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As a busy professional, managing your finances can be a challenge, especially when you're trying to juggle your career, family, and social life. Choosing the right financial advisor can make all the difference in helping you achieve your financial goals and maintaining a healthy work-life balance. There are many studies that illustrate the potential benefits of working with a financial advisor. Here are just a few. Improved Financial Outcomes While financial advisors are legally prohibited from making promissory statements about returns, a study conducted by Vanguard in 2022, titled "The Advisor's Alpha,"* found that individuals who partner with a financial advisor can potentially add about 3% in net returns to their clients' investment portfolios. The study attributed this increase to various factors, including asset allocation, cost-effective implementation, rebalancing, and behavioral coaching. By working with a financial advisor, clients can potentially experience improved financial outcomes and a higher likelihood of achieving their goals. Covenant Wealth Advisors offers a free, user-friendly tool that streamlines the process of connecting with a financial advisor. By completing a brief questionnaire, you can connect with a fiduciary financial advisor who is legally obligated to prioritize your best interests. The entire process takes only a few minutes, and you can be instantly scheduled with an advisor for a complimentary retirement consultation. Here are two hypothetical examples to help illustrate the potential benefit's of Vanguard's advisor's alpha study. Meet John, a 45-year-old professional who wants to invest $500,000 for his retirement. He's considering two options: self-managing his investments or working with a financial advisor who follows the Vanguard Advisor's Alpha approach. Option 1: Self-Managed Investments John decides to manage his investments independently. He invests his $500,000 in a diversified portfolio that generates an average annual return of 4% over 20 years. Here's how his investment would grow: Initial Investment: $500,000 Annual Return: 4% Investment Period: 20 years Future Value = $500,000 * (1 + 0.04)^20 Future Value = $1,096,635 By self-managing his investments, John's portfolio would grow to $1,096,635 by the time he retires. Option 2: Vanguard Advisor's Alpha Approach** Alternatively, John decides to work with a financial advisor who employs the Vanguard Advisor's Alpha approach. The advisor helps John optimize his portfolio, resulting in a 7% average annual return over 20 years: Initial Investment: $500,000 Annual Return: 7% (4% base return + 3% Advisor's Alpha) Investment Period: 20 years Future Value = $500,000 * (1 + 0.07)^20 Future Value = $1,934,917 By working with a financial advisor who follows the Vanguard Advisor's Alpha approach, John's portfolio could grow to $1,934,917 by the time he retires.* Enhanced Financial Confidence A survey conducted by Northwestern Mutual in 2020 revealed that 71% of US adults believe their financial planning needs improvement. However, the study also found that those who work with a financial advisor are more likely to feel financially secure, have a clear financial plan, and be prepared for economic downturns. Emotional Guardrails A competent advisor plays a crucial role in safeguarding you from impulsive or emotionally-driven decisions. If you recognize that you sometimes make hasty choices, having this support system can prove invaluable. Of course, your advisor cannot prevent you from experiencing emotions, just as a guardrail cannot avert every vehicle from veering off the road. However, when fear tempts you to abandon your plan, the advisor's responsibility is to remind you of the strategy you've devised and the ultimate goal: a rewarding and prosperous retirement. Here are the nine secrets that busy professionals use when selecting a financial advisor. 1. Define Your Financial Goals and Needs Before you begin searching for a financial advisor, take the time to identify your financial goals and needs. Whether you're planning for retirement, saving for your child's college education, or looking to grow your wealth, having a clear understanding of your objectives will help you find the right advisor to guide you on your financial journey. 2. Prioritize Fiduciary Duty Always look for a financial advisor who acts as a fiduciary, which means they are legally obligated to put your interests above their own. Fiduciary advisors will work to provide you with the best advice, minimizing conflicts of interest and prioritizing your financial well-being. All financial advisors at Covenant Wealth Advisors serve as a fiduciary and don't sell products. If you want to work with a financial advisor who doesn't push you to purchase investment products, and rather, you want an advisor who is focused on providing objective advice, use this no-cost tool to connect with an advisor at our firm. 3. Research Credentials and Experience Credentials and experience play a significant role in selecting a financial advisor. Look for advisors with relevant certifications such as CERTIFIED FINANCIAL PLANNER ™ (CFP ® ) or Certified Public Accountant (CPA). Also, consider their experience in working with clients in similar situations to yours. For example, the vast majority of our clients have over $1 million in savings and investments, they want to enjoy a comfortable retirement, and they value outside guidance and advice. 4. Seek Referrals and Recommendations Ask your colleagues, friends, and family for recommendations. Personal referrals can provide valuable insight into the advisor's working style, professionalism, and the quality of their advice. 5. Look for a Niche Expert Financial advisors often specialize in specific areas. For example, our team specializes in retirement income planning , investing, and tax planning for Individuals with over $1,000,000 in liquid investments. Our free retirement quiz helps connect you with a financial advisor who can advise you on how to retire. Other financial advisors may specialize in working with individuals within the tech industry. Still others may specialize in working with optometrists. The point is that you should consider finding an advisor whose expertise aligns with your financial needs and goals. 6. Understand Their Fee Structure Fee structures vary among financial advisors. Some charge a flat fee, others a percentage of assets under management, and some work on commissions. Understand how your potential advisor is compensated to avoid any conflicts of interest and ensure transparency. 7. Assess Their Communication and Availability As a busy professional, it's essential to have a financial advisor who is easily accessible and responsive to your needs. Make sure your potential advisor has a reliable communication system in place and is available to answer your questions and provide guidance when needed. For example, at Covenant Wealth Advisors, we use an easy online calendar that allows you to schedule a meeting at your convenience thus helping avoid the back and forth. 8. Perform Due Diligence Lastly, always perform due diligence when choosing a financial advisor. Verify their credentials, check for any disciplinary actions, and read online reviews to ensure you're selecting a trusted professional. 9. Schedule an Initial Consultation Before committing to a financial advisor, schedule an initial consultation to discuss your financial goals, assess their communication style, and gauge whether you feel comfortable working with them. A financial advisor may look great on paper, but you may find out that you just don't click. Conclusion By following these nine secrets, busy professionals can find the right financial advisor to help them achieve their financial goals while maintaining a healthy work-life balance. Take your time to research, ask for recommendations, and schedule consultations to ensure you find an advisor who understands your needs and can guide you towards financial success. Disclosure: * Vanguard Advisor's Alpha Study . **Assuming 4% annualized growth of $500k portfolio vs 7% annualized growth of advisor managed portfolio over 20 years. The hypothetical study discussed above assumes a 4% net return and a 3% net annual value add for professional financial advice to performance based on the Vanguard Whitepaper “Putting a Value on your Value, Quantifying Vanguard Advisor’s Alpha”. Please carefully review the methodologies employed in the Vanguard Whitepaper. To receive a copy of the whitepaper, please contact info@mycwa.com . The value of professional investment advice is only an illustrative estimate and varies with each unique client’s individual circumstances and portfolio composition. Carefully consider your investment objectives, risk factors, and perform your own due diligence before choosing an investment adviser. Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss.

Retirement is a stage of life that many people look forward to, envisioning a time of relaxation, travel, or pursuing long-held passions. However, one crucial question often lingers in the minds of those approaching retirement: how long will my retirement money last? With people living longer than ever and the cost of living constantly on the rise, it's essential to plan for a financially secure retirement. The challenge lies in estimating the longevity of your retirement money, as various factors come into play, including savings and investments, withdrawal rate, retirement age, life expectancy, inflation, health care expenses, and lifestyle choices. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire This comprehensive* guide aims to help you better understand these factors and provide strategies to ensure your retirement money lasts throughout your golden years. By following the ideas in this article, you will not only gain valuable insights into retirement planning but also learn about tools and resources that can assist you in making informed decisions. Ultimately, our goal is to help you enjoy a worry-free and financially secure retirement. Factors Affecting Retirement Money's Longevity Several factors can impact the longevity of your retirement money. Understanding these factors will enable you to make more informed decisions and adapt your financial plan accordingly. Retirement longevity refers to the length of time your retirement savings and income sources will last during your retirement years. It is a critical aspect of retirement planning, as ensuring that your financial resources last throughout your lifetime helps maintain financial security and peace of mind in retirement. Here are several factors to consider. Savings and Investments Amount saved: The more money you've saved, the longer your retirement funds are likely to last. It's essential to start saving early and consistently to maximize the amount available to you in retirement. Types of investments: Different investments come with varying levels of risk and potential returns. A thorough investment portfolio review can help ensure your retirement money lasts longer. Diversification: Spreading your investments across various asset classes ( stocks, bonds, real estate, etc. ) can help mitigate risk and provide more stable returns over time. Withdrawal Rate Safe withdrawal rate concept: The safe withdrawal rate is a percentage that represents how much money you can withdraw from your retirement savings annually without running out of funds. Historically, a 4% withdrawal rate has been considered safe, but recent studies suggest it may need to be adjusted based on your specific circumstances. Adjustments for personal circumstances: Factors such as life expectancy, market conditions, and personal risk tolerance can influence your ideal withdrawal rate. It's crucial to assess these factors and make necessary adjustments. Retirement Age Impact on savings: The age at which you retire affects the amount of time you have to save for retirement and the length of time your retirement money needs to last. Retiring later can provide you with more savings and a shorter retirement period, reducing the risk of outliving your money. Impact on Social Security benefits: The age at which you claim Social Security benefits also plays a significant role in your retirement income. Delaying your benefits can lead to a higher monthly payout, which could help your retirement money last longer. Life Expectancy Estimating personal life expectancy: Your individual life expectancy will determine how long your retirement money needs to last. You can use online tools or consult with a financial advisor to estimate your life expectancy based on factors like family history, health, and lifestyle. Planning for longer life spans: As life expectancies continue to rise, it's essential to plan for the possibility of living longer than average. This may involve adjusting your withdrawal rate, investment strategy, or other financial planning aspects. Inflation Inflation is when things get more expensive over time. Imagine your favorite candy bar costs $1 today. Next year, it might cost $1.05, and $1.10 the year after. This happens to most things we buy. It's why your parents say stuff was cheaper when they were kids. Inflation makes each dollar worth a little less as time goes on, so you can't buy as much with the same amount of money. Effect on purchasing power: Inflation erodes the purchasing power of your money over time, meaning that the same amount of money will buy less in the future. It's essential to factor inflation into your retirement planning to ensure your money lasts. Adjusting retirement planning for inflation: You can help combat inflation by investing in assets that tend to keep pace with or outperform inflation, such as stocks or inflation-protected securities. Health Care Expenses Long-term care: The cost of long-term care, such as assisted living or nursing home care, can quickly deplete retirement savings. Planning for these expenses is crucial in ensuring your retirement money lasts. Medicare and other health care costs: Even with Medicare, retirees often face out-of-pocket health care expenses, including premiums, deductibles, and co-payments. Budgeting for these costs is essential for maintaining your retirement funds. Lifestyle and Expenses Retirement goals and priorities: Your desired retirement lifestyle will directly impact how long your retirement money lasts. Luxury vacations, hobbies, and other discretionary spending can increase your overall expenses, requiring more substantial savings or a reduced withdrawal rate to make your money last. Budgeting and controlling expenses: Creating a realistic retirement budget that accounts for both essential and discretionary expenses is a crucial step in ensuring your retirement money lasts. Regularly reviewing and adjusting your budget can help you stay on track and make necessary changes as your financial situation evolves. Understanding these factors and their impact on your retirement money's longevity is essential for successful retirement planning. By considering each of these elements and making informed decisions, you can develop a financial plan that helps ensure your retirement money lasts throughout your golden years. In the following sections, we will discuss how to calculate how long your retirement savings may last and strategies for addressing these factors and optimizing your retirement finances. General Rules of Thumb to Calculate How Long Your Retirement Money Will Last So, how long will my retirement money last, you ask? There are a few general rules of thumb that can help you estimate how long your retirement money will last. Keep in mind that these guidelines are not a one-size-fits-all solution, there is no guarantee, and it's crucial to consider your unique financial situation and adapt your plan accordingly. The 4% Rule: This rule suggests that you can withdraw 4% of your retirement savings during the first year of retirement and then adjust this amount annually for inflation. Following this guideline, your retirement funds are projected to last for about 30 years, assuming a well-diversified investment portfolio with a mix of stocks and bonds. The 25x Rule: This rule proposes that you should have saved 25 times your annual retirement expenses before retiring. With this amount saved, you can withdraw 4% of your savings each year, as mentioned in the 4% Rule, and have a high likelihood of your funds lasting for 30 years. The Multiply by 12 Rule: To calculate your annual retirement income, you can multiply your desired monthly income by 12. Then, subtract any guaranteed income sources, such as Social Security or pensions, to determine the amount you'll need to withdraw from your savings each year. The Rule of 110 or 120: To determine your investment allocation, subtract your age from 110 or 120 (depending on your risk tolerance) to estimate the percentage of your investments that should be in stocks. The remainder should be in more conservative assets like bonds. This rule helps you maintain an age-appropriate level of risk in your investment portfolio, which can impact the longevity of your retirement money. While these rules of thumb can provide a starting point for estimating how long your retirement money will last, it's essential to use retirement calculators, conduct additional research, and consult with a financial advisor to create a personalized retirement plan tailored to your specific needs and goals. Strategies for Ensuring Retirement Money Lasts Implementing effective strategies for managing your retirement finances can help you ensure your retirement money lasts. Here are some key approaches to consider: Creating a retirement budget Assessing current expenses: Begin by evaluating your current expenses and identifying which will continue into retirement and which may change. This will help you create a realistic budget. Anticipating future expenses: Account for potential future expenses, such as increased health care costs, home maintenance, or travel, in your retirement budget. Maximizing Social Security benefits Delaying benefits to increase payout: Waiting to claim Social Security benefits until your full retirement age or even later can result in a higher monthly payout, helping your retirement money last longer. Strategies for married couples: Married couples have additional options for maximizing Social Security benefits , such as claiming spousal benefits or coordinating when each spouse claims their benefits. Diversifying investments Importance of asset allocation: Maintaining a well-diversified investment portfolio with an appropriate mix of stocks, bonds, and other assets can help protect your retirement money from market volatility and generate long-term growth. Rebalancing portfolio over time: As you age, you may need to adjust your asset allocation to reflect a more conservative approach. Regularly reviewing and rebalancing your portfolio can help you maintain an optimal mix of investments. Managing withdrawal rate Adjusting withdrawals based on market performance: In years when your investments perform well, you may be able to withdraw more, while in years with poor performance, you may need to reduce your withdrawals to preserve your retirement money. Setting a flexible withdrawal rate: Adopting a flexible withdrawal rate that accounts for market conditions, life expectancy, and other factors can help ensure your retirement money lasts. Considering annuities Types of annuities: Annuities can provide a guaranteed income stream for a set period or for life, helping to protect against the risk of outliving your money. There are various types of annuities, including fixed, variable, and indexed, each with its own benefits and drawbacks. Pros and cons of annuities: While annuities can offer financial security, they may also come with high fees and limited flexibility. Carefully weigh the pros and cons before incorporating annuities into your retirement plan. Planning for health care expenses Long-term care insurance: Purchasing long-term care insurance can help cover the costs of assisted living or nursing home care, protecting your retirement savings from being depleted by these expenses. Health savings accounts (HSAs): Contributing to an HSA can provide tax advantages and help you save for future medical expenses, ensuring you're better prepared for health care costs in retirement. By employing these strategies, you can optimize your retirement finances and increase the likelihood that your retirement money will last throughout your golden years. