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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.

You spent decades building the "perfect" retirement plan, and you're all set to put that plan in motion. But as soon as you're ready to hand in your retirement letter of resignation , the market drops significantly. What happens next? Many people found themselves in situations like this over the last year, and didn't know what to do. Should they still retire? What do they risk? Will their savings still last the way they anticipate? Today, we'll review the pros and cons of retiring "on time" even if it's a down market. First, Reconnect With Your Retirement Goals You may be tempted to act purely out of reaction to seeing your account value drop, but don’t rush into anything. Before you make any decisions concerning your portfolio or retirement, return to your plan and remember why it was created. What goals did you set? What are you most excited about? Ask yourself if your feelings or priorities have changed. In other words, if it wasn’t for the market would you even be second-guessing it? If you’ve kept your plan up to date each year then the answer is likely not. That narrows it down to the timeline. For many people, the most important thing about retiring is doing it the way they want to and not necessarily about the timeline it takes to get there. If the markets have you worried or are putting pressure on your goals, perhaps all you need to do is wait a little longer. This may be all you need to give yourself a greater chance of living the life you spent years planning and saving for. What's A Down Market Anyway? Financial articles talk about down markets all the time but what does that even mean? Generally, there are three "stages" of a down market, and it’s important to understand what each of them means. Market downturns are sustained market declines that usually last for at least a year before turning around. You’ll also hear these referred to as “bear” markets. Market corrections occur when the market has fallen at least 10% from its most recent peak. The length of time it lasts isn’t so much of a factor and although they can last a while they are often very short-lived as well. Market crashes aren’t defined by either a specific percentage drop or duration, but instead when the market drops quickly by a significant percentage. Understanding the market characteristics may give you and your advisor a better sense of how your portfolio and goals will be impacted and what your best options are for withstanding it. The Pros of Retiring, Even When The Market Is Down While it's certainly something you shouldn’t ignore, a down market doesn’t always mean you need to change your planning horizon. For some, it may make sense to stick with their original retirement timeline. Some factors that may contribute to your choice to stay the course include: Secure avenues of fixed income that will cover your needs, and are enough to make you comfortable. These are things like your Social Security payments, pension income, an annuity, bond interest, or a sizable cash reserve. Since these don’t rely on market performance to fund your withdrawals then they offer protection from market volatility. If you're comfortable adjusting your withdrawal rate. Even with a significant portion of your investments exposed to the market, you can protect yourself by reducing your withdrawals when your balance falls too much. If you have additional tax savings opportunities. Taxes matter a lot in retirement and your tax bracket can be impacted drastically with retirement account withdrawals . The more tax-efficient you are, the less you have to withdraw. By proactively taking advantage of tax-saving opportunities you can reduce the strain on your investments. Important Cons To Consider Before Retiring In A Down Market There are also reasons that you may want to avoid retiring when the market is down. Primary risks are: The effect on portfolio longevity . The more you withdraw from your portfolio the faster it will be depleted. This effect is amplified if you start retirement in a bear market. If you plan to live well into your 90s, you need to be careful about how much you withdraw. Waiting is your best defense, but you may also want to reconsider your investment plan in light of starting distributions. Lack of income stability . Cutting off your income right as the market drops further amplifies the downside. Instead, your paycheck can cover your living costs and you can buffer some of your losses by continuing to contribute to your retirement accounts. Remember, the best market days tend to follow some of the worst. When you contribute during the down market you’ll buy cheaper shares and then create momentum for the rebound. Compromising on your lifestyle . Don’t forget the whole reason you are planning for retirement and remember what you want. If you retire in a down market, you may need to make necessary lifestyle trade-offs until the market recovers. Since we can’t know how long that will take it might be better to hang on a little longer rather than risk ruining your best decades. Which Is Right For You? Let's Run Some Projections With all of these options and considerations, how do you know which move to make, if any? You need a method for evaluating your options, and our preferred method is Monte Carlo analysis. A Monte Carlo analysis allows us to estimate as a simple-to-understand percentage the likelihood that any given scenario will be successful based on a wide range of potential investment outcomes. We can run these projections for you and help you make the most informed decision based on what the results show. Get Started Retirement doesn’t have to be a big guess. Download our master list of retirement goals to help you start thinking about your plan and contact us for a free consultation when you’re ready to start. 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 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.

