Consider these four often overlooked factors to help keep your retirement on track.

If you are in retirement or nearing it, you know that making the transition from employee to retiree isn't as easy as packing up your desk and flipping a switch on your portfolio from "saving" to "spending." Seldom is the transition to retirement as simple as portrayed in TV ads.

But it doesn't have to be overwhelming. You already know the basics: As you enter into retirement, consider gradually moving your portfolio into more income-oriented investments, keeping a portion invested for long-term growth. There’s a lot more to consider, though, that's often overlooked, such as how to allocate and manage your assets, which saving and investment vehicles may be most helpful, and how to transition smartly from a savings to a withdrawal strategy. Taxes and Social Security are also big factors in your retirement, though they’re often considered as an afterthought. Instead, they should be addressed squarely in the context of your overall portfolio and retirement plan.

Here we lay out four key factors to consider to help you avoid some of the biggest pitfalls on the retirement road.

    1. Position your portfolio

    2. Prepare for taxing times

    3. Make the most of Social Security

    4. Plan for tax-smart withdrawals


Position your portfolio

Begin by evaluating your asset allocation over the full course of your retirement. Some people find themselves overly invested in stocks as they approach retirement, especially if they’re nearing retirement at a time when stocks are doing well. Other retirees go too conservative too early. For a 60-year-old nearing retirement, a 50% or so allocation to stocks may be appropriate. But the right mix is personal. You’ll need to consider your risk tolerance as well as investing time frame. You’ll also want to balance your need for income now (or soon) with the need for portfolio growth, to help ensure that you don’t run out of money.

That, of course, is easier said than done. Inflation poses a great risk to a portfolio that’s overly invested in fixed income and cash. Even a relatively low inflation rate can have a significant impact on a retiree’s purchasing power. For instance, $50,000 today would be worth just $30,477 in 25 years, assuming a relatively low 2% rate of inflation. If we assume inflation ticks up to 3%, that purchasing power drops to an equivalent of $23,880.

Some retirement income sources, such as Social Security and some pensions and annuities, track inflation automatically through annual cost-of-living adjustments or market-related performance. If any of these sources can cover most if not all of your essential expenses, you’ll have more flexibility in choosing more growth-oriented investments elsewhere in your portfolio to help you try to cover your remaining expenses.

Early in retirement you may want to consider “locking in” part of your nest egg by purchasing an annuity. Especially if you don’t have a pension or Social Security payments that will cover your fixed costs, an annuity large enough to provide income for those necessities could be worth thinking about


Prepare for taxing times

While nothing may be certain but death and taxes, there’s still some wiggle room with the latter. Some smart strategies have the potential to help minimize your tax burden and maximize your savings. Here’s a rundown of what to expect and some strategies to consider.

Income taxes
To potentially help save on taxes in the near future, consider tax-advantaged accounts. If you’re still working, saving in an employer retirement plan such as a 401(k) or 403(b) will reduce your current-year taxable income, in turn lowering your tax bill. For 2012, the maximum contribution is $17,000. And if you are age 50 or older, you can make catch-up contributions of an additional $5,500 to boost your tax-deferred savings and lower your taxable income.

For tax-free growth potential, consider a Roth IRA conversion. There’s no income limit on converting a traditional IRA or eligible workplace savings plan to a Roth IRA, however there are income limits on contributions to Roth IRAs. Unlike a traditional IRA, Roth IRAs offer no tax deduction for contributions. This means you’ll owe income tax on any amount you convert that has not been previously taxed. That might result in a big tax hit in the short term, but your account potentially grows tax free and, assuming you’re at least 59½ and the account has been open for five years, you can withdraw your earnings tax free.2 (Contributions can always be withdrawn tax free.)

While a conversion does finally allow many high-income investors the opportunity to have a Roth, it's important that you analyze your situation and are comfortable with your decision. The decision ultimately comes down to your assessment of the tax cost. How much tax will you pay if you convert now versus what you expect to pay when you withdraw the money during retirement? The decision to convert, however, needs to be made with care—and in consultation with your tax advisor.

Capital gains and dividend taxes
Consider tax-advantaged investments for your taxable accounts. Muni bonds provide income tax free (from federal and most state taxes), and can be purchased individually or through mutual funds and exchange traded funds (ETFs). Separately, some mutual funds are managed with tax-sensitive investing in mind.

You can also save through a tax-deferred annuity, in which assets can grow and compound tax deferred until withdrawn, with higher contribution limits than those of workplace savings plans. After maxing out your 401(k), 403(b), and retirement accounts, a tax-deferred annuity could offer you an additional opportunity to save while deferring on taxes.

