Introduction to Retirement Wealth Management
Retirement is referred to age when a person stops working or the age at which he became eligible to receive social security benefits. Different countries have different retirement age but the standard retirement age is 60. Talking about United States the average retirement age according to Mass Mutual Survey is 62 years.
In United States if an individual is born between the year 1943 to 1954 the full retirement age (FRA) is 66 and after it, he/she will start receiving the retirement benefits. If an individual is born between 1955 to 1960 the retirement age gradually increases and the retirement benefits are payable after age 67.
An individual can start collecting the social security benefits as early as age 62 but he/she would have to face certain losses such as 30% reduction in the benefit if he didn’t wait for FRA. If an individual delay the collection of benefits every year the benefits will increase gradually every month by 8% until an individual reaches the age of 70 where he receives the maximum benefits.
Retirement Wealth Management helps the individual to manage their finances before they reach their retirement age. It helps in managing retirement savings, planning for sudden and unexpected expenses, helps in developing retirement income strategies, and most importantly provides a peace of mind and financial security through proper wealth management for retirees.
Personalized Retirement Income Strategies
When an individual reaches the retirement age he shifts from earning a paycheck to drawing from their retirement amount, it is essential that he/she should personalized the retirement income strategies for managing their wealth in a set budget during retirement with proper planning.
According to the study of National Association of Plan Advisors 63% of the retiree claims that they major source of income is through social security. The benefit provided by the social security monthly in 2023 was around $1,835. This puts down to focus to enhance social security benefits. According to a survey it was identified that if an individual or a couple properly manage their finances, setup their monthly budget and move according to the plan the life of retirement saving increases by 10 years.
Furthermore, pensions are also provided as a source of income to the retiree to manage their finances and general expenses. 31% of the Americans are covered by traditional pension plan. Traditional pension plan is also known as defined benefit plan which guarantees a monthly set income to the retired people in exchange of their years of service. This amount is generally payout according to the employee salary and the year of service and is paid for the rest of the employees life.
A well-structured retirement withdrawal strategy helps in setting a monthly budget which ensure that the saving would last for longer while reducing the tax burden.
Investment Management for retirees
If an individual retires, rather than keeping the money in the drawer which would lose the value overtime due to inflation or exchange rate he/she should go with safe investment option rather than risky investment option.
Safe Investment Options
1. Saving Accounts
2. Annuities
3. Mutual Funds
4. Bond
5. EFTs
6. Dividend Stocks
Saving Account
1. It is the most fundamental option in retirement when an individuals top priority is saving the money. Saving accounts are in insured by Federal Deposit Insurance Corporation (FDIC) up to $250,000, making it a safe place to store the money.
2. Saving account provide easy access to the money which can be used for day-to-day living cost and or to cover unexpected expenses.
3. Saving account provide a peace of mind as it is not affiliated with market fluctuation this makes it a low risk option keeping your principal amount preserved.
4. Saving account provides interest on the preserved amount. The rate is lower than most of the other investment option like bonds or stocks, but it steadily grows your principal balance.
5. Saving accounts are most liquid because an individual can withdrawal the amount anytime for the use without any penalty. It is used for managing short-term financial needs.
Annuities
1. There are different types of annuities like Variable annuity, Fixes annuity and Indexed annuity. Depending on the type of annuity the retired individual receives a lump-sum income payment, or income payment on monthly, quarterly or annual basis.
2. An annuity guarantees income payment either over a period of time or right away. The income guaranteed by annuity is a supplement for retiree overall income either by social security benefits or individual retirement account (IRA). IRA is a self-managed account which is a personal saving account that help people save for their retirement and receive tax benefits over a period of time.
3. An annuity does not impose any contribution limit like 401k or an IRA. An individual can deposit as much money as he like in an annuity.
4. In an annuity an individual can lock-up the interest rate like 5% a year. By settling a fixed interest rate it will help in handling better how much income will be getting in.
5. Annuity refers to tax deferred contribution. This means that if an individual has put the money in an annuity and has not touched it will not be taxed and there is no tax on capital gain either. Payment form tax deferred annuity starts as soon as the one year after the setup of annuity.
6. Depending upon the type of annuity, it provides death benefits to the beneficiary either in a form of lump-sum payment or a percentage of regular income payment. Annuity holder can boost up the death benefit by additional cost.
Mutual Funds
1. In a Mutual Funds an individual needs to purchase it by paying a management fee as an expense ratio. This management fee helps to hire professional portfolio manager that handles and invest the money in stocks and bonds.