Your financial advisor should be a trusted source of clarity and confidence in your financial future. But not all financial advisors will be the best fit for helping you achieve your specific goals . Here are seven tell-tale signs you may need a new financial advisor in 2023. →Free Download: 25 Questions to Ask a Financial Advisor Before You Hire 1. They Aren't Prepared For Your Meetings First and foremost, you want to work with a firm that genuinely cares about you and your goals -and knows what they are in advance of meeting with you so they can help you prepare! Your advisor needs to devote the proper amount of care and attention to helping you achieve them. One way to assess how attentive they are is by paying attention to the care they give to meeting with you. If they don't remember what's going on in your life or seem scattered during calls, they may have taken on too many clients or just don’t consider you a top client. This could be a sign that they aren't the right fit for you. 2. You Haven't Reviewed Tax Planning Strategies At Covenant Wealth Advisors, we're firm believers in the power of proactive tax planning, especially for those on the cusp of retirement. You and your advisor should build a tax plan and review it often to ensure you're making the most of the opportunities available to you. This may include Roth conversions, managing your tax bracket, withdrawal plans in retirement, maximizing credits and deductions, charitable giving, and ongoing investment efficiency. Refer back to point #1. Your advisor won’t know which strategies may apply to you if they don’t know you and your goals. A simple way to gauge this is to think about the last time they asked you for a tax return. 3. The Fee Structure Is Confusing At Best You should have a clear understanding of what you’re paying your advisor. The world of financial fees can be challenging to navigate, especially if you're working with an advisor who isn't upfront or transparent about their fees. That’s why we're committed to being honest and straightforward about our fee structure as it helps develop a foundation of trust. The way you pay matters just as much as how much you pay. Covenant Wealth is a fee-only independent firm, meaning we only receive payments from our clients and not from referrals, commissions, kickbacks, or other third-party sources. This structure minimizes conflicts of interest and helps us serve you best. →Free Download: 25 Questions to Ask a Financial Advisor Before You Hire 4. You Don't Know If They Operate In Your Best Interest This might seem obvious, but you can’t assume your advisor is putting you first. That’s why it’s important to work with a fiduciary. It's easy to cast off "fiduciary" as just another financial buzzword, but it carries significant weight and meaning, especially to us. Fiduciary status is a legally binding oath that signifies operating at the highest level of care, something we do daily. You should ask if your advisor is a fiduciary and have them sign a statement saying so. 5. Their Advice Doesn't Seem Comprehensive (And Custom) Any financial advisor will talk to you about your investments. Most will even help you understand the best investment strategies to meet your needs and discuss their investment philosophy and how it will help you. But a good financial advisor does so much more than investment management. They understand how investments support retirement income and how to piece it all together with other sources. This includes your Social Security benefits, pension, annuities, real estate, and any others you may have. You also want an advisor who looks beyond investments at your entire financial picture. This includes insurance, tax planning , estate planning, risk management, cash flow planning, and life transitions. You don’t have tunnel vision regarding your future, and your advisor shouldn’t have tunnel vision for how to support it. 6. You're Not Really Who They Want To Work With Financial planning isn’t a one-size-fits-all service. Money is complex and different at each stage of life, and many advisors have specialties that reflect that. For example, if you're a pre-retiree it might not make sense to work with a firm specializing in college planning. Look for advisors with qualifications and specializations that meet your needs. At a minimum, this means your advisor should be a CERTIFIED FINANCIAL PLANNER™ practitioner. If you’re nearing retirement look for specialized retirement credentials such as the CFP® and CPA designation. Partnering with financial advisors who have both of these designations can be tremendously helpful. This not only shows they have the expertise to help you but the desire. The last thing you want is an advisor who is only taking you because you are willing to pay them! 7. You Don't Align On Communication Styles Regardless of how good your advisor is and if they work with other people like you, it’s critical that you are on the same page regarding communication. Whether that’s in person, virtual, frequently, or just once a year is all a matter of preference. The important thing is that it’s effective. This includes when times are good and bad. How they treat you when times are rough is telling of a firm's character. Do you feel ignored or unheard? These things matter! Work With A Firm Who Wants To Serve You Best If you’re interested in working with a firm that puts you first and provides you with peace about your financial future, call us today. At Covenant Wealth, we specialize in helping individuals and families 50 and older achieve their retirement planning and investment goals and are ready to start working for you. Want to see how we can help? Request a free retirement consultation 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 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.