You may want to consider income-producing investments for tax-deferred accounts such as IRAs. You won’t owe any tax on dividend-paying stocks or bonds if they’re held in an IRA or 401(k). Instead, all gains will accumulate tax-deferred. (You’ll incur income tax when withdrawn, though.)


Make the most of Social Security

One aspect of your retirement is certain: Social Security. But certainty doesn’t mean it is easy. The decision about when to take Social Security needs to be made in conjunction with your overall portfolio planning. Whether you take Social Security as soon as you’re eligible, at age 62, or wait until your benefits accrue as much as possible, by age 70, could mean the difference of more than a hundred thousand dollars over your lifetime.

But waiting isn’t always the best option, especially if you don’t have a pension or other guaranteed income and will instead need to rely heavily on your portfolio to provide income. This can cause you to drain those assets more quickly than you otherwise would—an especially acute problem during times of poor market performance, when your accounts won’t replenish themselves and could, in fact, run dry.

Take a hypothetical balanced portfolio of 50% stocks, 40% bonds, and 10% short-term investments and see how it would have fared over the 36 years from 1972 through 2008. That period included an 18-year bull market (from 1982-2000), three bear markets, six recessions, and the rampant inflation and tight monetary policy of the late 1970s. Using the actual, historical returns of that period, a portfolio of $500,000 that began withdrawing 6% a year in 1972 would have exhausted its money by the late 1980s. A 5% withdrawal rate could have extended income from the portfolio for nearly 25 years. That’s why we generally recommend holding withdrawals to 4% to 5% of the portfolio for someone aged 65.

It’s a delicate balance: The less you have in assets, the slower the growth potential, and the higher your expenses, the more likely it is you’ll need to take Social Security earlier, even if it means sacrificing any benefits that would accumulate by delaying.

Advanced Social Security strategies
Married couples can claim benefits based on either spouse’s earnings. Spousal benefits are equal to 50% of what your spouse gets if you begin drawing them at your full retirement age, less if you start taking them earlier. The ability to delay your own benefits while taking spousal benefits can become a significant part of your larger retirement income and portfolio strategy.


Plan for tax-smart withdrawals

Once you’re ready to start tapping your retirement accounts, it’s not as easy as hitting the ATM. You’ll need to take your tax situation and your portfolio allocation into account.

One strategy is to have funds in different types of accounts with different tax consequences upon withdrawal. This sort of tax diversification has the potential to help minimize your tax bill in retirement.

Any money withdrawn from a traditional IRA or 401(k), for instance, will be taxed as ordinary income. If those withdrawals are made in addition to other taxable income (from, say, a pension), they may increase your tax bill and possibly push you into a higher tax bracket. It also makes your income more susceptible to higher tax rates down the road.

Withdrawals from a Roth IRA, however, are not taxed, provided you’ve followed the rules regarding your age and how long the account has been opened.2 Having more options will allow you to consider the potential tax consequences of the different accounts before making withdrawals—and that can mean a lot to your savings.

If you don’t expect to exhaust your retirement accounts in your lifetime, Roth IRAs may be advantageous for your heirs. Roth IRAs are not subject to minimum required distribution (MRD) rules during the lifetime of the original owner, which means you’re never forced to take withdrawals you don’t need. (Generally, you’re required to take IRS-mandated minimum distributions from IRAs and 401(k)s in the year you turn 70½.) With a Roth IRA, you can leave the assets in place for as long as you live, with the potential to generate tax-free growth for your beneficiaries.

Your heirs will have to take a minimum amount each year after they inherit the account, but they generally won't be taxed on those distributions if certain conditions are met, which potentially increases the value of your bequest. But remember, while Roth IRAs are generally not subject to income tax, they are still potentially subject to estate tax, so it is important to plan accordingly.

Of course, there is no one-size-fits-all roadmap to a successful retirement. You have to create a path that’s right for you. So, begin by talking with your family about your personal goals for retirement. Consider our four key factors as you fine-tune your plan.

For more information on retirement plans click on the link below:


For help along the way, call

Ashong & Associates, LLC at 215-613-5224.


Please call Ashong & Associates, LLC at 215-941-7349 and reduce or eliminate these red flags in your life. Being a Certified Public Accountant, we qualify to represent you before the IRS.

We will be there for you when audited.


Compiled by Albert Ashong, CPA, ACCA, September 26, 2012


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