2. Dividend and other interest source help in growing your investment as they are declared for funds. It can also be used to purchase additional shares mutual funds.
3. Mutual Funds are easier to buy and understand. They are traded once per day at the net closing asset value (NAV). It has a minimum low investment and the benefit is that it eliminates price fluctuation that occurs through out the day and arbitrage opportunities that trader practice that day.
4. By investment in mutual funds it reduces the portfolio risk through the use of diversification, as most mutual funds can be invested in any 50 to 200 stocks depending upon the focus.
Bonds
1. Bonds are considered to be stable and a safer bet compared to stocks as its value reduces less compared to stocks. If an individual contacts the broker and asks for the safe investment advice, majority of the broker would advice to buy bonds plus stock because it would reduce their portfolio during stock market decline.
2. It is considered a best retirement option as it generates a regular income stream through interest payment from your savings.
3. Bonds such as (Municipal, I bond or Bonds issued by Federal government) are usually tax-free. As bonds are considered to be tax saving elements they provide low yield compared to taxable bonds. Usually, tax-free bonds provide a higher after-tax income to investor in high tax bracket.
4. Next in line after cash is Treasury (Bonds) which is considered to be the most liquid and safest option. Short-term bonds are usually used if funds are required in emergency or you need money relatively soon.
Exchange Traded Funds (EFTs)
1. EFTs provide diversified structured by providing varieties of investment platform such as stocks, bonds and other commodities. This diversification reduces the portfolio risk and help in mitigating down the risk. Having a diversified structure helps in retirement plan as it is not reliant on single investment option.
2. Another benefit of EFTs is that it reduces the risk by moving the money to a safer option which helps an individual to manage their portfolio efficiently as per the change in the market condition. Unlike mutual funds which can be traded at the end of the day, EFTs can be bought or sold on the stock market throughout the trading day. Due to the ease of buying and selling they are considered to be the most liquid.
3. EFTs usually have lower cost which is also known as expense ratio. In EFTs it follows a specific index like S&P 500 instead of hiring a manager who picks up the investment.
Dividend Stocks
1. Dividend Stock provides steady source of income and regular payout during retirement. This steady source of income helps in covering up the living cost without having sell off their investments.
2. Dividend paying companies experiences growth which helps investment grow its value overtime. This growth helps in protecting the purchasing power against the inflation.
3. It provides tax advantage as qualified dividends are often taxed at lower rate than regular income which reduce tax burden after retirement. Qualified Dividends are shares in domestic corporation held at least a minimum period of time known as holding period.
4. If an individual do not require the income right away they can reinvest their dividends in stocks to buy more shares. This reinvestment compounds your returns, leading to more income growth overtime.
Tax Planning in Retirement
Tax planning is important in retirement to manage the money efficiently. Some of the key strategies include managing Required Minimum Distribution (RMD) from IRA and 401(k)s, considering Roth IRA conversion and making tax-efficient withdrawal.
If an individual withdraws the right amount on the right time it will help in reducing the tax bills. Another wise option to think is the Roth IRA conversion which reduce taxes on future withdrawal. Other tax saving strategies are giving charities or opening up a tax deferred account to save taxes.
A well-managed planning is required during the retirement phase to reduce the tax bills and maximize the income to cover costs like healthcare during emergency by keeping a specific amount of money in the pocket.
Managing Retirement Expense
One of the major challenges that people have to face during their retirement period is managing their expenses proper and wisely. This requires setting up a proper retirement budget tips that ensures that the income meets the individual needs while allowing to enjoy the retirement years. Providing retirement budgeting tips helps in planning for long-term care, health care planning and protect the retiree from inflation. Planning is the key fundamental during retirement phase where an individual can enjoy his retired life and maintain a lifestyle without depleting the savings.
Estate and Legacy Planning for Retirees
Estate and Legacy Planning for Retiree is a key fundamental for wealth management which ensures that the assets of an individual is passed on to their heirs and that their legacy is protected.
The main reason for this planning that it include creating trusts and managing the estate to ensure that the money and property is transferred to the right people you care about protecting your assets form unnecessary taxes and legal issues.
Long-term Financial Security in Retirement
The main goal of retirement wealth management is to manage the finances properly for a long period of time. This means that managing the income and expense now while also planning for the future. Financial independence in retirement means that having a peace of mind and enough money to enjoy the retirement phase without worrying about finances.
Taking advices and working with financial advisors is very helpful as they guide through the complexities associated with the retirement planning, helping in avoid the common mistakes and ensures that the future of an individual is secured. This helps retired people to enjoy their retirement phase without financial stress.