Last year was a rollercoaster for investors, as markets plummeted and inflation spiked. With the S&P 500, Dow and Nasdaq experiencing their worst performance since 2008 at 19.4%, 8.8% and 33.1% declines respectively - paired with wild swings in interest rates throughout the year - it can be said that 2022 tested even veteran market observers' knowledge of economics fundamentals like never before! Free Download: 15 Free Retirement Planning Checklists [New for 2023] The 10-year Treasury yield skyrocketed from 1.51% to 4.24%, while the Consumer Price Index surged to its highest level in four decades – topping out at 9%. To combat these trends, the Fed responded accordingly by raising rates seven consecutive times through December 2021 reaching an unprecedented high of 4.25%. Meanwhile various geopolitical factors such as Ukraine's war efforts or China’s “zero Covid" protocols compounded this movement leading both oil prices changes as well currency fluctuations which were felt worldwide. The past year has been a roller coaster ride for even the most adroit investors. The multitude of consequences from Covid-19, including economic distress and fiscal/monetary stimulus measures caused markets to oscillate wildly. Though these fluctuations often inflict short term harm on finances, they eventually subside as equilibrium is reestablished in the global economy. Despite these historic, tumultuous times in the market and economy over the past year, one thing remains consistent: there is no substitute for long-term investing. Remaining disciplined despite any short-term volatility seen across markets can be daunting; however through a diversified portfolio aimed at longer time horizons investors may stave off losses while positioning themselves to capture gains when opportunities arise - as we saw during March of 2020 prior to rapid recovery or even 2008 ahead of an exponential decade expansion. Now more than ever it's clear that staying focused on our goals should trump external factors when making investments decisions! Free Download: 15 Free Retirement Planning Checklists [New for 2023] As we look to 2023, investors should take the time to reflect on five key lessons from the year gone by. Doing so can help them keep their eyes firmly fixed on a long-term outlook and make sound financial decisions going forward. 1. The historic surge in interest rates impacted both stocks and bonds After four decades of decreasing interest rates, the tables have turned. The surge in inflation this past year acted as a catalyst for higher interest rates, leading to an unprecedented drop across numerous asset classes. This sudden shift has caused investors to rethink their strategies and explore new methods for long-term protection against market volatility. In spite of ongoing diversity challenges, there is cause for optimism in many global economies. Inflationary indicators have seen notable moderation and central bank rate hikes have been largely accounted-for by interest rates settling down again since last year. Economists are generally expecting the trend to remain steady over 2023 as opposed to 2022's volatile pattern - though uncertainty remains high. 2. The Fed raised rates at a historically fast pace The Fed has been resolute in its commitment to fighting inflation, as seen in their seven consecutive rate hikes over the course of 2022 and four 75 basis point increases back-to-back. As a result, rates are now at 4.25% to 4.50%, reaching heights not seen since before 2008's housing bubble crash - representing an ambitious bid for stability that looks set to continue strong into 2023 and beyond. The Fed is navigating a delicate balance between inflation and recession, with the current market-based measures pointing to policy rates of 5% in the middle of 2023. Though two quarters of negative GDP growth occurred early this year, many economists still don't classify it as an official downturn - instead predicting that we may experience one in '23, albeit shallowly. The slumping economy could mean that monetary policymakers pull back before reaching their target rate for next year's midpoint. Although markets welcomed the news of potential policy shifts from the Federal Reserve, leading to a robust rally in June-August and again October - November, 2022 proved that good news should be taken with caution. When investors' hopes for easing were met by an opposing reality, volatility ensued until year's end; serving as another reminder that data can inform market movements but must not replace rational thought processes. 3. Inflation reached 40-year highs but has improved The effects of the recent financial shocks may appear to be transient, but could still prove episodic. This is due to factors such as improved supply chains, lower energy prices and reduced rents now fading away; however wages remain in a tight market with potential for sustained inflation. With investors eagerly awaiting signs of recovery in inflationary measures, the focus has shifted to where prices will be heading rather than actual levels. Good news is already being priced into markets with expectations that 2023 may bring better results across both headline and core inflation numbers - an encouraging sign for many investors. 