with a piece of fruit. It was a small change, but a significant one for me.
The success that came with that small adjustment led me to rethink my daily soda with lunch, as well. Each small change moved me closer to being the healthier person I wanted to become.
“Success is the product of daily habits, not once-in-a-lifetime transformations.” — James Clear
Once you decide to make a change, how do you make it stick? Consistency. Making the change automatic and trying not to miss more than two times in a row are two things that can help.
Let’s use a savings example. I have a friend who had never invested in the stock market. When she began a new job years ago that offered a 401K plan, I encouraged her to have automatic contributions withdrawn from her paychecks. Fast forward about 20 years, and she’d accumulated more than $250,000. Even though she did take some money out of the account along the way, she had still managed to save a nice sum of money for retirement.
We’re all human. We all get off track from time to time. Sometimes we miss deadlines, avoid workouts, or skip saving contributions. Give yourself room to be human. Know that you will have setbacks, and know that you can rebound. Commit to getting back at it as soon as possible.
The biggest rewards come when you have been consistent over long periods of time and your habits compound.
*When you purchase books from Bookshop.org, a portion of the proceeds supports the independent bookstores and authors listed on the site.
Teaching children about money management will help set them on the right path to financial independence and success. Of course, it’s not as easy as it sounds to begin a money conversation. As a parent, I understand how challenging it can be to impart ideas and wisdom on your own kids. Let’s face it, most young people are inclined to take advice from anyone but their parents. Factor in that many people don’t feel qualified to teach financial topics, and the task becomes even more daunting.
The good news is there are many resources and people to assist in you.
As a long-time and active volunteer for Scouts BSA, one of my regular roles has been as a Personal Management Merit Badge counselor. This badge addresses elements like creating a budget, knowing the difference between saving and investing, and exploring and evaluating careers. The curriculum was developed by Brent Neiser, CFP® and Eagle Scout. It’s a challenging merit badge that takes several months to complete.
I’ve learned a couple of interesting things by teaching the course. First, young people are often eager to talk about money if you approach it in a way that is relatable. Second, they tend to pick up on key concepts more quickly than you might expect.
Here are a few tips to begin a money conversation with a child or young adult in your life.
- Start with the basics. That means introducing the importance of living within your means. Earning a weekly or monthly allowance for completing chores is a great start. When a child manages an allowance, he or she begins to understand how to balance wants with cash flow.
- Make budgeting real and personal, not theoretical. Help your child create a budget. Older children can use a simple spread sheet to track spending, saving, investing and charitable giving. Young ones can use labeled envelopes or jars for each category.
- Show that money can grow over time. Use this simple chart to show how a person who invests $5,000 a year starting at age 25 can end up with nearly $825,000 by age 65, while one who waits until age 50 to invest $5,000 a year would have just $128,000. Then show them a picture of what they could buy with the $697,000 difference. (e.g, a new Tesla Roadster costs about $200,000; they could buy several.)
Our advisors often facilitate family discussions about money. It’s one of our Core Client Services. That’s the value of Perspective.
Effective vaccines, record government support, and pent-up demand are fueling a historic turnaround for the global economy. Data shows major economies bouncing back. In June, the International Monetary Fund more than doubled its 2021 U.S. GDP estimate to 6.4 percent. The National Retail Federation (NRF) also revised its forecast, anticipating retail sales growth between 10.5 percent and 13.5 percent. NRF’s initial projection for 2021 was 6.5 percent.
“The economy and consumer spending have proven to be much more resilient than expected,” said NRF President Matthew Shay. “While there are still risks related to worker shortages, tax increases and over-regulation, households are healthier overall and consumers are demonstrating their ability and willingness to spend.”