Retirement Planning

As one approaches retirement, monitoring your financial situation by understanding your net worth and assessing the assets and resources needed to maintain a comfortable lifestyle throughout retirement is vital. This article explores eight key financial wellness metrics individuals must monitor as they approach retirement.

1. Income Replacement Ratio
   One of the primary financial wellness metrics is the Income Replacement Ratio (IRR), which calculates the percentage of your pre-retirement income that your retirement income will replace. Many individuals work toward a target ratio between 70-80%. Therefore, if you currently make $100,000 annually, your retirement income should ideally be between $70,000 to $80,000.

   2. Net Worth
   Net worth is one of the most fundamental financial wellness metrics, measuring the total assets, including savings, personal properties, and investments, minus any liabilities or debts. This metric gives an essential broad picture of your financial health and indicates financial stability that may allow you to support yourself comfortably in retirement.

   3. Liquidity Ratio
   The liquidity ratio is another critical metric that measures your ability to cover short-term expenses without selling long-term assets or taking on additional debt. This ratio is calculated by dividing your liquid assets, such as cash, savings, and short-term investments, by your current liabilities. A ratio of 1 or greater indicates a healthy level of liquidity.

   4. Savings Rate
   Your savings rate, the percentage of income you put aside for savings, is a critical component of retirement planning since it directly impacts the savings you’ll have available to support yourself. Financial professionals often recommend a savings rate of 10% to 15% of gross income. However, the savings rate may change depending on one’s situation, market conditions, risk tolerance, and timeline until retirement.

   5. Debt-to-Income Ratio
   Recognizing your level of debt is equally important when preparing for retirement. The Debt-to-Income Ratio (DTI) compares your total monthly debt payment to your gross monthly income, providing a deeper look at how you manage your debts. Lenders often use this metric to determine your ability to manage monthly payments and repay borrowed money. A lower DTI ratio indicates a good balance between debt and income.

   6. Medical Expense Forecast
   Healthcare can be a significant expense in retirement. Understanding your likely medical costs can help you plan for this considerable expenditure. Consider your current health status, anticipated medical needs, family medical history, and potential long-term care costs.

   7. Retirement Savings Lifespan
   Another crucial metric involves determining how long your retirement savings may last. By evaluating your expected annual withdrawal rate alongside your total savings and expected longevity, you can estimate the lifespan of your retirement savings.

   8. Investment Diversification
   Lastly, investment diversification, the degree to which your assets are spread across different types of investments, is a crucial metric in mitigating risk. A diversified portfolio may provide greater independence, especially during volatile market periods.

 

Since everyone’s retirement journey is different, these metrics provide a starting point to determine what is appropriate and realistic for your circumstances. It’s always advisable to seek assistance from a financial professional since calculating these metrics on your own may be complex.

 

 

Important Disclosures:

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

 

This article was prepared by Fresh Finance.

 

LPL Tracking #502413-04

 

Sources:

 

https://www.investopedia.com/terms/r/retirement-readiness.asp

 

https://money.usnews.com/money/retirement/iras/articles/4-metrics-to-measure-retirement-preparedness

 

 

 

After years of saving and planning for their golden years, many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you will likely see a reduction in the amount of taxes you owe after the age of 65, you still need to plan ahead if you want to minimize your tax bill from the IRS.

Social Security Benefits

Depending upon your total income and marital status, a portion of your Social Security benefits may be taxable. For a rough estimate of your potential tax liability, add half of your Social Security benefits to your projected income from all other sources. This figure is your adjusted gross income (AGI), plus any tax-free interest income from municipal bonds or foreign-earned income. Up to half of Social Security benefits are taxable if this sum, which is called your provisional income, exceeds $25,000 for singles or $32,000 for married couples filing jointly. However, up to 85% of Social Security benefits are taxable if your provisional income is above $34,000 for single filers or $44,000 for married couples filing jointly.

Use the Social Security Benefits Worksheet in the instructions for IRS Form 1040 to calculate the exact amount of taxes owed. Rather than writing a large check once a year, you can arrange to have taxes withheld from your Social Security benefits checks by completing Form W-4V and filing it with the Social Security Administration.

Other Income Sources

In addition to collecting Social Security benefits, most retirees receive their income from a variety of sources, including distributions from 401(k) accounts and individual retirement accounts (IRAs); payouts from company pensions and annuities; and earnings from investments.

Contributions and earnings growth are tax deferred on 401(k)s and traditional IRAs; however, distributions from these accounts are fully taxable, but have no penalties if withdrawals are made after age 59½. If you have savings in 401(k) accounts or traditional IRAs, you must begin making withdrawals from these accounts—and paying taxes on the distributions—by April 1 of the year following the year in which you reach age 72. If you are at least 59½ years old and have owned a Roth IRA or Roth 401(k) for at least five years, withdrawals are completely tax free. There are no minimum distribution requirements for Roth accounts.

Strategies to Minimize Taxes

Most retirees with nest eggs or pension income of any size will pay at least some taxes on their retirement income, but there are strategies to reduce the amount owed. While it usually makes sense to delay taking taxable distributions from retirement accounts until the funds are needed, or until distributions are required, you may want to withdraw more funds in tax years when claiming a large number of deductions temporarily lowers your tax rate. You may, for example, choose to take advantage of itemized deductions, such as the breaks for medical expenses or charitable gifts, in certain years, while taking the standard deduction in other years.

A desire to leave a portion of your assets to your family may also influence how you handle withdrawals from tax-deferred accounts. Keep in mind that, if you leave behind funds in a traditional IRA, the rules for inheritance can be complex. To avoid these issues and make it easier to pass on your estate to family members, consider converting traditional IRAs to Roth IRAs. While you will have to pay taxes on the funds converted, moving to a Roth IRA eliminates future tax liabilities, regardless of whether you use the funds in retirement or pass the money on to your heirs. Alternatively, you may wish to consider cashing in your traditional IRAs and using the funds to purchase tax-free bonds or a life insurance policy that will provide your heirs with a tax-free inheritance.

If you are planning to retire soon, consider the tax implications of your income to avoid an unexpected bill from the IRS. For more information, consult your tax professional.

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security or insurance product. To determine which investment(s) or product(s) may be appropriate for you, consult your financial professional prior to investing or purchasing.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices. Guarantees are based on the claims paying ability of the issuing company.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Liberty Publishing, Inc.

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