Retirement isn’t just about slowing down; it’s about thriving in an exciting phase of life. Whether your goals include maintaining a comfortable lifestyle, exploring new passions, or leaving a legacy, it’s important to check in on your retirement plan to ensure you’re on the right track.
Retirement is a major life transition in which your earned income will diminish, and you will switch from the accumulation phase to the withdrawal phase. Without careful planning, you may withdraw too much too soon or make withdraws when your portfolio is down. Reviewing your retirement plan to ensure your asset allocation and withdrawal strategy align with your income needs and risk tolerance while maximizing tax efficiency will go a long way to making sure your money will last.
Considering Risk Tolerance in Retirement Planning
One of the key factors in determining your asset allocation is your risk tolerance—your ability and willingness to endure market fluctuations. Striking the right balance between risk and return is key to creating and maintaining a portfolio that will help you achieve financial confidence in retirement. When assessing your risk tolerance in retirement, you should consider the following:
- Your Withdrawal Rate: The amount of money you will need to withdraw from your portfolio each year. You should design your portfolio to have an expected return that will support the withdraw rate. Having a combination of a high withdraw rate and high risk may be a perfect storm during a market downturn.
- Your Emotional Response to Market Volatility: A more conservative allocation may be a better fit if market swings cause you stress and lead to impulsive investment decisions. Selling when the market is down can permanently change your changes for success.
- Your Other Income Sources: If you have stable income from Social Security, a pension, or annuities that covers the majority of your expenses you may be able to take on more investment risk than someone relying solely on their portfolio for income.
- Your Time Horizon: Even in retirement, your portfolio may need to last 20 to 30 years. Growth-oriented investments can help ensure your money doesn’t lose purchasing power due to inflation.
The Role of Asset Allocation in Retirement Planning
Asset allocation—the mix of stocks, bonds, and cash in your portfolio—is vital in determining how long your money will last. As you transition into retirement, it is important to realize your investment strategy should shift from accumulation to distribution as you replace earned income with an income stream from your investment resources. This means focusing on building a portfolio that balances growth, income, stability, and tax efficiency to generate the returns necessary to reach your goals in retirement.
Tax-Efficiency in Retirement Planning
Taxes can significantly impact how long your retirement savings last. A well-planned tax-efficient asset allocation and withdrawal strategy can help you maximize after-tax income and reduce unnecessary tax burdens.
Tax-Efficient Asset Allocation
Not all investment accounts are taxed the same way, so placing assets in the right accounts can help you minimize taxes while preserving withdrawal flexibility. The major types of accounts typically held by those planning for and in retirement are taxable accounts, tax-deferred accounts (traditional IRA and 401(k)), and tax-free accounts (Roth IRA and Roth 401(k)). In addition to tax efficiency considerations, investments within your accounts should be reviewed with timeline and risk tolerance in mind.
Tax-Smart Withdrawal Strategies
We previously wrote about 3 Popular Retirement Withdrawal Strategies. Let’s now take a brief look at withdrawals from a tax-efficiency standpoint. The order in which you withdraw money from your retirement accounts can significantly impact how much you pay in taxes over your lifetime and can help extend your portfolio longevity.
- Withdraw from Taxable Accounts First – Use money from taxable brokerage accounts before touching tax-deferred or tax-free accounts. This allows tax-advantaged accounts to continue growing.
- Tap Tax-Deferred Accounts Next (Traditional IRAs, 401(k)s) – Required minimum distributions (RMDs) from these accounts must begin at age 73.
- Use Roth Accounts Last – Roth IRAs and Roth 401(k)s should be the last source of withdrawals since they grow tax-free and have no RMDs during the account owner’s lifetime.
Additional Tax-Efficient Strategies
Having access to the above savings and a clear understanding of your taxes can help you maximize your wealth and ensure your money will last. Some retirees find themselves in low tax brackets at the early stage of retirement before Social Security begins and Required Minimum distributions start. Some things to consider during this low-income phase include:
- Converting traditional IRA funds into a Roth IRA. This will allow for low taxes on a reduction in future Required Minimum Distributions.,
- Recognizing Capital Gains in low-income years could allow you to take advantage of a 0% tax rate,
- Considering Qualified Charitable Distributions (QCDs) from an IRA at the age of 70 can help satisfy RMDs while reducing taxable income.
Why Regular Portfolio Reviews Matter
Market conditions, inflation, and personal circumstances change, making reviewing your asset allocation regularly essential. Some key reasons to conduct an annual review include:
- Ensuring Your Portfolio Supports Your Spending Needs – As your retirement progresses, you may spend more on healthcare or travel, requiring an adjustment in your withdrawal strategy.
- Managing Market Volatility – Economic downturns can erode your portfolio’s value, and without proper allocation, you may be forced to sell investments at a loss to generate income.
- Adjusting for Inflation – Rising costs of living can diminish your purchasing power if your portfolio isn’t structured to keep pace with inflation.
- Adapting to Changing Life Circumstances – Unexpected expenses, health changes, or loss of a spouse can impact your financial needs and require adjustments to your asset allocation.
If you haven’t reviewed your retirement portfolio recently, reach out to us. We can help ensure your retirement assets and withdrawal strategy are positioned to support your financial well-being during retirement.