4. The rallies in tech, growth and pandemic-era stocks have reversed After a two year run of strong performance in tech, Growth style investing and pandemic-era stocks, the past year saw an impressive reversal. This resulted in Value outperforming Growth to mark the first time since prolonged market bull runs began several years ago. As economic growth decelerated and interest rates rose up again, investors were reminded that cautiousness does not have to mean missed opportunities for gains. Free Download: 15 Free Retirement Planning Checklists [New for 2023] Investors should always be mindful that portfolio diversification is a vital component of successful investing, especially across size categories (large and small caps), styles (Value and Growth) desirable sectors, geographies (U.S., developed markets and emerging markets). During periods characterized by high investor sentiment - known as "fear-of-missing out" , or FOMO - it's essential to remain disciplined in order to maintain an effective long term strategy. 5. History shows that bear markets eventually recover when it's least expected Even though the previous year dealt a heavy blow to investors, markets have repeatedly demonstrated their resilience when faced with unexpected challenges. While it can take time for bear markets to regain momentum, predicting precisely where and when that inflection point will happen is nearly impossible. Investing, like life itself, is a journey of twists and turns. The stock market often follows this pattern - long periods of growth followed by short bouts of turbulence that can quickly lead to flurries in investor sentiment. Though it may be tempting for some to try their hand at timing the markets during such times, history has shown us again and again that staying invested provides greater returns than attempting any drastic maneuvers mid-cycle. 2023 could well see yet another example unfold before our eyes; so buckle up! The past year was a turbulent one, yet by adhering to essential investment practices such as discipline, diversification and long-term focus investors can position themselves for success in the coming years. By committing to these strategies now they will be better able to realize their financial aspirations well into 2023 and beyond. 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. Registration of an investment advisor does not imply a certain level of skill or training.

Over the past few decades, inflation has been relatively low. But the tide had no problem (drastically) changing in 2021, in no small part due to the pandemic. In December of 2021, the 12-month rate of inflation was 7.00%. Recent data from the Bureau of Labor Statistics revealed that the Consumer Price Index (the average change in prices of goods and services) rose 0.5% as of last December. That's when a lot of investors who are nearing retirement or currently retired started to think about how to invest to protect against inflation . It's a real problem. Download our free war chest of retirement checklists to help you retire without the stress of money - New for 2023. The current level of inflation has a real and significant impact on many people’s portfolios and, as such, continues to spike widespread concern. When inflation increases, your purchasing power decreases, making every dollar less valuable. This means that a dollar today purchases much less than a dollar did a year ago. As a result, inflation makes the cost of goods that you use every day more expensive. For example, in 1920 a quart of milk cost $0.17. By 2020, that same $0.17 only purchased 12 tablespoons of milk as illustrated in the chart below. When inflation rises, the Federal Reserve steps in and often implements economic changes to dampen the effects, like raising interest rates, slowing the economy, and limiting its balance sheet. High inflation, and rising prices, have many people looking for deliberate ways to make sure their investments, can keep up. The good news is that the right investment strategy may help you beat inflation (thought not guaranteed), and it may not be as difficult as you think to accomplish that goal. By building your portfolio with an asset allocation that prioritizes areas of the stock market with higher expected real returns—(in this case, real means the return you receive above and beyond the inflation rate)—you may have a stronger chance at outpacing inflation over the long-term of ten years or more. Keep in mind that higher returns can also mean higher risk, so you may want to make sure that you de-risk your portfolio in retirement as well. In this article, you'll learn the following: S tock Performance During High Inflation Years Treasury Inflation Protected Bonds and I Bonds Consider Real Estate as an Inflation Hedge Benefit of Social Security During High Inflation What Does Inflation Do To The Stock Market? Conclusion Here's how to invest to protect against inflation in retirement. 