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire Now let's dive into tools and resources to help you plan and make informed decisions about your retirement finances. Using Retirement Calculators and Tools Retirement calculators and other financial planning tools can be invaluable in helping you estimate how long your retirement money will last and identify areas where adjustments may be needed. Here's what you need to know about using these resources: Introduction to retirement calculators Retirement calculators use your input data, such as age, income, savings, and desired retirement age, to estimate how much money you'll need in retirement and how long your current savings will last. Many calculators also take into account factors like inflation, Social Security benefits, and investment returns. Factors to consider when using calculators While retirement calculators can provide useful insights, it's important to remember that they are based on assumptions and estimates. Be cautious about relying solely on calculator results and consider the following: Limitations of calculators: No calculator can predict the future or account for every possible scenario. Use calculators as a starting point and supplement their results with additional research and professional advice. Varying assumptions: Different calculators may use different assumptions about factors like investment returns, inflation, and life expectancy. It can be helpful to use multiple calculators to compare results and gain a broader perspective. Popular retirement calculators There are many retirement calculators available online, each with its own unique features and focus. Some popular and easy to use options include: Covenant Wealth Advisors' Free Retirement Assessment - While this is a lot more powerful and accurate than a simple calculator, our retirement assessment dives deep into the many considerations of retirement including cash flow, taxes, social security and more. Vanguard's Retirement Nest Egg Calculator T. Rowe Price's Retirement Income Calculator Fidelity's Retirement Score Social Security Administration's Retirement Estimator Experiment with various calculators to find one or more that best suit your needs and preferences. Problems with retirement calculators While retirement calculators can offer valuable insights into your financial preparedness for retirement, it's important to recognize their limitations. Firstly, these calculators rely on assumptions and estimates, such as inflation rates, investment returns, and life expectancy, which may not accurately reflect future realities. Secondly, they typically cannot account for all individual variables or unexpected life events that may impact your retirement finances. Additionally, different calculators may use varying methodologies and assumptions, leading to discrepancies in their results. Third, and this is a big one, free calculators and even calculators you pay for often have serious limitations when it comes to evaluating taxes in retirement. Taxes can be your biggest expense. Unfortunately, proper tax planning often requires advanced planning retirement calculators generally not made for the individual investor. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire For example, at my firm Covenant Wealth Advisors, we spend an extraordinary amount of time and money on advanced systems, training, and staff to provide proper and accurate retirement tax planning strategies to our clients. Therefore, it's essential to use retirement calculators as a starting point rather than as the sole basis for your retirement planning. Supplementing these tools with additional research, professional advice, and a thorough understanding of your unique financial situation will help you make more informed decisions and create a more robust retirement plan. Consulting with a financial advisor While retirement calculators and tools can provide valuable insights, consulting with a qualified financial advisor can offer personalized guidance tailored to your specific situation. An advisor can help you refine your retirement plan, suggest strategies for optimizing your savings and investments, and provide ongoing support as you navigate your financial journey. Just be sure that you arm yourself with the best questions to ask a financial advisor about retirement so you can maximize your time together. Using retirement calculators and tools can help you gain a better understanding of your financial situation and make informed decisions about your retirement planning. However, it's essential to supplement these tools with additional research and professional advice to ensure you're on the right track toward a financially secure retirement. Conclusion Planning for a financially secure retirement is a crucial responsibility that requires proactive decision-making and continuous evaluation. By understanding the factors that impact the longevity of your retirement money and employing effective strategies to address these challenges, you can help ensure a comfortable and worry-free retirement. The importance of flexibility and adaptation cannot be overstated. As your financial situation, market conditions, and personal circumstances change, it's essential to adjust your retirement plan accordingly. Utilizing retirement calculators and tools, as well as seeking professional advice from a financial advisor, can provide valuable guidance in making these adjustments. Ultimately, the key to a successful and financially secure retirement lies in taking control of your financial future and making informed decisions based on your unique needs and goals. By following the insights provided in this comprehensive guide, you'll be well on your way to create a retirement plan that stands the test of time and allows you to fully enjoy your next chapter in life. Do you want to make your retirement money last? Schedule a free retirement consultation with one of our CERTIFIED FINANCIAL PLANNER professionals today! We serve clients across the United States. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Let’s face it: retirement is expensive! Between lifestyle costs, taxes, and insurance, there’s a lot you have to plan for and coordinate in your spending plan. While you may know that Medicare is a critical component of any retirement spending plan, there’s one expense that high-net-worth retirees in particular need to keep a close eye on—Medicare IRMAA. What is Medicare IRMAA? It’s a surcharge that increases your standard premium on Medicare part B, medical coverage, and part D, prescription drug coverage, if you earn above the annual threshold. Ultimately, IRMAA can increase your Medicare costs, making healthcare more expensive. Read this article to learn how Medicare IRMAA impacts today’s retirees and some smart strategies to avoid carelessly paying too much . What’s Medicare IRMAA? IRMAA, or income-related monthly adjustment amount, can surprise new retirees because many don’t understand how it works and may not even know it exists. As your income rises, IRMAA increases your monthly Medicare premiums. It’s important to note that a premium is different from a deductible. A premium represents the cost of maintaining coverage, and a deducible is your portion of the service or product expense. The concept of IRMAA is very similar to how income tax brackets affect your tax bill when you file your annual tax return. If your taxable income pushes you into a higher tax bracket, you’ll owe more on a larger portion of your income. For 2022 , the base Medicare Part B premium is $170.10. This chart shows the Part B premiums for different income levels. Individual Joint Monthly Premium $91,000 or less $182,000 or less $170.10 $91,000 – $114,000 $182,000 – $228,000 $238.10 $114,000 – $142,000 $228,000 -$284,000 $340.20 $142,000 – $170,000 ​$284,000 – $340,000 $442.30 $170,000 – $500,000 $340,000 – $750,000 $544.30 Greater than $500,000 Greater than $750,000 $578.30 Now, these income thresholds might not be what you actually make in a given tax year. Rather, the income measure Medicare uses to determine your premium payment is your modified adjusted gross income (MAGI). For IRMAA, MAGI is your adjusted gross income plus: Tax-exempt interest Interest from US savings bonds used to pay for higher education expenses Any income you earned abroad that’s not already included in your gross income Other income you earned from specific foreign sources that aren’t otherwise included in your AGI For most people, MAGI for IRMAA is going to be the same as their AGI, or with tax-exempt interest added. But not so fast. You won’t use your current modified adjusted gross income to determine if IRMAA applies. Instead, Medicare bases your current premiums on tax records from two years earlier, meaning your 2022 premiums come from 2020 financial data. Think of IRMAA like financial karma; the decisions you make now will impact what you pay in the future, making it even more critical to have a long-term comprehensive plan. As with most other tax items, the income bands and subsequent IRMAA surcharges are updated each year for inflation as measured by changes in the CPI-U. How Retirees Can Strategically Manage Their MAGI Whether or not you have an IRMAA surcharge and how much it is, depends on your MAGI, so you should look for ways to strategically manage it. Doing so has the potential to save you thousands of dollars each year. Strategic Roth Conversions Roth conversions are a popular tax management strategy. But you need to consider how they may affect your MAGI. If you convert too much, you could increase your taxable income to the point of tipping you into a higher IRMAA bracket. And there is a significant difference between the brackets. For example, if you’re married filing jointly and earned $285,000 instead of $284,000 in 2020, you’d be on the hook for an extra $102 a month in Part B premiums. This is one reason why Roth conversions tend to be more advantageous early in retirement. Your income tends to be lower before you start taking Social Security, pension income, annuity payouts, and required minimum distributions (RMDs), giving you more wiggle room when converting. Think about it like this: when you turn 65, Roth conversions will impact your MAGI, which is also when most people start Medicare. Planning for Required Minimum Distributions (RMDs) RMDs could create unexpected changes in your Medicare premiums because they increase your taxable income and, therefore, your MAGI. However, if you don’t need all of your RMDs to cover living expenses, you could consider donating all or a portion via QCD s, or qualified charitable distributions . Using this giving strategy allows you to avoid including RMDs in your taxable income and, by extension, your MAGI. QCDs can be super beneficial for people who want to give more intentionally and strategically. Remember, a fundamental feature (and benefit) of a Roth IRA is that the IRS doesn’t mandate RMDs from this account—yet another reason to start thinking about Roth conversions early. Create a Custom Withdrawal Strategy Your retirement portfolio likely consists of several types of portfolios—401k, traditional IRA, Roth IRA, brokerage account, etc. Determining the most appropriate way for you to draw from each account can significantly impact your taxable income. For example, withdrawals from traditional accounts like 401k and IRA are taxed at your ordinary income rates, whereas selling assets in a brokerage account may trigger capital gains tax. We can help you create a custom withdrawal strategy that aims to maximize your retirement income and minimize your tax liability long term. As we build this strategy, we’ll also consider which accounts you’ll pull from first, at what time, and how it will impact your IRMAA and larger health care costs. Proactive Tax Planning You can’t plan for retirement without considering your tax picture, and IRMAA considerations make it even more important if you’re close to income thresholds. For example, if you hold investments in taxable accounts, you might consider focusing on keeping the most tax-efficient investments like ETFs. That way, you’re actively managing the ongoing capital gains within that account. We’re passionate about the value that comprehensive tax planning brings to a retirement plan. By planning in advance, we have more control over the tax liability and take the “surprise” tax bills out of the equation, which ultimately can help insulate your nest egg long-term. Plan For Social Security One of the biggest and sometimes overlooked benefits of Social Security is its role as a tax-efficient income source. At most, only 85% of your Social Security benefits is taxed, so maximizing this is a great way to reduce your taxable income per available dollar in retirement. Coordinate With Your Spouse If one spouse dies, the surviving spouse must consider the individual income limits when calculating IRMAA. Depending on how pension funds, Social Security, and other income payouts adjust, the surviving spouse may find that they suddenly have a much higher IRMAA charge. Keeping Medicare IRMAA At Bay Throughout Retirement Given the toll it can take on your monthly spending, Medicare IRMAA is certainly something those with higher income should consider each year. It’s also important to be cognizant of ways to reduce or avoid IRMAA expenses when possible. But for high-earners, IRMAA may always be something you’re contending with, so be sure to build it into your health insurance, income, and tax planning processes. Keep your team aware of any significant life-changing events because you can use these to contest a surcharge via Form SSA-44. Retirement is a perfect example! Because of the nuance involved, working with a firm specializing in high-net-worth retirement planning is essential. Our entire business is built on creating tax-managed retirement plans for high-net-worth families who have over $1 million. We would be happy to meet with you and discuss your tailored plan for addressing IRMAA. Set up a call today! About the author: Megan Waters, CFP® Financial Advisor Megan Waters is a CERTIFIED FINANCIAL PLANNER™ professional and Financial Advisor at Covenant Wealth Advisors . Megan has over 14 years of experience in the financial services industry. Raised in Williamsburg, VA, Megan graduated from the Honors College at the College of Charleston with a BS in Economics and a minor in Environmental Studies. Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

