Planning Your Successful Retirement Investment Strategy in Norman, Oklahoma

You can give your retirement savings a boost by investing capital through a tax-advantaged account geared specifically to retirement savers. People saving enough for retirement is a winning proposition across the board – new job seekers can take the place of the outgoing retirees, opening up positions for the youngest crowd to join the workforce. Meanwhile, the retirees live off their nest egg and depend less on the government for sustenance.

A successful retirement (hyperlink future blog “What are the different types of retirement accounts”) is always good news, that’s why the government offers tax breaks to those who attempt to save. Of course, this is the federal government we’re talking about here, so there’s inevitable red tape and fine print to get through (ie. income limits and contribution caps). But if you’re able to use these vehicles to fund your retirement, you’ll find yourself owing much less to Uncle Sam long-term.

• 401(k) Accounts – Named after the tax code that enabled their existence, the 401(k) plan is an investment vehicle that provides tax breaks to those who contribute (up to a certain amount). A 401(k) plan must be sponsored by an employer, who then enrolls their workers and provides investment choices through a custodial broker. Contributions made to 401(k) accounts are tax-deductible up to a certain limit ($19,500 in 2021).

Strings are attached, of course. Funds cannot be withdrawn before age 59.5 without penalty unless certain circumstances apply and you’ll still owe taxes when you withdraw the funds. Plus, only certain investments like mutual funds can be used within the account. But the 401(k) is a great vehicle for employees and one of the primary vectors to begin building a nest egg.

• Individual Retirement Accounts (IRAs) – An IRA isn’t attached to an employer and can be opened by anyone with earned income to invest. For eligible contributions, you’ll get a tax deduction up to a certain limit like a 401(k), although this limit is only $6,000, certain limits apply and, the tax deduction has income restrictions.

For eligible IRA contributions, you’ll get a tax deduction up to a certain limit like a 401(k), although this limit is only $6,000 ($7,000 if you’re 50 or older). Additionally, the tax break has some restrictions. If you or your spouse already have a retirement plan through work, you’ll face a phased-out tax deduction ($68,000 for individual filers, $109,000 for married couples). There’s no income limit if you don’t have an employer-sponsored plan.

• Roth IRAs – The Roth IRA is a unique retirement vehicle. Instead of the tax break occurring upfront, IRA contributions are made with already taxed dollars and the investments made with them grow tax-free. For example, if you invest $6,000 into a Roth IRA, you won’t be able to deduct $6,000 from your current year’s tax bill.

However, any investment profit made with that $6,000 will remain untaxed provided it’s withdrawn after age 59.5 and the account has been established for five years. And since your principal has already been taxed, you can withdraw it at any time without penalty.

Roth IRAs aren’t subject to RMDs either. So what’s the catch? For 2021, single filers with a MAGI over $140,000, or married filing jointly, with a MAGI over $208,000 can not open a Roth IRA. If eligible you can open a traditional IRA and roll money over into a Roth through a conversion.

A Roth IRA conversion allows high net worth individuals a loophole to contribute to an otherwise off-limits account, but the process can be complicated. Don’t perform a Roth IRA conversion without the assistance of a trusted financial advisor.

Variations on these accounts exist, such as the Simplified Employee Pension (SEP) IRA, the Roth 401(k), and the Savings Incentive Match Plan For Employees (SIMPLE) IRA. Not much simpleness to that last acronym. These plans vary based on contribution limits, employer-match requirements, and income and withdrawal restrictions. However, most savers will encounter one of the three plans we laid out in more detail above.

Choosing a retirement vehicle that fits your tax situation is the easy part. Now you need to decide how to build your retirement portfolio. What investments should you make? How much should you save? And what are the things that worry you most about the future? Here are a few important factors to consider when constructing your ideal portfolio.

Time Horizon – Savings goals vary depending on how long we plan to remain in the market. A 24-year old college-graduate earning her first real paycheck probably won’t have a ton of excess savings, but she also doesn’t need to max out a 401(k) since there are decades between her and retirement. But what about a 55-year old who’s staring down his final decade of work?

Nearly everything about these two financial plans will be different, even if their desired destination (a comfortable retirement) is the same.  Take it from The Rolling Stones, time is on your side. When you’re young, that is. If you’re starting to save later, you’ll need to adjust appropriately.

Risk Tolerance – Time horizon and risk tolerance often go hand-in-hand since the longer you have to invest, the more risk you can apply to your portfolio. But risk tolerance is also a personal thing as two people with similar time horizons might not be able to sleep soundly applying the same risk to their portfolios.