1. Stock Performance During High Inflation Years Stocks have historically had the highest long-term average returns of all standard asset classes, making them an excellent asset to hedge against inflationary periods over the long term. Taken as a whole, the US Equity Market has produced annualized real returns of just under 5% since 1927. This of course includes periods of low inflation, average inflation, and high inflation. But you can also consider how specific slices of stocks have performed compared to inflation. Asset classes that benefit from inflation include (1927-2020): U.S. Small-Cap Value: 11.95% U.S. Large-Cap Value: 8.13% U.S. Small-Cap Growth: 5.09% Sectors that benefit from inflation include (1927-2020): Energy Industry: 9.92% Business Equipment Industry: 7.23% Financial Services Industry: 6.52% From 1927-2020 the annualized real returns in years with above median US inflation for the best performing asset classes are shown in the chart below. Average Annual Real Returns in Years with Above-Median US Inflation, 1927-2020 While past performance can’t be assumed to reap future results, this data highlights the importance of maintaining enough equity exposure, even in retirement, and diversification among different types of asset classes, even in a high inflationary environment. Given its ability to outpace inflation, it makes sense why many retirees benefit from holding a portion of their portfolio in the stock market as part of their overall investment strategy. 2. Treasury Inflation Protected Bonds and I Bonds Government bonds are some of the most conservative investments you can own in a portfolio. Because of that relative safety, government bonds also typically provide lower yields than bonds issued by corporations. So why would you consider government bonds as a suitable investment for protection against inflation? First, understand that most government bonds have still provided average annual returns slightly above inflation over the long term. But, when we look to government bonds for inflation protection, we are thinking about two particular types. Treasury Inflation-Protected Securities - TIPS, as they are called, are bonds whose interest payments are directly tied to inflation. Every six months, the principal amount on which the interest payment is based is adjusted by the most recent inflation figures. That means the interest you receive on these treasury bonds will go up by the same amount as inflation. In effect, you lock in a real rate of interest. I Bonds - Series I Savings Bonds also have a built-in inflation adjustment. It works a little differently than TIPS, though. There are two components to an I Bonds interest rate. One is a fixed rate that remains constant for the life of the bond. The other is an inflation rate adjusted for inflation every six months. 3. Consider Rental Real Estate as an Inflation Hedge The value of holding real estate comes from two primary sources. The first is in the value of the property itself. If the price of your property appreciates over time, you may be able to sell it for more than you paid. That value is often correlated to inflation. As inflation rises, property values tend to increase as well. The second is from the rent you can collect on it. Rental payments can be a good source of income that is structured to be a natural inflation hedge. Since most lease terms are for one year, particularly on residential property, you can simply increase the rent by the rate of inflation when the annual lease term ends. Owning rental property can be more involved than you may like. There’s rent to collect, vacancies to fill, and damage to repair. Real estate investment trusts, or REITs, are securities that hold real estate portfolios, much like mutual funds and exchange-traded funds (ETFs) hold portfolios of stocks and bonds. You can include real estate in your portfolio through the use of REITs if direct ownership isn’t for you. For more information on the current state of the U.S. housing market, click here . 4. Your Social Security Benefits Account for Inflation Strictly speaking, Social Security isn’t an investment. But if you are thinking about what to invest in to protect against inflation, then you need to consider your Social Security benefits. Social Security is a great way to protect both you and your investments from inflation. That’s because the payments you receive from Social Security are directly adjusted for inflation. The greater the inflation rate, the greater the Social Security cost of living adjustment is. When you treat it like an investment and take proactive steps to maximize your Social Security, then you can increase your inflation-adjusted income and reduce the strain on your portfolio in retirement. Understanding the right time to start social security is important. You can claim Social Security benefits as early as 62, but you can also delay them to 70. The longer you wait, the greater your benefit becomes. It's paramount you get this part of your financial plan correct. Remember, too, that Social Security benefits get preferential tax treatment so that increased payout will adjust for inflation and not be fully taxable. It’s hard to beat that. How Do Stocks Hold Up During High Inflation? Inflation can be a problem when it comes to investing. Historically, nominal stock market returns may still be positive. However, real rates return suffer. Remember, nominal returns are the returns you receive including inflation. Real return is the return you get above inflation. For example, Mary's portfolio averaged 9% nominal return per year during her ten year investment period. During the same period, inflation was normal and averaged 3% per year. Mary's real rate of return is 9% - 3% = 6%. Unfortunately, during inflationary periods, we find that real rates of return within stock markets tend to fall vs. periods of average or low inflation. For example, John's portfolio averaged 9% per year during his ten year investment period. During the same period inflation was high and averaged 7% per year. John's real rate of return is 9% - 7% = 2%. That's why it's so important to remain disciplined with your investment approach. Most importantly, beating inflation takes a long-term approach to investing . For example, take a look at the chart below. We show returns for a hypothetical mix of indexes ( 60/40 portfolio ) and different stock and bond asset classes from 1973 to 1982. This was a period of time in the United States where inflation averaged 8.67% for 10 years.