Has the global COVID-19 pandemic prompted you to rethink your money moves? Bravo if you put establishing an emergency fund at the top of your list. An emergency fund is one of your most powerful tools to weather life’s crises. But what is it and how can it impact you? Let’s take a closer look. Get your Retirement Checklist of over 30 things that you need to think about for your retirement. What’s an emergency fund? Simply put, an emergency fund is your personal financial safety net . It’s highly liquid, such as a cash or money market account kept separately from your regular checking and savings account, and set up to cover large, unexpected expenses. What kind of expenses? You may be thinking “gas line repair,” “new roof” and “unforeseen medical expenses.” Six months ago, these may have been at the top of the list. But the ongoing pandemic has shifted our thinking. Now many people want to earmark that emergency fund as their primary source of support for themselves and their families in case of unemployment. Since March, more than 40 million Americans of all income brackets and occupations have lost their jobs because of COVID-19 and the subsequent economic fallout. Although some hiring has resumed, uncertainty prevails. You want to be prepared. Depending on your family situation (single, married, a working spouse, minor dependents), aim for emergency savings to cover up to nine months of expenses you may have to pay due to unemployment. That buffer will allow you to continue paying your monthly rent or mortgage, food and medications, private school tuition, utilities, car loan, insurance, plus property, and real estate taxes. For example, Susan and David have expenses totaling $9,000 per month. They both work full-time, but if Dave were to lose his job, then Susan's salary would only cover $3,000 of their monthly expenses. This leaves $6,000 per month in expenses that they won't be able to cover. Susan and David should target $42,000 to $63,000 for their emergency fund. This equates to six to nine months of expenses. Emergency funds aren’t just for working families, even retirees still need a healthy emergency fund. We typically encourage our retired clients to have between one to two years of expenses saved up in an emergency fund or as part of their overall retirement portfolio. It’s good to have cash on hand in case of any dips in your nest egg . Create a separate rainy day fund In addition to your emergency fund, you want a rainy day fund. This is a smaller savings account, also kept separate from your regular checking account, for life’s less traumatic hiccups: new tires or a malfunctioning water heater. Try to build up $2,500 to $5,000 in this account or the equivalent of one month’s pay. Why do you need both? An emergency fund preserves your financial security and boosts your peace of mind. You will withstand life’s major blows much better if your finances are in good shape. Consider the benefits of an emergency fund: Intact retirement accounts. You won’t have to dip into your IRA, 401(k) or Profit Sharing Plan. Those withdrawals, while permissible under IRS rules for certain expenses, might cost you dearly in terms of lost investment earnings, income taxes and possibly, penalties. That could mean delaying your retirement or jeopardizing your lifestyle in retirement. No need to face those consequences if you have a well-endowed emergency fund. Control over your investments. You want to decide when to sell your securities so you can minimize losses when stocks are down and excessive capital gains taxes when stocks are up. A financial crunch could necessitate unfavorable selling choices, but an emergency fund lets you stay in charge. No new debt. Avoid taking on new debt, especially from credit cards, during a major crisis. Credit card debt is particularly harmful due to high interest rates exceeding 21.16% on average as of 2024 and steep late fees. Additional debt also damages your credit score, making future borrowing more expensive. If you do use a credit card, be sure to choose one with some strong cash-back benefits or points . An emergency fund helps you sidestep this financial trap. Maintain personal relationships. You probably know this proverb: “Before borrowing money from a friend, decide which you need more: the friend or the money.” Asking friends or family members for loans typically strains the relationship even if you manage to pay back all that you owe. A good night’s sleep. You’ll sleep better and have an optimistic outlook even in darker times knowing your emergency fund is carrying you through this time of financial hardship. How to build (or replenish) your emergency fund Saving up thousands of dollars for emergencies is daunting, no question about it. But the good news is that you can start small and set your own pace. With time, as your savings and your sense of financial well-being grow, you’ll discover that you actually enjoy putting money aside. Here are some suggestions to help you get started: Open two new bank accounts, one designated as your emergency, the other as your rainy day fund. These should be no-cost, highly liquid cash, or money market accounts. If you are employed, ask your human resources department to direct payroll deductions of your choosing into those accounts each payday. You can start small like $50, which could add up to $1,300 over one year. Alternatively, instruct your financial institution to automate those money transfers. Save regularly and consistently every week, every month! Increase the regular savings as you are able to. Channel all or parts of financial windfalls, such as an IRS refund, a raise, or bonus into those accounts. After you have paid off any outstanding loans, continue the monthly payments, but make them to yourself by transferring the money into your emergency/rainy day funds. For additional cash boosts, consider taking on a part-time job for a few months, selling some rarely used household items and kitchen gadgets, or canceling select media subscriptions and club memberships. Add the extra earnings and savings to your cash reserves. Once your emergency fund has reached the desired balance, channel all future deposits into your rainy day fund. Pro Tip: Want to save even more? If you own a house or a condo, you know there will be repairs at some point. Try this savings strategy to be prepared: Calculate 1 to 1.5 percent of the value of your house and divide that amount by 12. Set this sum aside each month to build up a house repair fund. For example: If your house is worth $200,000, divide 1 percent of its value, 2,000, by 12: $167. Save this amount each month. Over time, you’ll grow a comfortable cushion to draw from when the air conditioner conks out. Consider a similar strategy to be prepared for car repairs, your family vacation, and holiday presents. Christmas is December 25 each year, no surprise there. Nor should be your expenses. Establish a budget in advance, divide by 12, and save those amounts each month. Emergencies should always be part of the plan Life can throw some unexpected curve balls your way. You need to be prepared for a tough financial storm, whether it be a leaking roof, plumbing issue, unexpected hospital bills, or losing employment. Planning when times are good will help you stay afloat when times are bad. Our team is always here to help you craft a plan that will support you throughout all of life’s journeys. If you would like to talk to us about revamping your savings plan, give us a call today . We can help establish your personal savings plan for life’s bigger and smaller emergencies. Get in Touch With Us Mark Fonville, CFP® Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors . Schedule a free intro call with Mark Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice. Registration of an investment advisor does not imply a certain level of skill or training.

As we enter the last quarter of the year, the financial world has taken some unexpected turns. Despite fears of a recession, our economy has continued to grow, albeit at a slower pace. Inflation is coming down, moving closer to the Federal Reserve's target. This shift has led the Fed to start lowering interest rates, which has pushed the S&P 500 and Dow Jones to new record highs and improved bond returns. These events remind us that it's often better to focus on long-term trends rather than short-term happenings. Of course, we still face challenges in the months ahead: We're not sure exactly what the Fed will do next with interest rates. The upcoming presidential election could affect taxes, regulations, and trade policies. Global conflicts are getting worse, which could impact world stability, supply chains, and oil prices. The stock market might swing up and down, especially since stock prices and expected earnings are quite high right now. However, facing risks is part of investing. What matters most is how we respond to these risks. Instead of trying to time the market perfectly, it's usually better to have a well-balanced investment portfolio that can handle different market conditions. Let's look at five key factors influencing the market and what they might mean for experienced investors like you. 1. New Market Highs Are Normal in Bull Markets The stock market has hit many new all-time highs this year. While this is good news, it might make some investors nervous, wondering if we're due for a downturn. It's important to remember that during bull markets (periods when stock prices are rising), it's normal to see many new record highs. This happens because companies are earning more, the economy is growing, and investors are feeling optimistic. Just because we've hit new highs doesn't mean a downturn is coming soon. Of course, the market will eventually have some down days - that's just part of investing. But trying to predict exactly when those will happen is very difficult. For example, this year we saw small dips in April and August, but the market bounced back faster than many expected. History shows us that it's often better to stay invested rather than trying to jump in and out of the market. 2. The Market Has Performed Well Under Both Political Parties With the presidential election coming up, many investors are worried about how it might affect the economy. While elections are important for our country, it's crucial not to let them dictate our investment decisions. Looking back, we can see that the stock market has grown over the long term regardless of which political party is in power. This is because things like economic cycles, company earnings, and overall market conditions have a much bigger impact on stocks than who's in the White House. That said, government policies can affect taxes, trade, and regulations. But these changes often happen slowly, and their impact is usually less dramatic than people expect. What politicians promise during campaigns is often different from what actually happens once they're in office. As an experienced investor, it's better to focus on long-term economic trends rather than day-to-day political news. 3. The Fed is Likely to Keep Cutting Interest Rates Inflation is continuing to slow down. The latest data shows that the PCE price index (the Fed's preferred way to measure inflation) is up just 2.2% from last year, getting close to the Fed's 2% target. The job market is also cooling off a bit, with unemployment at 4.2%, though this is still low compared to historical averages. These conditions led the Fed to cut interest rates by 0.5% in September, and more cuts are expected through the rest of this year and into 2025. The stock market has been anticipating these cuts all year, which helps explain why it's been doing well. It's worth noting that the current situation is different from past rate cuts. Often, the Fed cuts rates during economic crises, like in 2008 or 2020. But now, they're trying to achieve a "soft landing" - slowing the economy just enough to control inflation without causing a recession. This is similar to what happened in the mid-1990s, which led to a long period of economic growth and rising stock prices. 4. The Bond Market is Changing As the Fed cuts interest rates, we're seeing lower rates across all types of bonds. This is reversing the tough times bonds had in 2022 when interest rates were going up. Remember, bond prices move in the opposite direction of interest rates. So, as rates fall, existing bonds with higher rates become more valuable. This means that right now, bond investors can benefit from both higher-than-average yields and potential price increases if rates continue to fall. For the broader economy, lower interest rates make it cheaper for companies and individuals to borrow money. This can boost economic growth, which is good for company earnings and stock prices. That's why it's important to keep a balanced mix of stocks and bonds in your portfolio, even though bonds have faced challenges in recent years. 5. Geopolitical Conflicts Are Concerning, But Their Market Impact is Often Limited Tensions are rising in the Middle East, adding to ongoing global conflicts like the war between Russia and Ukraine. While these events have major real-world impacts, their effects on the stock market are often less direct and usually short-lived. Looking back, we can see that long-lasting market downturns typically coincide with major economic events, like the dot-com crash or the recent interest rate hikes, rather than geopolitical conflicts. One way these conflicts can affect the economy is through oil prices. The situation in the Middle East has caused oil prices to rise slightly, but the increase has been modest compared to past crises. The fact that the U.S. is now the world's largest oil and gas producer helps protect us somewhat from global events. Despite all the geopolitical uncertainty, the stock market has only had two pullbacks of 5% or more this year. This underscores the importance of staying invested and focusing on broader market trends rather than reacting to headlines. Conclusion With interest rates coming down, the election approaching, and markets near all-time highs, it's more important than ever to stay focused on your long-term financial goals. As an experienced investor, you've likely weathered market ups and downs before. Remember, a well-balanced portfolio tailored to your specific needs and risk tolerance is often the best way to navigate changing market conditions. If you have any questions about how these market trends might affect your specific financial situation, don't hesitate to reach out. We're here to help you make informed decisions and stay on track toward your financial goals. You can also request a free retirement assessment here. This is valuable if you want an objective party to review your investment portfolio to ensure that you are doing everything possible to manage risk regardless of what the future holds. Author: Mark Fonville, CFP ® Mark is a fiduciary and fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER ™ professional  with the assistance of AI.  No  advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Knowing how to reduce taxes in retirement is paramount to making your money last. Unfortunately, retirement savings plans like 401ks can create a massive tax problem when you retire because every dollar invested on a pre-tax basis is taxable upon withdrawal. When you retire, Uncle Sam wants his portion of your nest egg. If you are not prepared, you may pay more taxes than necessary. Fortunately, there are some key tax planning strategies to consider to make sure he doesn't take too much. Here are some top ways you can reduce taxes in retirement. Download our powerful tax, investment, and savings cheat sheet for more helpful tax tips and insights! Manage Your Withdrawal Strategy Many people think taking withdrawals from their retirement savings is all about deciding how much they can withdraw. That's a critical component, but how you create income (a.k.a the method you use) from your savings can be just as vital. Why? Because it affects how much of that withdrawal you will lose to taxes. With a little planning, you may be able to reduce your tax bill significantly. To manage your income and tax brackets efficiently, you must plan how and when you'll withdraw from taxable, tax-deferred, and tax-free savings. Conventional wisdom vs. customized plan Most people think you should withdraw from your retirement accounts in a set order. We see this in our audience polling during taxes in retirement webinars all the time. For example, conventional wisdom starts by taking after-tax money held in a bank or taxable investment accounts first, then withdraw tax-deferred savings from a Traditional IRA, and then take distributions from tax-free Roth IRA accounts last. This conventional wisdom isn't terrible, but it usually isn't optimal either. Our suspicion is it became a status-quo because it's easy to implement, and most people, including many financial advisors at major brokerage firms, don't like digging into the details on taxes. However, the order in which you withdraw money from your savings is an area that can substantially impact your retirement income plan. Ask the experts Because this topic is so important, it has unsurprisingly drawn the attention of academic researchers. Multiple studies show how a holistic approach to income withdrawal planning can affect retirees. Some of those studies include: Converting to Roth IRA under New Tax Law: a Decision Framework, by Kenneth E. Anderson and David S. Hulse, Journal of Financial Service Professionals, 2007 The Effects of Social Security Benefits and RMDs on Tax-Efficient Withdrawal Strategies, by Greg Geisler, Ph.D.; and David S. Hulse, Ph.D., Journal of Financial Planning, 2018 Tax-Efficient Withdrawal Strategies, by Kirsten A. Cook, William Meyer, and William Reichenstein, CFA. Published in Financial Analysts Journal, 2015 These studies, and many others like them, have shown that the conventional approach to withdrawing money in retirement is rarely ideal, and we don't rely on general rules of thumb for our clients at Covenant Wealth Advisors. Our take on retirement withdrawal strategies Based on this research and our own experience, we often use a blended approach to withdrawals depending upon a client's tax situation. Here's how it works in a nutshell. Consider taking advantage of Roth IRA conversions in low taxable income years. Converting the money from your Traditional IRA while you're in a lower tax bracket potentially decreases the amount of taxes you'll owe in the long run. Let's break this down a bit further. Your pre-tax contributions and earnings to a Traditional IRA will be taxed as ordinary income. When Required Minimum Distributions (RMDs) kick in at age 72, the IRS forces you to make a withdrawal. The more money you have in your account, the higher your annual RMDs will be—often putting you in a higher tax bracket or forcing you to pay taxes on income you may not need in the first place! Alternatively, qualified distributions from your Roth IRA aren't taxed, nor are they subject to RMDs, providing