Posted by The TaxAdvocate Group, LLC

Ways To Create Wealth, Even in Old Age

Ways To Create Wealth, Even in Old Age

So you are planning for retirement, and you don't know how to go about it? Investing in your 50s/60s is a time of transition. So stop focusing on fundraising for retirement. Instead, now is the time to break that nest egg. Therefore, you have to change your investment strategy. The idea is to withdraw enough to help you survive while still having enough reserve to finance the rest of your life.

Here are some tips for a financially stable retirement:


Recover lost time

The older, wiser, and hopefully wealthier you are (after all, these are your peak earning years) can help you overcome past savings shortcomings by helping you recoup your contributions to tax-favored retirement accounts.

For fiscal 2020, the IRS allows people 50 and over to funnel an additional $6,500 per year into a 401(k), in addition to the usual limit of $19,500 (total $26,000). In addition, these savers can also contribute an additional $1,000 per year to an IRA, in addition to the usual limit of $6,000 ($7,000 in total).

This portfolio completion can significantly improve your retirement prospects. By saving $7,000 instead of $6,000 in an IRA between the ages of 50 and 65 and earning an average annual return of 6%, you can add almost $24,000 to your retirement savings. Then, maximize 401(k) at work with that extra $6,500 per year, and you'll end up with about $160,000 more for retirement than if you didn't make any catch-up contributions.


You can never go wrong with stocks.

Investors of all ages experience increases in blood pressure as the market rises and falls, as has happened several times recently, but now is not the time to ratchet your exposure to capital.

You have years, if not decades, if you are healthy and have a family history of longevity to get through the ups and downs of the stock market.

 

Increase diversification

As part of the stocks and bonds in your portfolio, your money should be even more diversified by asset class. For equities, this means exposure to large, small, and medium-sized companies, established and emerging international and real estate markets. With bonds, allocate money to short, medium, and the long-term US and international bonds.

For DIY investors, diversification can be done with individual stocks, index-linked mutual funds, or exchange-traded funds. Major brokers have fund filters to help analyze options based on fund type, performance, expense ratio, and other factors.

 

Consider an asset allocation shortcut. 

Buying a target-date mutual fund or using a robotics advisor makes it easier to build and manage a properly balanced portfolio.

Target date funds automatically adjust the mix of stock and bond investments accordingly for a person who intends to retire in any given year. Robotics advisors or computerized investment managers create and manage a portfolio based on goals and tolerance for risk.

With both options, beware of rates that can have a corrosive effect on portfolio performance. The typical administration costs of a Robo-advisor start at 0.25% of their assets per year. According to the Investment Company's Institute, hybrid funds average 0.74% per annum, although the best have less than half a percent expense rates.


Use a Roth

The diversification exercise continues in the tax rules around your investments. For example, young investors sometimes prefer Roth IRAs (which offer tax-free withdrawals) to traditional IRAs (where withdrawals are taxed but tax-deductible contributions). This makes sense, as they will likely be in a lower tax category now than when they retire. But Roth remains a valuable retiree investment tool for middle-aged savers.

Investing in a Roth IRA gives savers more flexibility in the future to withdraw funds from funds with different tax treatments. Roth is also more tax-efficient when it comes to transferring money to your heirs.

Are you not eligible to contribute to a Roth IRA? If your employer offers a Roth 401(k) option, there is no income limit for eligibility. Consider splitting your contributions between traditional accounts and Roth accounts to keep some of the tax cuts this year.


Plan your withdrawals

Retirees need a system of regular cash withdrawals. For example, one popular system suggests taking 4% of your initial savings balance each year and then adjusting that amount each year for inflation.

The 4% rule is not rigid but provides a framework. The key is to adopt a system and adapt it to the needs.


Plan the required minimum distributions

Once you reach a certain age, the Internal Revenue Service requires you to take minimum annual distributions from most types of retirement accounts, including 401(k) plans and traditional individual retirement accounts.

Previously, this age was 70½, but a recent federal law increased it to 72 for people who turned 70 and a half after December 31, 2019.

These minimum annual withdrawal amounts are based on life expectancy and account balances.

IRS rules are specific and inflexible about how much can be withdrawn for Required Minimum Distributions (RMDs) and when. Ignore them, and you could face stiff penalties.

However, if you are normally required to take an RMD in 2020, you are exempt from liability. Another recent federal law this year excludes RMDs due to the coronavirus pandemic.


Consider other sources of income.

Stocks and bonds aren't the only investment options for building wealth at an old age. Two other options are longevity insurance and annuities.

Longevity insurance begins to pay off when you reach a certain age. For example, you can pay $50,000 for a policy at age 60, and you can start receiving payments of $15,000 or more per year at age 80.

You've probably heard of annuities, which are financial contracts sold by insurance companies that promise to pay you a regular income. However, because there are different types of annuities, be careful before going into it.


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