* Click here to see the full period . In 1973 and 1974, inflation topped the charts at 8.71% and 12.34%, respectively. During those same years the U.S. Total Stock Market was down -18.06% and -27.04%, respectively. (Source: Data disclosures and index data for full period 1973 to 2023 ) Can you imagine living during a period with inflation over 12% while also watching your investment portfolio tumble? That's not easy to stomach. Protecting against inflation takes discipline and a long-term mindset. But, at Covenant Wealth Advisors , we believe that the right mix of investments can give you the best chance at beating inflation long-term. For example, the hypothetical portfolio (notated by the white box in the chart above) consists of 60% stocks and 40% fixed income to simulate investment index returns vs. inflation from 1973 to 1982 (you can't invest directly in an index). The hypothetical 60% stocks and 40% fixed income portfolio looks like this when broken down into different asset classes: Before fees, the diversified portfolio's average annual return from 1973 to 1982 was +10.05% (white box below) vs. CPI for inflation (gray box below) of +8.67% for the ten year period.* This means that the average rate of return above inflation was +1.38% during the period. But, the returns also came with some tough years in the market. Notice in the chart below the lowest historical performance for each asset class. U.S. Small Value's worst performance year was -27.25% from 1973 to 1982 even though it was the best performing asset class for the entire time frame. Ultimately, to get the returns you want, you must be able to endure the bad times too. Conclusion High inflation can be scary as you approach retirement. While nothing is guaranteed, history has shown that a well-diversified portfolio of stocks and bonds may be the best way to keep pace with inflation long-term. For more hands on investors, dipping your toe into rental real estate as a long-term investment may also be a great way to beat inflation. Knowing how to invest to beat inflation is just the first step. You also have to maintain discipline during volatile times, make smart tax decisions, and stick to your investment plan. That's not an easy task and most people fail to outperform the stock market according to Dalbar. You are going to encounter times when inflation is out of control and stocks go down at the same time. Times like this will test your ability to stick to your plan. The good news is that inflation doesn’t have to ruin your retirement. We believe the right investment portfolio can give you the best chance of long-term success. If you want our help managing your investment portfolio, contact us. We are passionate about helping people create diversified portfolios and personal financial plans built for the long haul. We’d love to help you create an investment plan that has the best chance at outpacing inflation and accomplishing your life goals. Set up a call today! About Mark Fonville, CFP® Mark is a personal financial advisor and the President of Covenant Wealth Advisors. He manages investment portfolio and provides retirement income planning for individuals age 50 plus who have over $1 million in investments. He has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule a call. Important Disclosures: Download hypothetical data disclosures for 1973 to 1982 here . Download hypothetical data disclosures for full period from 1972 to 2023 here . These are for illustrative purposes only and not intended to represent any particular investment(s). Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. We provide investment advisory, financial planning, and tax planning services to individuals. Investments involve risk and do not guarantee that investments will appreciate. Past performance is not indicative of future results. The returns for the Hypothetical Portfolio shown in this report are based on asset class returns and not reflective of any specific product. The asset class returns are constructed using index data and do not include any of the fees or expenses that would have been incurred when investing in a specific product. Investors cannot directly invest in an index and the actual returns of a specific product may have been more or less than the index returns used in this report. The index returns used in this report assume dividend and capital gain reinvestment. The returns shown in this report should not be considered a guarantee of future performance nor a guarantee of achieving overall financial objectives. All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, nor any other financial institution. Asset allocation models may not be suitable for all investors. International markets and Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. Real estate securities funds are subject to changes in economic conditions, credit risk and interest rate fluctuations. Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. 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.