more flexibility and breathing room tax-wise. Converting funds from your Traditional IRA in low-tax years saves you from potentially much larger distributions (and subsequently higher tax bills) later. This blended approach gives you more flexibility to use your tax-free Roth money strategically in future years. Does a blended approach work? How much impact would a blended approach have on your retirement income? In the academic studies we mentioned, retirement income strategies may increase your savings' lifespan (a.k.a portfolio longevity) by as much as two years. While not always the case, we've seen projected tax savings on Roth conversion strategies can exceed $200,000 over a lifetime for individuals and couples. Think about that. By simply being more deliberate about your withdrawals, there is potential to save a tremendous amount of money. Additionally, reducing the amount you accumulate in tax-deferred IRAs may reduce your future RMDs, which provides you with another element of flexibility and control. For this strategy to work, you have to think of your retirement as a multi-year event and realize that a lower average tax bill is better than having a lower tax bill in any given year. You should always consult your tax professional when considering a plan like this, and no strategy works for everyone. Maximize Roth Accounts Roth accounts are one of the best tools you have for retirement income planning. You can, of course, use Roth accounts to save for retirement, but they're also a valuable tool in retirement —even if the bulk of your savings is in tax-deferred accounts. You can do a Roth conversion in retirement, even a partial one, any year with relatively low taxable income. In our experience, we've seen that Roth conversions can be optimal in the first few years of retirement if you haven't started collecting Social Security or pension funds, for example. Since you know your taxable income will go up once social security or pension benefits start, it can make sense to consider Roth conversions beforehand. That's why it is so important to manage your tax bracket. Ask yourself, What's your current federal tax bracket? What's your IRMAA tax bracket? What's your long-term capital gains tax bracket? How will your tax bracket change with the other sources of income in the future? How much time do I have to let my Roth savings grow? For example, John and Mary have taxable income of $40,000. This puts them squarely in the 12% tax bracket, ranging from $19,900 to $81,050 in 2021. This means an additional $41,050 of taxable income they can receive will be taxed at the 12% rate. They have also decided to defer taking social security until age 70. However, once social security benefits kick in, they anticipate being in the 22% tax bracket. John and Mary decide to convert $41,050 from their Traditional IRA to their Roth IRA, thus paying only 12% federal tax on that income. As a result, they have: Reduced their future required minimum distributions from their Traditional IRA. Created a tax-free source of income Created more flexibility in the taxation of their income in future years. The concept is pretty simple—it's better to pay taxes at 12% than 22%. Maintain Your Charitable Giving One of the most impactful ways to reduce your taxes in retirement is through charitable giving. There are many ways to reduce your taxes in retirement, and several relate to your distributions. In the case of RMDs, you may want to consider donating via a Qualified Charitable Distribution to avoid paying taxes on amounts up to $100,000. You can also set up a Donor Advised Fund (DAF) to set aside money for future charitable gifts. A DAF allows you to gift a highly appreciated investment, avoiding paying taxes on the gain and potentially qualifying for a charitable deduction. Take Advantage of Tax Opportunities Don't forget about the everyday tax-planning items that still apply in retirement. For example, maximizing your itemized deductions can allow you to reduce your total taxable income. We've found that a lot of people in retirement mistakenly use the standard deduction. Proper tax planning can help identify ways to itemize deductions instead. You will still need to manage your taxable investments efficiently. Effectively harvesting tax losses and even harvesting tax gains in low-income years when you qualify for 0% taxes on long-term capital gains can be effective strategies to reduce your taxes in retirement. How about the grandkids? If you want to help them in a lasting way, consider giving to a 529 plan. In Virginia, you can deduct up to $4,000 in contributions to each 529 account per year and carry forward any amount above that to deduct in future years. If you are age 70 or older, you can deduct the full amount of the contribution. Remain Conscious of Extra Income Consider the total effect that a given source of income has on your total income, which is what will drive your tax bill. This is especially important regarding Social Security. As your income increases, the amount of your Social Security benefit that is subject to income taxes increases. That makes it even more important to think of your income in retirement across multiple years. As outlined previously, delaying Social Security benefits can create an opportunity to convert some of your tax-deferred savings into a Roth IRA. But remember, you must take into account multiple tax considerations, including federal income tax, state tax, long-term capital gains taxes, and a little-known tax call IRMAA. That's a lot of taxes to consider, but the payoff can be significant. Remember, qualified withdrawals from a Roth IRA won't increase your taxable income and may keep more of your Social Security payments from being taxable. The bottom line Withdrawal planning is a crucial part of retirement planning. You must know how to reduce taxes in retirement to give yourself a fighting chance at making your money last. Spending in retirement is about a lot more than just investing and deciding on an amount to withdraw from you accounts. You need to focus on the order of your withdrawals, different tax rates, and how those decisions impact your personal situation. Unfortunately, tax planning doesn't come naturally to most people. Even if you need help, finding a professional to guide you can be hard because most financial advisors rarely provide tax planning as part of their investment centric services. The good news is that you don't have to go it alone. At Covenant Wealth Advisors, we build personalized retirement income plans that consider your entire financial situation. From taxes to investments to creating income in retirement, we can help create a plan that gives you the peace of mind you want. If you'd like more help, we'd be glad to discuss developing a plan to manage your retirement income withdrawals effectively. Contact us today for free retirement assessment. Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

When you’re early in your career and just starting to build wealth, the do-it-yourself approach to portfolio management is enough to start your nest egg. By the time you’re approaching your 50s, however, investing isn’t one-size-fits-all. Retirement is on the horizon and staying on track with your investment goals is essential. Download Free: 15 Free Retirement Planning Checklists [New] At a high level, portfolio management is important in your 50s because retirement could last thirty years or more. That means you'll want to employ every strategy possible aimed at helping you get ready. Unfortunately, investment strategies and tactics differ for everyone and its easy for small investment mistakes to snowball into big ones. That's why guidance from an expert can help. Table of Contents: Financial goals change over time Determine the right mix of stocks and bonds Properly diversify your portfolio Fine-tune your tax reduction strategy Rebalance to maximize returns and minimize risk Ensure liquidity when you need it DIY or professional portfolio manager? Here are seven powerful reasons why portfolio management is important in your 50s. 1. Financial goals change over time When you begin investing for retirement, you have a very hazy idea of what retirement might look like. Your goal is simply to put aside as much as you can while funding your other priorities like saving for a home or college education for your children. When you’re in your 50s, however, your vision of retirement is beginning to take shape. You’re deciding what age to retire , where to live, and how you plan to spend your time—in other words, your income needs are becoming more concrete. But, life throws curve balls all the time and goals frequently change. Example: John is 50 years old and wants to retire at age 65. But, after a couple of years, he get's burned out by his job and decides he wants to retire at 60. This creates a big challenge for John. He must now make his retirement savings last an additional five years plus he must figure out how to pay for healthcare insurance from age 60 to 65, at which point he can apply for medicare. If he get's portfolio management help now, he can implement strategies to help him achieve his objective. Getting professional investment advice in your 50s can help you be better prepared for life in your 60s and beyond. You want to make sure your assets and investments are fully aligned with your personal goals. Getting advice too late could cost you thousands. But, there are a lot more reasons why portfolio management in your 50s is so important. 2. Determine the right mix of stocks and bonds Asset allocation plays a huge role in your portfolio returns. According to one study, over 90% of the variance of returns in a portfolio is directly related to the mix if investments you own. If you get your asset allocation right, you stand a much better chance of being where you need to be when you’re ready to retire. When you’re younger, a more aggressive investment portfolio can make sense—your risk tolerance is higher because time is on your side. In your 50s, professional portfolio management becomes more important. You'll want to make sure that your investments match the shortened time frame to when you’ll need your money for retirement. Your strategy needs to change from focusing on growth to focusing on preserving wealth, creating multiple sources of income for retirement, and reducing taxes during your highest earning years. Questions you'll want to answer to build the right asset allocation include: How much return do I need on my money? Do I own investments that may be unsuitable for my individual or family situation? Am I taking too much risk? Should I own index funds, stocks, or mutual funds? A portfolio manager can help align your mix of bonds vs stocks vs mutual funds with specific goals such as generating income, preserving your wealth, and minimize taxes. 3. Properly diversify your portfolio Everyone knows that diversification is important. The problem is that most people aren't properly diversified. Example: Mary has saved $1,300,000 for retirement. She thought she was diversified because she owned thirty seven stocks and four mutual funds. Upon further inspection, Mary learns that her mutual funds actually own the same stock - a company called Lehman Brothers. When the stock market crashed, Mary is devastated because Lehman Brothers flies for bankruptcy and never recovers. Portfolio risk can be divided into two types: Systematic and unsystematic. Systematic risk is defined as risk related to the financial markets as a whole—market volatility, inflation and rising interest rates, for example. Unsystematic risk cannot be diversified away. Unsystematic risk is limited to a particular sector like technology or an individual stock. Generally speaking, a well-structured investment portfolio should diversify away unsystematic risk. This means that if a single stock that you own goes bankrupt, the impact to your portfolio will be minor because you have a very small percentage of your money invested in an single security. Portfolio management in your 50s is important because you need diversification more than ever. While diversification can't guarantee against a loss, it can help reduce your risk and give you time to recover if one of your investments tanks. Professional portfolio management can help you properly diversify. 4. Fine-tune your tax reduction strategy When you retire, you will likely draw income from several sources: Social Security, pensions, distributions from IRAs and 401(k)s, personal savings and investments, and perhaps even rental properties. Each source of income may be taxed differently. Your retirement planning should ensure each source of income works together as efficiently as possible to minimize your tax liability—both now and after you retire. Reducing your tax liability is one of the major reasons portfolio management in your 50s is so important. You'll want to make sure that you create different buckets of income as early as possible. Example: Michael is 52 years old and has saved $1,124,000 in his 401 (k). Michael is disappointed when he learns that every dollar he withdrawals from his 401 (k) in retirement will be taxed at the highest federal tax rate for his income level. Michael hires a portfolio manager to help him build out a strategy so he can enjoy tax free income and tax-advantaged income upon retirement. Having greater control over his income taxes in retirement will help Michael make his money last longer. A portfolio manager helps you choose the right retirement accounts and investments to lower your taxes before you retire and keep them low when you’re drawing down assets in retirement. That may mean properly allocating your investments to reduce taxes, contributing to both a Roth and a traditional IRA, creating a mega backdoor Roth IRA, buying tax-exempt bonds, or making catch-up contributions to your IRAs and health savings account. 5. Rebalance to maximize returns and minimize risk You invest for specific goals—starting a new business, educating your children, ensuring income for retirement—and your asset allocation strategy reflects those goals. The problem is that the market is always changing ; some investments outperform and others underperform. Over time, that imbalance can really mess up your asset allocation. Take the last 10 years for example: The S&P 500 is up nearly 200%. If your asset allocation strategy was 50% stocks, 45% bond funds, and 5% cash in January 2010, your portfolio mix wouldn’t look anything like that in January 2020. As you can see, there’s significantly more money tied up in stocks in 2020, which is a level of risk you may not be comfortable with if you’re close to retirement. A 10% drop in the stock market would affect nearly 75% of your portfolio. Rebalancing is the process of selling off some assets and purchasing others to keep your portfolio aligned with your allocation strategy. This should be done on an annual basis at a minimum. In tax-deferred accounts such as IRAs and 401(k)s, you don’t have to worry about capital gains on any assets you sell, but that’s not the case in your individual investment accounts. A financial advisor for retirement can use techniques such as tax-loss harvesting during rebalancing to minimize your exposure to capital gains tax . 6. Ensure liquidity when you need it Diversification can hedge your risks, but it can’t eliminate it entirely. When there is a lot of volatility in the market, as we have seen lately, you need to have assets in your portfolio to provide income when you need it without selling off the stocks and funds you’re counting on for growth to protect your nest egg against inflation. Working with a portfolio manager in your 50s is a way to ensure you have liquidity—a source of income for your immediate needs in retirement—without sacrificing growth. This might include mixing short- and long-term bonds with cash assets such as staggered CDs and money market funds to provide liquidity and safeguard your capital during a potential market correction. DIY or professional portfolio manager? Your 50s are a pivotal time for retirement planning. Your income plateaus at the same time as your long-term needs are coming into near-term focus. It’s your last chance to re-examine your strategy, refocus your plan, and make a course correction if you need to. If you’ve spent your life investing on autopilot—making your maximum contributions to tax-deferred accounts—working with a portfolio manager in your 50s might seem like an unnecessary expense. But that may be a short-sighted view. Over the next five to 10 years, you need to optimize your portfolio to make sure it works for you the day you enter retirement. That means investing in the right mix of assets to capture growth while protecting against market downturns. It means putting your retirement savings in the context of your complete financial picture so all the pieces work together efficiently to maximize your income and minimize your taxes. It’s something you can’t afford to leave on autopilot. Covenant Wealth Advisors is one of the area’s only independent advisory firms specifically focused on investing for retirement; we’re not affiliated with a particular financial product. Our independence lets us choose the investments we believe are best aligned with your goals and values. We’re fee-only Certified Financial Planners; our fees are transparent so you know exactly what you’re getting and how much you’ll pay—no hidden costs or unpleasant surprises. We don’t take a percentage of your portfolio off the top for management fees. If you’re in your 50s and want to be sure you’re on the right track for retirement, schedule a consultation to learn more about our retirement planning and portfolio management services. Request your free retirement assessment today Mark Fonville, CFP® Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors . Get your free retirement assessment Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice. Registration of an investment advisor does not imply a certain level of skill or training.