Do you have the temperament to withstand the 50-60% drawdowns that occur frequently in individual stocks?  Or are you more comfortable setting it and forgetting it with index funds? Your risk tolerance can change over time as well, so don’t be afraid to re-evaluate your portfolio with your advisor if you feel like you want to reduce (or increase) risk.

Sources of Income – You’ll need to consider not only your current sources of income but also how you’ll fund your lifestyle in retirement. When building a nest egg, you’ll need to consider all income streams – wages, investments, rental properties, etc. Your savings rate depends on your overall income and savings rate is one of the few things you can control when investing. But don’t forget to consider your income streams in retirement.

How will you draw down your investments? When will you tap Social Security? Building a nest egg is one skill; spending it thriftily in retirement is another.

Taxes – Finally, the cut Uncle Sam takes from your investments must be considered when planning for retirement. Even if you’ve saved primarily through tax-advantaged accounts like IRAs and 401(k)s, you’ll need to structure your investments in a manner that minimizes your tax burden.

For example, since a Roth IRA has no tax obligations on investment growth, high dividend stocks that pay regular income can be effective. Always consider how taxes will take a bite out of your retirement cookie – you can’t go back and save again.

One of the more uncomfortable parts of retirement planning is discussing how we want our assets divided after we’re gone. Estate planning is a necessary part of the process though because if you don’t decide where your assets go, the state will.

Estate planning isn’t just a conversation about estate taxes either – only a small percentage of US households are subject to the federal estate tax, which this year has a threshold of $11.7 million in assets. Some states have their own estate and inheritance taxes as well. Taxes like these are uncommon, but they still need to be considered if you live in a state that levies them.

However, the main concern with estate planning is making sure your final wishes are carried out in accordance. Do you have a will? Who has the power of attorney should you become incapacitated? And are there any advanced medical directives you wish to leave should you not be able to speak for yourself? A few documents to consider:

• Will – Everyone needs a will. If you have children, assets, or anything you wish to leave to an heir, you’ll need to put that into a will. A will does not keep your affairs out of the public record, but it can be used to assign guardians to young children or bequeath assets to heirs.
• Trust – A trust can also be used to pass wealth and property onto heirs and it’s a vehicle that will keep your affairs out of probate court. Trusts can be changed as long as the trustor is alive and they usually cannot be challenged in court (unlike a will). Trusts can be used to bypass probate and give assets directly to your heirs, which saves money on court costs.

Health care costs can eat away at a retirement portfolio. As we age, Mother Nature will have her say over our well-being. Even if we eat our veggies, hit the gym, and avoid carcinogens, age creeps up and adverse medical events become more likely. Good health insurance is a necessity to prevent medical costs from eating into your nest egg.

If you receive health insurance through work, it’s likely you’re enrolled in a group health insurance plan. Group health insurance spreads the costs of healthcare over the management and employees of the business to reduce premiums.

Group health plans are usually one of two types: Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs). HMOs have cheaper premiums but more limited access to specific doctors and specialists. PPOs are a little more expensive, however, the range of providers in-network is much more vast.

Group health insurance is beneficial in two main ways:

• Reducing premiums for the group by spreading out risk
• Identifying participants in order to better tailor plans to the group

Group insurance doesn’t necessarily need to be acquired through an employer, either. Organizations like the American Association of Retired People (AARP) also offer group health insurance plans.

Most retirement investments will be some combination of stocks and bonds. But if you’re looking to diversify from traditional asset classes, commodities like precious metals are a common ingredient to a diverse investment pie.

Commodities come in four main forms: agriculture, meat and livestock, energy, and metals. Metals like gold and silver are often included in investment portfolios as a hedge against inflation as they hold value longer than cash.

You can access precious metals in a few different ways. Buying gold and silver directly is always an option. You can purchase and store gold in the form of coins or bullion, but physical gold carries tax and storage considerations.

The capital gains tax on physical gold and silver is equal to an investor’s marginal tax rate, up to a maximum of 28 percent, meaning market participants in higher tax brackets are still only required to pay 28 percent on long-term gains from their physical precious metals sales

Another way to gain exposure to precious metals is through equities like ETFs. For example, the SPDR Gold ETF (GLD) holds gold bars in a vault and can be purchased through a traditional brokerage account. Gold ETFs can be subject to tracking errors, but you won’t pay any storage costs.

Gold and silver futures can also be purchased on exchanges, but futures contracts are derivatives that require knowledge of complex market structures and leverage. Short-term traders can sometimes profit from buying and selling futures contracts, however, it’s not a long-term strategy recommended to retirement savers. If you want exposure to precious metals in your portfolio, your best bet is either buying physical metals or investing in a cheap (and tax-efficient) ETF.