You worked hard to hit a $1 million-plus retirement goal.
It’s a nice nest egg, but that balance can be deceiving if you make costly missteps. That’s because total savings don’t fund retirement; spendable, after-tax dollars do.
“Most people have a number in mind – that when their account balances get to it, they’re set and can retire with ease,” says Amanda McHugh Stilwell, senior financial advisor and founder of Clarity Financial Solutions.
“In order to really understand how much of that $1 million you get to keep, you need to consider what type of money you’ve saved, how much income you need for your living expenses and where it’s going to come from, and what is the after-tax balance of your accounts,” she adds.
Misunderstanding the tax implications of your retirement accounts – be they tax-deferred IRAs with required distribution dates, employer-based 401ks, or tax-advantaged brokerage and instant-access savings accounts – can have significant implications.
Ill-timed withdrawals can result in higher tax brackets and payments, costly Medicare premiums, and less money for life’s unexpected expenses, whether that’s a new roof or a family member in need.
Instead of mistakenly thinking of lump-sum savings, consider your retirement accounts as different buckets, Stilwell says, adding that having “those diversified buckets is paramount. You want specific types of money to be able to manage the (tax) brackets.”
Not considering controllable risks is another mistake, Stilwell says, adding that it’s also important to plan for longevity, budget for healthcare costs, and determine the right time to take Social Security benefits.
While you can’t control how inflation, changing tax legislation, or rates of return will impact your retirement funds, you can have “diversification, different distribution buckets, a distribution plan, and a required minimum distribution strategy,” she says.
Clarity Financial Solutions can help you create a retirement plan that maximizes your savings. “You really need to be able to determine realistically, and stress test along the way, exactly how long your money is going to last. You saved it for a reason,” Stilwell says.
Always consult a financial, tax, or legal professional familiar with your unique circumstances before making any decisions. This material is intended for educational purposes only and does not constitute financial, tax, or legal advice. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any rates of return are historical in nature and are not a guarantee of future returns, which may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions and security positions, when sold, may be worth less or more than their original cost.