It's no secret that retirement can be a risky period for investors. For many pre-retirees and retirees alike, the thought of retirement brings with it a sense of anxiety and worry. Leaving a life with a steady job and a comfortable paycheck is nerve racking because that all goes away when you retire. You'll face a multitude of retirement risks throughout your journey. And, if you don't have a plan to counter those risks, you may run out of money, pay too much in taxes, or both. Download now: Get access to 15 of the same checklists we use to help clients overcome the key risks in retirement The good news is that many of the retirement risks you'll face can be mitigated with the right strategies and knowing how to avoid them is essential for a secure and comfortable retirement. Here are nine retirement risks that you need to be aware of as you plan for your next chapter in life. Inflation Risk in Retirement Market Risk in Retirement Interest Rate Risk in Retirement Behavioral Risk in Retirement Sequence of Return Risk in Retirement Tax Risk in Retirement Liquidity Risk in Retirement Opportunity Cost Risk in Retirement Longevity Risk in Retirement You'll also learn about strategies we often use with clients that can help mitigate retirement risks and strengthen your retirement income planning. Inflation Risk in Retirement Inflation risk is the danger that your savings and investments will not keep up with the rising cost of living, resulting in a decline in your purchasing power. Said another way, your current living expenses will increase over time because of inflation. For retirees who typically have a fixed income, inflation can be a major threat to your financial security. Inflation is a silent killer that can erode the value of your savings over time, and it can be very difficult to predict how high it will go. There have been several periods in United States history where inflation was especially high thus making it difficult for retirees to keep their purchasing power at pace with the rising cost of goods. Some of the most notable examples are: - The late 1970s, when inflation reached more than 14% annually - The early 1980s, when it peaked at more than 13% - The late 1990s, when it reached more than 4% Each of these periods presented unique challenges for retirees and investors. There are a few things you can do to help protect yourself from inflation risk: Make sure you have a diversified portfolio, with exposure to different asset classes including stocks and real estate. Invest in assets that have a history of outpacing inflation, such as real estate or value stocks. Consider using inflation-protected investments, such as TIPS or I Bonds as a portion of your fixed income. Utilize a health savings account to help pay for rising health care costs and health care expenses. Optimize your retirement account withdrawal strategy to help lower taxes. Market Risk in Retirement Market risk refers to the possibility that the value of your investments will fall due to factors such as economic recession or political instability. This is a particular concern for retirees, who may not have time to wait for their investments to recover if they lose money. Since the 1950s, there have been several major stock market crashes that have caused significant losses for investors. The most recent example of a sudden market downturn was the stock market crash of 2022 which resulted in the stock market crashing by more than 20% from peak to trough. Other notable examples include the crash of 2008, which led to the Great Recession, and the dot-com bubble burst of 2000, which caused the NASDAQ to lose more than 78% of its value. Each of these crashes had a unique set of causes, but they all resulted in significant losses for investors. If you're planning on retiring in the near future, it's important to be aware of these risks and take steps to protect yourself from them. To help better manage your market risk, you may consider the following: Understand your risk tolerance so you can properly allocate the correct amount of investments across stocks, bonds, and cash. Implement opportunistic portfolio rebalancing. Properly diversifying your retirement portfolio across fixed-income, U.S. companies, and non-U.S. companies. Avoid owning more than 2% of your portfolio in any single stock holding. Focus on long-term investing rather than short-term trading strategies. Avoid trying to time when to get in and out of the stock market. Interest Rate Risk in Retirement Interest rate risk is the danger that rising interest rates will cause the value of your fixed-income investments to decline. When interest rates rise, the prices of bonds fall. This is because investors can get a higher return from investing in other types of securities, such as stocks. As a result, demand for bonds decreases, and their prices drop. This can be especially harmful to retirees who rely on income from these investments to cover their living expenses. One of the worst bond markets in history occurred in the early 1980s when interest rates reached their highest levels in decades. This caused the value of bonds to plummet, and many investors lost significant amounts of money. Here are several strategies to help combat interest rate risk in retirement: Consider investing a portion of your portfolio in bonds with short-term maturities between 1 to 3 years. Maintain fixed-rate loans and mortgages if any. Maintain adequate cash reserves of 1 to 2 years of your total expenses. If possible, avoid moving during periods of rising rates if you'll need a mortgage to finance the purchase. Behavioral Risk in Retirement Behavioral finance is a field of study that combines the principles of economics and psychology to gain an understanding of how people make financial decisions. It focuses on the psychological factors that influence decision-making, such as emotions, risk preferences, and cognitive biases. The concept of behavioral finance was popularized by Nobel Prize-winning behavioral economist Daniel Kahneman in his 2002 book Thinking Fast and Slow. In it, he suggested that investors are prone to making irrational decisions when it comes to investing due to their inherent biases, particularly when they feel overwhelmed or uncertain. Behavioral finance recognizes that emotions can play a huge role in how people invest their money. Fear, greed, overconfidence, and regret are all common emotional states that can shape investor behavior. This is often referred to as the “emotion cycle” of investing, which has proven to be one of the major risks for retirees. Another important factor for retirees to consider is cognitive bias. Cognitive bias occurs when people let their preconceived notions or beliefs hinder their ability to make rational investment decisions. This could be anything from holding onto losing stocks too long out of hope you will turn around, to becoming overly focused on short-term market fluctuations rather than taking a long-term view of your retirement portfolio’s performance. By recognizing these biases and understanding the risks of your behavior we can take steps to counteract them, such as seeking out objective advice from a qualified financial advisor when necessary and having a personalized retirement income plan that helps you maintain focus on what you can control. Ultimately, while there is no substitute for doing the research before entering retirement investments, it's also important for retirees to be aware of how behavioral finance risks can affect their investments as well. Here are several actions you can take to help better manage behavioral risks in retirement: Hire a financial advisor who can help remove emotion from your thought process Create a plan to help you maintain focus when emotions are high Learn more about how markets work to help you become a more disciplined investor Sequence of Return Risk in Retirement Sequence of return risk is the danger that a retiree will experience negative returns in the early years of retirement , which can potentially lead you toward running out of money later in life. For example, if someone were to retire in 2000 and heavily invested in stocks, they would have experienced a significant decline in the value of their investments due to the dot com crash. This drop in value would have been further amplified by any withdrawals they made during this period, as each withdrawal would have decreased their portfolio even more. The combination of these negative returns along with withdrawals could mean that the individual’s portfolio may not last them through their retirement years. An example of a common mistake that investors make as it relates to sequence of return risk is when a retiree has multiple accounts with different types of investments and they withdraw from one account before another, regardless of the market performance. For instance, if an individual had both stocks and bonds within their retirement portfolio but withdrew from only the stock portion during a down market year, it could potentially mean even greater losses for them as stocks tend to be more volatile than bonds. Retirees need to be aware of sequence of return risk and take steps to protect themselves from it. Potential strategies to help mitigate sequence of return risk in retirement may include: Implement strategies that create guaranteed income to cover your fixed expenses and utilize your retirement savings for variable expenses for which you have more control over the timing of those expenses. Properly diversify your retirement savings and investment assets using mutual funds or exchange-traded funds (ETFs). Determine the optimal spending strategy and order of withdrawals across your account types. Be diligent about which investments you draw from first during up and down stock markets. Maintain 1 to 2 years of cash on hand to cover expenses to help reduce risks associated with sequence of return risk. By withdrawing from bonds or fixed-income investments rather than from stock positions when stocks are down — an investor may help prevent large losses due to a single type of investment experiencing a downturn. Retirees need to be aware of the risks associated with withdrawing their money during negative market years and take steps to protect themselves from running out of money later on in life. Download now: Get access to 15 of the same checklists we use to help clients overcome the key risks in retirement Tax Risk in Retirement Tax risks in retirement usually come in two forms: not having enough money to pay taxes and inadvertently increasing your tax bill. We've found that retirees rarely integrate their tax plan with their investment plan, thus creating costly problems in the near term and later in retirement. The good news is that with proper tax planning, you can help manage tax risk in retirement and have more money left over to spend on yourself and your loved ones. There are many strategies you can implement to help minimize the chances of not having enough money to pay taxes and to help reduce your total income tax bill. First, you'll want to plan to make sure that you have adequate cash on hand and a healthy balance in your taxable accounts such as brokerage or trusts. Not having proper tax diversification across different account types in retirement is one of the biggest mistakes we see retirees make. To help avoid overpaying taxes in retirement, you'll want to incorporate tax bracket management. Tax bracket management is the process of strategically withdrawing money from your retirement accounts at the right time to avoid pushing your income unnecessarily into higher tax brackets while also taking advantage of lower tax brackets. Your overall tax bracket management approach can be managed using the following strategies: Order of withdrawal strategies Tax-loss harvesting Tax-gain harvesting Roth conversion strategies Qualified charitable distributions Charitable bunching Strategic qualified account withdrawals Delay filing for social security from the social security administration Properly save across taxable, tax-deferred, and tax-free accounts well before retirement It's also important to be aware of the many deductions and credits available to retirees, so you can take advantage of them when filing your taxes. By incorporating many of the strategies above, you substantially boost the likelihood of paying less in taxes and being prepared for changes to future tax laws. Liquidity Risk in Retirement Liquidity risk in retirement is the possibility that you will not have enough money available to cover your expenses. This can happen when you don't have enough cash on hand, when investments are difficult to sell or when you need to access money quickly and can't. For example, imagine that you have found a new home that you want to purchase so you can downsize in retirement, but you don't have enough liquidity to submit a strong offer on the house. This could put you in the difficult position of having to sell investments and incur sizable taxation at the same time. If you plan accordingly, liquidity risk can be reduced. Here are several strategies you may consider to help reduce liquidity risk: Maintain a diversified portfolio of assets that include different types of investments such as government bonds. This will allow you more flexibility in being able to access investments that may not have significant capital gains. Keep an adequate amount of cash on hand to cover unexpected costs. Plan ahead and know how much money you'll need each year in retirement through detailed cash flow planning. Consider taking distributions slowly over time rather than all at once. Harvest losses in your portfolio in years where stocks are down to help offset future gains in years where you may have a large liquidity need. Open an equity line of credit on your home. Opportunity Cost Risk in Retirement Opportunity cost risk in retirement is the potential for lost earnings due to missed investment opportunities. Opportunity cost is the cost of not taking an action or investing in a particular asset. It's the idea that any money, time, or resources used in one way means they can't be used elsewhere. This is a critical concept to understand when it comes to retirement planning, as every decision has potential risks and rewards associated with it. As an example, this can happen when you choose to sit on the sidelines in cash because you are nervous about stock markets. Another example may include the decision to purchase long-term care insurance instead of investing the premium payments in the market. Opportunity costs are often quite hard to measure, as you're essentially comparing one action to another without knowing what would have happened if you had pursued the other option. However, this type of analysis can be incredibly beneficial when it comes to making decisions about your retirement portfolio. For example, if you decide not to invest in a certain stock or mutual fund due to financial risks associated with it, you may miss out on a potentially lucrative investment opportunity and suffer from lost earnings as a result. On the other hand, if you decide to invest in something that turns out to be riskier than expected, you could end up taking losses that could have been avoided by making different decisions. It's worth noting that opportunity cost risks don't just apply to investments. Even seemingly small lifestyle choices – like choosing where and how much of your income goes towards housing – can have drastic implications on your retirement savings in the long run. For instance, buying an expensive home could leave you with less money for investing and growing your wealth over time. Ultimately, understanding opportunity costs and incorporating them into your retirement planning process can help ensure that you make decisions that lead to maximum growth in your savings over time – and minimize risks associated with missed opportunities down the line. A sound retirement income plan should incorporate scenarios that help you understand the tradeoffs of making certain decisions. Download now: Get access to 15 of the same checklists we use to help clients overcome the key risks in retirement Longevity Risk in Retirement Longevity risk in retirement is the risk of outliving your savings and investments. This can have a huge impact on a retiree’s ability to stay financially secure throughout their golden years. Living too long can pose a risk to your financial security in retirement because you'll need to make your money last longer. When planning for retirement, most people underestimate the risks associated with living longer than expected and having to stretch their savings over more years. This is because life expectancy and life span increase as medical science advances, making it even more difficult to determine how long you may need your retirement funds to last. Unfortunately, the majority of retirees don’t have an adequate plan in place that caters to the risks of living too long. The result is that many retirees find themselves struggling financially when they outlive their savings or investments. There are several strategies you can use to help protect yourself against longevity risks, including: Create cash flow projections in retirement: This is a crucial part of financial planning and can help ensure that you have a steady stream of income to cover your expenses. One way to do this is by developing a budget that accounts for your current income, as well as any potential risks associated with living longer than expected. Delay your retirement age: Working longer and potentially moving your retirement age from age 62 to age 65 as an example, can help reduce the amount of money you have to withdraw from your portfolio. Invest in annuities: An annuity provides a fixed income stream for the rest of your life and includes some form of death benefit if you pass away before it runs out. Maximize Social Security benefits: Knowing exactly when to claim Social Security can make a big difference in maximizing benefits over time, ensuring that you receive higher monthly payments for as long as possible. Be sure to login to your account to verify your potential benefits through the social security administration and run a social security analysis to maximize your benefits. Utilize Roth IRA accounts: A Roth IRA account allows you the option of withdrawing contributions and earnings without any taxes or penalties once you turn 59 1/2 years old – helping ensure that you have better tax control over your money in retirement. Utilize portfolio rebalancing strategies: Rebalancing helps keep portfolios aligned with your risk tolerance and can reduce risk by selling off investments that have grown too large and buying back investments that have declined in value. This may help protect against market volatility without sacrificing returns over time. Ultimately, it’s important for you to understand the risks associated with living too long so you can develop an appropriate plan that will help you remain financially secure throughout your golden years – no matter how long those years may be! Conclusion If you are nearing retirement or currently retired, you should make sure that you are familiar with the risks associated with retirement and develop a plan that caters to your specific needs. If you don't identify the risks in retirement in advance, you won't be able to properly plan. As a result, you'll likely end up making costly mistakes that could impact your savings and investment assets, your retirement assets, your tax bill and your ability to make your money last in retirement. Retirement income planning can be a powerful step to help thwart the retirement risks you will face. Do you need help with your retirement income planning? We can help. Contact us today for a free consultation. We advise clients across the United States. Mark Fonville, CFP® Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors and specializes in helping individuals aged 50 plus create, implement, and protect a personalized financial plan for retirement. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule a Free Consultation Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.

In retirement planning, it is essential to have an emergency fund to prepare for unexpected events such as sudden medical expenses or job loss. However, simply saving money in a traditional savings account may not be the best option for maximizing your returns. In this blog post, we will explore various investment options for emergency funds. You'll also learn their pros and cons to help you make an informed decision on where to invest and keep your emergency fund leading up to and through retirement. What is an Emergency Fund? An emergency fund is a pool of money set aside to cover unexpected expenses that may arise at any time. These expenses could include things like job loss, medical emergencies, unexpected home repairs, or car repairs. The idea behind an emergency fund is to have a buffer that can cover these unforeseen expenses without disrupting your financial plan or leaving you in debt. When it comes to emergency funds, there is no one-size-fits-all approach. The amount you should save for your emergency fund will depend on your personal situation, such as your income, expenses, and lifestyle. As a general rule, we recommend saving three to six months' worth of living expenses in your emergency savings during your working years. You may consider having three months of worth of expenses if you have a duel income household, but default to six months in a single income household. Having emergency savings is especially important when planning for retirement. During retirement, your income will likely decrease, and you may have limited options for generating additional income if an unexpected expense arises. Therefore, having an emergency fund can provide a safety net and help you avoid tapping into your retirement savings prematurely. When you retire, we typically recommend that you maintain 1-2 years of living expenses not covered by other guaranteed sources, such as social security or a pension. Overall, an emergency fund is an essential part of any financial plan, providing a sense of security and financial stability during times of uncertainty. It's important to understand the purpose and benefits of an emergency fund when making decisions about where to invest your money for retirement. Keep reading to learn about the characteristics of a good emergency fund investment and explore different investment options to consider. Where to Invest Emergency Funds When investing your emergency fund, it's important to look for investments that meet certain criteria. A good emergency fund investment should be low-risk, easily accessible, and offer a reasonable rate of return. Additionally, it's important to consider the liquidity of the investment, meaning how quickly you can access your funds without penalty. Savings Account Savings accounts offer FDIC insurance up to $250,000 per account and bank accounts are generally considered low-risk. However, the interest rates on savings accounts are typically low and may not keep up with inflation. High Yield Savings Account High-yield savings accounts are another option for investing your emergency fund. These online savings accounts offer higher interest rates than traditional savings accounts but may also have higher minimum balances and transaction limits. Examples of High High Yield Savings Accounts: Ally Bank or your local credit union Marcus by Goldman Sachs Flourish Cash offered through independent financial advisors Certificates of Deposit (CDs) and CD Ladders Certificates of Deposit (CDs) and CD Ladders can also be a good option for emergency funds. CDs offer higher interest rates than savings accounts and money market accounts but require you to lock up your money for a set period of time, typically ranging from three months to five years. CD Ladders involve investing in a series of CDs with varying maturity dates to help balance liquidity and higher interest rates. Examples of CD Ladders: Fidelity CD Ladders Schwab CD Ladders Money Market Mutual Funds Money market mutual funds are an alternative option to high yield savings account, but they may offer higher interest rates. Money market mutual funds do not offer FDIC insurance but are considered extremely low-risk. However, some of these cash alternative options may require a higher minimum balance or limit the number of transactions allowed. Examples of Money Market Funds: Fidelity Government Cash Reserves (FDRXX) Vanguard Federal Money Market Fund (VMFXX) Treasury Bills and Bonds Building an emergency fund using treasury bills and bonds can be a good option for investors who are looking for low-risk investments that provide a reliable source of income. Treasury bills and bonds are backed by the full faith and credit of the U.S. government, making them one of the safest investments available. To build an emergency fund using treasury bills and bonds, you may consider working with your financial advisor or purchasing them through a broker such as Fidelity or Schwab. Treasury bills, also known as T-bills, are short-term securities that mature in one year or less. Treasury bonds, on the other hand, are long-term securities that have a maturity of 10 to 30 years. One strategy for building an emergency fund using treasury bills and bonds is to create a laddered portfolio. This involves purchasing securities with varying maturity dates, so that a portion of your portfolio will mature each year. For example, you might purchase a one-year T-bill, a two-year T-bond, and a three-year T-note. This will provide you with a steady stream of income each year and ensure that your emergency fund is always accessible. Short-Term Bond Funds and Short-Term Municipal Bond Funds Finally, short-term bond funds and short-term municipal bond funds can provide a higher rate of return than traditional savings accounts or money market accounts, while still being relatively low-risk. These investments invest in short-term debt securities and can provide a good balance between risk and reward. However, it's important to note that these investments are not FDIC-insured and may fluctuate in value. Examples of Low Cost Short-Term Bond Funds: Fidelity Short-Term Bond Fund Vanguard Ultra-Short Term Bond ETF JP Morgan Ultra Short Income ETF Ultimately, the best investment for your emergency fund will depend on your individual needs and goals. Consider factors such as liquidity, risk tolerance, and return when choosing where to invest your emergency fund money or funds for retirement. What are the Pros and Cons of Different Emergency Funds? As you can imagine, when it comes to investing your emergency fund, there are several options to consider, each with its own set of pros and cons. Here are some of the key advantages and disadvantages of each type of investment: Savings Accounts Pros: Savings accounts are generally considered low-risk and offer FDIC insurance up to $250,000 per account. They also offer easy access to your funds, typically with no penalties for withdrawals. Cons: The interest rates on online savings account or accounts are typically lower than other types of investments, which means your money may not keep up with inflation. Some savings accounts may also have minimum balance requirements or limit the number of transactions allowed. High-Yield Savings Accounts Pros: High-yield savings accounts offer higher interest rates than traditional savings accounts, which can help your money grow faster. They also offer FDIC insurance and are considered low-risk. Cons: Some high-yield savings accounts may require a higher minimum balance or limit the number of transactions allowed. The interest rates on high-yield savings accounts may also fluctuate, which means your returns may not be as predictable as other types of investments. Certificates of Deposit (CDs) and CD Ladders Pros: CDs offer higher interest rates than savings accounts and money market accounts, and your rate is fixed for the term of the CD. This can provide a predictable source of income for your emergency fund. CDs also offer FDIC insurance. Cons: CDs require you to lock up your money for a set period of time, which means you may not be able to access your funds in an emergency without paying a penalty. Additionally, the interest rates on CDs may not keep up with inflation, which means your money may lose value over time. Money Market Mutual Funds Pros: Money market mutual funds are typically a higher yield alternative to high-yield savings accounts. They are extremely liquid and typically provide access to your money within one to three days. Cons: Some money market mutual funds may require a higher minimum balance or limit the number of transactions allowed. The interest rates on some money market funds and accounts may also be lower than other types of investments. Money market mutual funds are not FDIC insured. Treasury Bills and Bonds Pros: Treasury bills and bonds are considered one of the safest investments available and are backed by the full faith and credit of the U.S. government. They offer a reliable source of income and can provide a predictable stream of cash flow. They also have relatively low risk and are considered a safe haven during times of economic uncertainty. Cons: Treasury bills and bonds can fluctuate in value based on changes in interest rates, and they may not offer as high of a return as other types of investments. Additionally, they may not be as accessible as other types of investments, which means you may need to sell them before maturity to access your funds. Short-Term Bond Funds and Short-Term Municipal Bond Funds Pros: Bond funds offer diversification and professional management, which can help reduce risk. Short-term bond funds and short-term municipal bond funds can provide a higher rate of return than traditional savings accounts or money market accounts, while still being relatively low-risk. Cons: Bond funds are not FDIC-insured, and the value of your investment can fluctuate based on changes in interest rates. Additionally, short-term bond funds and short-term municipal bond funds may not be as accessible as savings accounts or money market accounts. Each type of investment for an emergency fund has its own set of advantages and disadvantages. When choosing where to invest your emergency funds, it's important to consider your individual needs and goals, as well as your risk tolerance and liquidity needs. By weighing the pros and cons of each investment type, you can make an informed decision that is right for you. Conclusion In conclusion, an emergency fund is an essential part of any financial plan, especially in retirement planning. It provides a sense of security and financial stability during times of uncertainty, such as unexpected medical expenses or job loss. While traditional savings accounts are a popular option for emergency funds, they may not offer the best returns. Therefore, investors should look for investments that are low-risk, easily accessible, and offer a reasonable rate of return. The investment options discussed in this blog post, including high yield savings accounts, CDs, money market funds, treasury bills and bonds, and short-term bond funds, all have their pros and cons. It's important to consider the liquidity of the investment, meaning how quickly you can access your funds without penalty, and work with a financial advisor to determine the best investment strategy for your personal situation. By investing your emergency fund wisely, you can prepare for unexpected events while also maximizing your returns. At Covenant Wealth Advisors, we help individuals who have over $1 million implement personalized investment portfolio that help you enjoy life without the stress of money. Contact us for a free retirement assessment today! Author: Mark Fonville, CFP® Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Request a free consultation today Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Registration of an investment advisor does not imply a certain level of skill or training.

Transitioning into retirement is one of the most pivotal times in your life. You’re not just leaving a career- you’re moving into an entirely new phase of your life. It’s an exciting time, and if you’ve planned properly (here are some handy checklists to help you make sure you’ve thought of everything!), then it should be a positive experience and one that you look forward to. However, don’t be too quick to rush out the door. There are some things that you will want to discuss with your employer before you leave for the last time. These conversations with your employer will ensure that you have the right information you need to make decisions that will have long-lasting effects on your retirement. What Company Benefits Extend to Retirees? The first conversation you may want to have with your employer is to inquire about your benefits after you leave the company. This may come as a surprise, but your benefits won’t necessarily end just because you leave a job. Many companies offer benefits to employees who retire. You won’t know what these benefits are unless you check, so do your research and don’t assume that everything stops when you leave. Free Download: 15 Free Retirement Planning Checklists [New for 2023] While you’re doing your research, you’ll want to make sure you review key health insurance documents. This includes: Life insurance Long-term care Disability If there is a risk-management benefit provided by your employer, it’s worth taking the time to read the policy or benefit description provided by your employer to see if it will continue with you - either automatically or by an option to continue the coverage on your own. If you're retiring before you’re eligible for Medicare, retaining your health plan through your employer could be of great benefit. Sure, you’ll likely have to pay more than you were paying before but look at the total costs (what you'd have to pay vs. what the company would still pay) and make your comparison against what you’d otherwise pay for a new policy. Because many employers offer healthcare benefits at a lower cost than the open market, this may be a good route to choose. Keep in mind there is more to this benefit than potential financial savings, too. Sticking with your employer’s plan can be a matter of significant convenience and preference - especially if you’ve been with the same employer (and therefore covered under the same policy) for a long time. Keeping the same plan will most likely be easier to maintain the same doctors, care, and coverage you're used to. Changing plans means you may have to switch providers, migrate your records, and learn new processes, which can be a hassle. Remember though, to thoroughly review your options. Don’t assume that because a continued benefit is available to you that it’s the best choice. It's still important to compare your options and weigh the pros and cons before you decide what to do. For example, recall that the Affordable Care Act provided a refundable premium tax credit for certain individuals based on income. It was set to expire in 2023, but the Inflation Reduction Act extended those credits through 2025. You can only receive the credit if you purchase a plan through the Marketplace, so if you qualify for an extended premium tax credit, it might be cheaper than continuing under your employer’s plan. And don’t assume that Cobra will be a less expensive option. COBRA provides eligible individuals with the option to continue the same health insurance plan they had under their former employer, but they will have to pay the full premium cost themselves, including the portion that was previously paid by their employer. The coverage period for COBRA is typically 18 months, but it can be extended under certain circumstances. Free Download: 15 Free Retirement Planning Checklists [New for 2023] COBRA healthcare can be an important option for people who would otherwise be uninsured, but it can be expensive due to the full cost of the premium being the responsibility of the individual. Have your financial advisor help you compare and decide which is right for you. The bottom line regarding continued employee benefits after you retire is to make sure you know all the benefits available. Have a conversation with your HR department to discuss your retirement timeline and get the info you need ahead of time. Will I Still Have Access to My Stock Options? Stock options provide a way for employees to benefit when the share price of their company rises over time. Many senior executives earn stock options as part of their compensation package because it is believed to incentivize them to improve the business value and align their interests with that of the shareholders - the owners of the company. Typically, stock options have a significant time component built in to disincentivize short-term thinking and encourage key executives to focus on longer-term value creation. This time component means stock options have a vesting schedule. You may be granted some form of equity compensation but may not be able to exercise it for several years. For example, you may be granted equity compensation, but it doesn’t vest (become yours or exercisable) for 3 years. Or a percentage (for example, 20%), may vest each year. So, what happens if you are granted stock options (or other equity compensation) shortly before you retire, but they haven’t vested yet? If you have equity, it's important to know what will happen to them when you retire because it could represent a significant amount of money. What happens depends on the company. You’ll want to find out the following: Will you forfeit anything that hasn’t vested? Is there a transition period? Do you get to keep a percentage? Your answers will help you work the correct information into your plan, and time your departure accordingly. Of course, it also helps if you understand the equity you have. Some of the most common types that you may have include: Incentive Stock Options (ISOs) : Allow you to purchase a share of stock at a predetermined price called a strike price. Again, the idea is that the strike price will be below the future market price when the options vest and you can exercise them. If certain rules are followed, you won’t pay income tax on the gain. Nonqualified Stock Options (NSOs) : These work much the same way as ISOs, but without favorable tax treatment. You will owe income tax on the gain between the strike price and the fair market price at which you exercise your options. Restricted Stock Units (RSUs) : A restricted stock unit is essentially a share of stock that becomes yours on the vesting date. You can then hold it or sell it just like any other stock. You will owe income tax on the fair market value of the shares when you receive them. Understanding what you have, how it works, and the rules concerning any further vesting or exercising once you retire is critical so that you and your advisor, and your CPA can make a plan. Favorable Taxation of Company Stock There are also special tax rules concerning your employer's stock in retirement plans too. If you have significant company equity in your 401k or ESOP, you could look into a unique tax strategy called net unrealized appreciation, or NUA. This is another area you want to be careful about because you must follow specific steps to take advantage of it. Net unrealized appreciation allows you to pay capital gains tax, instead of income tax, on the gain portion of company stock you withdraw from your retirement plan. If you’ve held shares for a long period that have climbed significantly in value, then this could result in large tax savings. Free Download: 15 Free Retirement Planning Checklists [New for 2023] The logistics are very important for the proper execution of this strategy. You must withdraw the actual shares; you can’t sell them and then distribute the cash. This is called an in-kind distribution. You must also close the retirement account by withdrawing or transferring the rest of the assets. Again, it’s better to speak with a trained professional before taking action with this or other strategies. How Do I Make My Pension Distribution Election? Although they aren’t as popular as they once were, there are still plenty of people nearing retirement with pensions. You may be one of them. If so, there are a couple of things to consider here as well. Before you are removed from the company payroll, make sure you know how to get in contact with the pension custodian. This is the entity responsible for managing the pension and ensuring it operates as it should. Once you leave the company and start receiving your benefits you may need to contact them, and find out how to will likely be easier while you still have a connection to your company’s HR department. Why might you need to contact the pension custodian? Once your payments begin you may need to make changes, such as where to send payments or updating a beneficiary. Having that information readily available ahead of time will make it much easier and less stressful. The big question will be how you want to take your distribution. You will usually have two basic options: a lump sum or regular payments. If you choose a: Lump sum - you can roll your lump sum into an IRA, make investments, and take distributions in any amount on a schedule that works for you, subject to taxation and RMD rules. Regular payment option - the payment will be guaranteed for your lifetime. There will also be several choices within this option concerning payments to a beneficiary if you pass away. You might have several choices such as 100%, 75%, 50%, 25%, or 0%. The ability to leave all or a portion of your payments to a spouse when you die should be carefully considered. The tradeoff among these choices is that the higher percentage you leave to a beneficiary, the lower your payment. Review your options with your advisor so you can make a plan ahead of time. Like other areas of your retirement plan, this decision shouldn’t be made in a vacuum. Think about all of your sources of retirement income, such as Social Security or an annuity, and whether you have sufficient liquid assets that you could access in an emergency. The best choice for your pension payout will depend on these other factors and what your preferences are. Would The Company Be Open to a Part-Time, Contract, or Consulting Work Arrangement? The classic view of retirement is that you leave work for a calm life of hobbies and traveling. This may not always be the case, though. The fact is most people don’t simply enjoy a pure leisure retirement for very long. While you may think you won’t necessarily miss working, many aspects of working play a huge part in our lives. Meaningful work can help bring fulfillment, routine, purpose, and community to your life as a retiree. In fact, for some, retirement may just mean no longer working full-time. If that applies to you, you may not even need to “leave” at all. Many large companies have flexible part-time work arrangements that allow “retirees' to provide support on a contract or project basis, or as a consultant. This is good for both you and the company. After all, you have years of experience and insight that would otherwise leave with you. Free Download: 15 Free Retirement Planning Checklists [New for 2023] If this is something you're interested in, bring up the conversation with your employer and see if they can create a transition plan that works for both of you. Again, this is something you want to address ahead of time. It's far easier to set something up while you're still on the payroll rather than 6 months to a year later. By then you’ll no longer be in the company’s system and they will have moved on to other options. However, some caution is in order here. Only bring this up when you know you are ready- don't rush your timeline. Announcing your plans to retire too soon may mean you get passed over for promotions, or your role gets phased out sooner. Retire With Confidence This list of conversations to have with an employer isn’t exhaustive, but it’s a great place to start as you begin your transition into your retired (or scaled-back) life. When you are confident that you are ready, give your retirement letter of resignation to HR and relax knowing that you’ve made the best decisions for yourself and your family - you’ve earned it! Remember, the decisions you make now could permanently impact your retirement. Review your employer's retirement policy to make sure you’ve considered everything and don’t leave anything to chance. We’re here to help you navigate what you need to know for these conversations and to help make sure your road to retirement is a smooth one. Contact us today to get started. We work with clients across the United States. Author: Mark Fonville, CFP® Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Request a free consultation today Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Registration of an investment advisor does not imply a certain level of skill or training.

Nobody likes losing money during a falling stock market. But, when markets decline it's what you do next that matters most. That's where tax-loss harvesting can turn lemons into lemonade. Tax-loss harvesting is a strategy used by investors to reduce their tax liability by selling investments that have declined in value and realizing losses. The losses are then used to offset capital gains and can be used to reduce taxable ordinary income up to $3,000 per year. This strategy has gained popularity among investors as a way to minimize taxes and increase after-tax returns. As an investor, taxes can significantly impact your returns. Taxes can eat up a large portion of your investment gains, especially in a year where there are high capital gains. Therefore, it's crucial to have a tax-efficient investment strategy, and tax loss harvesting can be an effective way to achieve this. Free Download: Get the same cheat sheet we use to help clients pay less in taxes In this article, we'll explore how tax loss harvesting works, its benefits and limitations, and when it makes sense to use it as part of your investment strategy. Understanding Capital Gains and Losses Before delving into the details of tax loss harvesting, it's essential to understand capital gains and losses. Capital gains and losses refer to the difference between the purchase price of an asset and the sale price. If the sale price is higher than the purchase price, it's called a capital gain, and if the sale price is lower than the purchase price, it's called a capital loss. Capital gains and losses have tax implications in taxable brokerage and trust accounts. Capital gains are taxable, and the amount of tax you pay depends on how long you've held the asset. Short-term gains are gains from the sale of assets held for one year or less and are taxed as ordinary income. Long-term gains, on the other hand, are gains from the sale of assets held for more than one year and are taxed at a lower rate than short-term gains. Capital losses can also reduce your tax liability. If you realize a capital loss by selling an asset for less than its purchase price, you can use that loss to offset capital gains. If your capital losses exceed your capital gains, you can use the excess loss to reduce your taxable income, up to a certain limit. Overview of Tax-Loss Harvesting Tax loss harvesting is a strategy that involves selling investments with losses to offset capital gains and reduce taxes. The key is to sell investments that have lost value and then reinvest the proceeds in similar assets to maintain your desired asset allocation. By doing so, you can reduce your tax liability without significantly altering your investment strategy. To identify investments with losses, you'll need to review your portfolio and determine which investments have declined in value since you purchased them. You'll also need to consider the tax implications of selling those investments. It's essential to understand the IRS's wash sale rule, which prohibits you from claiming a loss on a security if you purchase a "substantially identical" security within 30 days before or after the sale. Once you've identified investments with losses, you can sell them to realize the losses. The losses can then be used to offset capital gains, reducing your tax liability. If your capital losses exceed your capital gains, you can use the excess loss to reduce your taxable income, up to a certain limit. After realizing losses, you'll need to reinvest the proceeds in similar assets to maintain your desired asset allocation. For example, if you sold shares of a stock fund, you may reinvest the proceeds in another stock fund with similar characteristics. It's essential to be careful not to violate the wash sale rule when reinvesting the proceeds. Overall, tax loss harvesting can significantly reduce your tax liability without significantly altering your investment strategy. By identifying investments with losses, realizing those losses, and reinvesting in similar assets, you can minimize your tax burden and increase your after-tax returns. It's a powerful tool for investors to consider when developing a tax-efficient investment strategy. Potential Benefits of Tax-Loss Harvesting There are several potential benefits to tax-loss harvesting which can be summarized as follows: 1. Capital gains tax reduction: Tax loss harvesting allows you to offset capital gains taxes on other investments. The losses you realize can be used to offset any capital gains you may have from other investments, reducing your overall taxable gains. 2. Ordinary income tax reduction: Tax loss harvesting can also be used to reduce your taxable income, as you can use up to $3,000 of capital losses to offset ordinary income in a given tax year. Any losses that exceed $3,000 can be carried forward to future tax years. 3. Portfolio optimization: Tax loss harvesting can also be used to optimize your investment portfolio. By selling securities at a loss, you can reinvest the proceeds in other investments to better diversify your holdings. Tax-Loss Harvesting Example: So how does Tax-Loss harvesting actually work in action? Here are a couple of hypothetical examples. Tax-Loss Harvesting Example 1: Mary purchased 100 shares of XYZ Company for $10,000 in January of 2021. By December of 2021, the value of those shares had dropped to $8,000. If Mary sells those shares, she will realize a $2,000 loss. Mary could use tax loss harvesting by selling those shares and using the loss to offset gains in other areas of her portfolio. For example, if Mary sold another stock earlier in the year and realized a $2,000 gain, she could use the loss from selling the XYZ shares to offset that gain and reduce her overall tax liability. However, the wash sale rule would prohibit Mary from buying back the same or a substantially identical stock within 30 days of the sale. Therefore, Mary would need to reinvest the proceeds from the sale of XYZ shares in a different, but similar, stock or wait at least 30 days before repurchasing XYZ shares. If Mary wanted to maintain her exposure to the same industry as XYZ Company, she could consider purchasing shares of a similar company, such as ABC Company, within the same industry. This way, she can still benefit from the potential growth of the industry while avoiding the wash sale rule. Tax-Loss Harvesting Example 2: Let's say you have two investments in your portfolio: Investment A and Investment B. Investment A has increased in value since you bought it and you plan to sell it soon, which will result in a capital gain of $5,000. Investment B, on the other hand, has decreased in value since you bought it and is now worth $4,000 less than what you paid for it. Without tax loss harvesting, you would owe capital gains tax on the $5,000 gain from Investment A. However, by using tax loss harvesting, you can sell Investment B and realize a $4,000 loss, which can be used to offset the capital gain from Investment A. In this scenario, you would owe capital gains tax on the net gain of $1,000 ($5,000 - $4,000), rather than on the full $5,000 gain from Investment A. Additionally, you could use up to $3,000 of the capital loss from Investment B to offset ordinary income in the current tax year, reducing your overall taxable income. Any unused capital losses can be carried forward to future tax years. So, in this scenario, you could carry forward the remaining $1,000 capital loss from Investment B to offset future capital gains or ordinary income in future tax years. Free Download: Get the same cheat sheet we use to help clients pay less in taxes Limitations of Tax-Loss Harvesting While tax loss harvesting can be an effective tax strategy, it's important to understand its limitations. The IRS has rules and restrictions regarding tax loss harvesting that investors need to be aware of. These rules are designed to prevent investors from using tax loss harvesting to evade taxes. One of the main restrictions is the wash sale rule. As mentioned earlier, this rule prohibits investors from claiming a loss on a security if they purchase a "substantially identical" security within 30 days before or after the sale. This rule is designed to prevent investors from selling an investment to realize a loss and then buying the same investment back at a lower price, effectively avoiding taxes. Another limitation of tax loss harvesting is its impact on long-term investment strategy. Tax loss harvesting can be an effective strategy for reducing taxes in the short term, but it may not be beneficial in the long term. If you sell an investment to realize a loss, you may miss out on potential gains if the investment recovers. Therefore, it's essential to consider the long-term implications of tax loss harvesting and weigh the potential benefits against the potential costs. When Tax Loss Harvesting Makes Sense Tax loss harvesting makes the most sense in certain market conditions and for investors in specific situations. For example, tax loss harvesting can be particularly beneficial in a year where you have high capital gains. By realizing losses, you can offset those gains and reduce your tax liability. Tax loss harvesting can also be beneficial for investors in a high tax bracket as it can help reduce their taxable income. Investors with large investment portfolios that have many individual holdings may also benefit from tax loss harvesting. With a larger portfolio, there are likely more opportunities to identify investments with losses, which can be used to offset gains and reduce taxes. Tax Loss Harvesting vs Other Tax Strategies Tax loss harvesting is just one tax strategy that investors can use to minimize their tax liability. Two other common strategies are tax-deferred accounts and tax-efficient funds. Tax-deferred accounts, such as traditional IRAs and 401(k)s, allow investors to defer taxes on contributions and investment gains until retirement when they may be in a lower tax bracket. These accounts can be beneficial for investors who expect to be in a lower tax bracket in retirement. Free Download: Get the same cheat sheet we use to help clients pay less in taxes Tax-efficient funds, on the other hand, are designed to minimize taxes by investing in securities with low turnover and tax-efficient structures. These funds aim to reduce capital gains and generate more tax-free income, such as from municipal bonds. Each tax strategy has its advantages and disadvantages, and investors should consider their individual circumstances when deciding which strategy to use. Conclusion In conclusion, tax loss harvesting is a powerful tool that investors can use to reduce their tax liability and increase their after-tax returns. By identifying investments with losses, realizing those losses, and reinvesting in similar assets, investors can minimize their tax burden without significantly altering their investment strategy. However, tax loss harvesting has its limitations, and investors should be aware of the IRS's rules and restrictions. It's also essential to consider the long-term implications of tax loss harvesting and weigh the potential benefits against the potential costs. Finally, tax loss harvesting is just one tax strategy that investors can use. It's important to consider your individual circumstances and consult with a financial advisor before implementing any tax strategy. With proper planning and execution, tax loss harvesting can be an effective way to minimize taxes and increase after-tax returns. If you are an investor with over $1 million in combined investments, excluding real estate, contact us for a free consultation to see how we can help you potentially improve after-tax returns on your portfolio. Mark Fonville, CFP® Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Request a Free Retirement Consultation Today Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Registration of an investment advisor does not imply a certain level of skill or training.

Taxes and retirement are like two peas in a pod; you don't get one without the other. Fortunately, planning opportunities available may allow you to reduce the amount of taxes you pay and relieve you of some of the potential pain associated with it. Effectively managing your tax bracket in retirement starts with understanding how your income sources are taxed. Let's review how common retirement income vehicles are taxed and what you can do to prepare. You may want to download our 2023 tax reference cheat sheet to reference as you read. Why Tax Planning Is So Important In Retirement Taxes are an unavoidable part of life both before and during retirement, but that doesn’t mean you need to pay more than you have to. You've worked hard for your money and made sacrifices along the way to accumulate your savings. Important to keep the funds you need to support the lifestyle you’ve earned for yourself. Taxes can be a drain on that support. That’s why planning becomes critical - especially in retirement. Proactive tax planning helps you pay as little tax as possible without running afoul of the law. It’s a key piece of every retirement plan we help with. We look for opportunities to maximize your income and minimize taxes long-term, and help you identify the best way to combine and implement strategies most effectively. ( Roth conversions , tax loss harvesting, deferring income, strategically realizing gains and losses, etc.) Of course it all starts with understanding the basics. To make good strategic choices, you must know how the IRS taxes your retirement income. How Do You Pay Taxes In Retirement? The mechanics may also change some in retirement depending on what you are used to and the type of income sources you’ll have in retirement. Most employees are accustomed to having taxes withheld from their paychecks while they are working. This makes actually paying taxes pretty easy because your employer handles it for you. Some types of retirement income allow you to do the same. For example, you can have taxes directly from your Social Security "paycheck." Doing so helps ensure you're paying enough to the IRS throughout the year to avoid penalties. However, it doesn’t always work this way. If you have a lot of investment income or other types of income (such as rental income) that you can't automatically withhold, you'll likely have to make estimated payments throughout the year. Paying them late (they are typically due on a quarterly schedule) or not paying the correct amount can result in additional penalties. Avoiding these penalties is one easy way to save. Your financial advisor and CPA or tax preparer can help you keep track and determine the best payment strategy for you. How Your Income Is Taxed In Retirement Now, to the fun part. Let's review! Here is how each of the most common retirement income items are taxed: Social Security: Your benefits are taxed like ordinary income. The good thing is, not all of your benefits are subject to taxation. At most, 85% of your benefit is taxed so 15% is tax-free! As mentioned before, you can ask that the SSA withhold estimated taxes as well as Medicare Part B premiums. We recommend doing this to avoid any potential hiccups. Pensions & Qualified Annuities: These are also taxed as ordinary income. You can either decide on fixed monthly payments or a lump sum. While fixed payments offer stability, a lump-sum could help you gain more returns if invested appropriately. Also consider that a lump sum payment lumps your tax liability too. You’ll want to carefully weigh your options. Traditional 401k and IRA accounts: (including non-deductible IRAs): Again, distributions on any pre-tax earnings are subject to ordinary income tax. A distribution of after-tax contributions are not taxed, but the earnings are always taxed. The key thing here is timing your withdrawals to minimize the taxable impact. This could include converting to Roth accounts while working or during early retirement or taking distributions before RMDs begin. Once RMDs start QCDs are another great avenue to explore . Roth 401k and IRA: These are powerful tax tools because qualified distributions aren't taxed at all. This gives you more freedom over your cash flow and tax bracket. With a combination of Roth and traditional accounts you have a lot of flexibility to maximize planning opportunities. Health Savings Account or HSA: Qualified distributions aren't taxed. You can take tax-free withdrawals from your HSA to pay for qualified medical costs - like expenses that Medicare doesn't cover. This includes things like hearing aids, dental and vision expenses, long-term care (insurance or the care itself), and additional out of pocket expenses like co-pays and prescriptions. Brokerage account: Money held outside of retirement accounts adds a layer of complexity but also additional planning opportunities. Withdrawals of cost-basis from taxable accounts aren’t taxed, but the gains on the investments are. This is very different from the way retirement accounts work. Investments are taxed according to capital gains rules. Short-term gains are taxed as income, while long-term gains are taxed at either 0%, 15%, or 20% according to how much other income you have. Real estate: Here again, capital gains tax comes into play. You may also have deductions that you can use to offset gains for things like repairs and property management expenses. Actively Managing Your Tax Bracket Matters Once you know all of your income sources and how they are taxed, you can combine them to figure out your total tax liability. As you might expect though, it’s not as simple as just adding them all together. That’s because there is considerable interplay between them. An important tax number to know is your adjusted gross income or AGI and your modified adjusted gross income or MAGI. The reason it’s critical is because it can determine how much tax you'll owe on your Social Security benefits, whether your Medicare premiums will go up due to the income-related monthly adjustment amount (IRMAA), or even if you’ll be subject to completely new taxes like the net investment income tax! Adding up all of your sources of income and understanding not only how each is taxed, but how they affect one another can be confusing. Then, thinking about how to navigate planning through it can become overwhelming. Don’t worry - we can help! Please reach out to us to schedule a time to chat today. Author: Scott Hurt, CFP®, CPA Scott is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors serving clients across the United States. He specializes in helping individuals aged 50 plus create, implement, and protect a personalized financial plan for retirement. Schedule a Free Consultation Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Registration of an investment advisor does not imply a certain level of skill or training.