Everyone has different income needs in retirement. Several factors influence your “retirement number,” including your age, where and when you hope to retire, and what you want to do in retirement. Someone with dreams of early retirement will likely need more saved up than someone who plans to work through their golden years. No matter what an ideal retirement looks like for you—an encore career or taking it easy—this article will help you sort through the many considerations on your plate and ensure you set yourself up for success. As you prepare for your retirement journey, be sure to snag our must-have retirement planning checklists . They are free and are built using the latest in retirement insights and strategies. So, if you are wondering: "how much retirement savings should I have?" , keep reading to find out. Create a List of Your Retirement Goals As you begin planning for retirement, the top question that likely percolates in your mind is, How much should you have saved for retirement? The short answer? It depends. Several variables work together to determine your personal savings goals, but there are good benchmarks to help zero in on the ideal amount you should target. To start, consider the following: How many years are you from retirement? Your retirement time horizon can help you take a more precise (and critical) look at how much you’ve saved. The closer you are, the more confident you’ll want to be that your savings can fully fund your retirement expenses. A 55-year-old who wants to retire may require a more aggressive plan than someone who wants to retire at 70, for example. If you still have a reasonable amount of time before you send in your retirement letter of resignation , you have time to make up for any gaps in your savings strategy. Are you hoping to move when you retire? More and more retirees are looking to relocate in retirement. In fact, 30% more retirees moved out of state in 2020 compared to 2019 (and Virginia was their top destination). If you are planning a move, define what it looks like. Are you planning to go somewhere more or less expensive than your current location (think about the cost of living, insurance, taxes, and more)? If you move somewhere less costly, you’ll not only have a reduced budget but may also be able to stash away some money when you sell your current house. Do you anticipate doing a lot of travel in retirement? 63% of Americans over 50 cited travel as an important retirement goal, according to an Ipsos poll . And, on average , retirees spend a little more than $11,000 per year on travel costs. Since travel is a common and costly goal, it’s critical to think through what your travel goals are. Do you hope to take a big trip every year? Are you hoping to leave money to children and/or grandchildren? Estate and legacy planning should play an essential role in your overall retirement plan. Your financial team can help you craft an estate plan that lets your legacy shine and pass your wealth to heirs efficiently and effectively. Are you in good health? Many pre-retirees underestimate healthcare costs in their golden years, but financially planning for health care is a must, since it could account for roughly 15% of your retirement budget. The specific answer to these questions is less important than whether you simply can answer them. In other words, it’s okay if you plan to travel more in retirement. It’s also okay if you don’t. The key here is to have a plan so that you know what your target is. Writing your retirement goals will help you adjust your savings strategy and ensure you’re on track to live the retirement lifestyle you desire, whatever that is for you. While you won’t have an exact answer for everything, and things won’t always go exactly as you plan (the pandemic certainly taught us all that hard lesson), anticipating how you will spend your retirement dollars puts you on a much stronger path. Calculate Your Current Savings and Expectations When thinking about how much you need to save for retirement, start with where you are right now. How much do you have saved in retirement-specific accounts (401k, individual retirement account (IRA), Roth IRA, etc.)? What do your savings look like in other investment accounts (brokerage account, real estate, etc.)? What sources of guaranteed income will be available to you? (pension, Social Security, annuity, etc.)? Knowing how much you currently have saved is critical to figuring out how far you have left to go and what adjustments you need to make to get there. How Much Retirement Savings Should I Have? There are several ways to calculate how much retirements savings you should have on hand. As a general rule of thumb, experts recommend having 6-8x your annual salary saved in your 50s and 8-10x saved in your 60s. Another way to look at it is being able to replace about 80-90% of your pre-retirement income. Using a multiple of 6-8x your annual salary is a good place to start. But, an even more precise way to calculate your savings need is to use the "4% rule". Here's how to do it: First, you'll want to calculate your social security benefit by logging in to ssa.gov and reviewing your social security statement. If you haven't reviewed your social security statement in awhile, it's a good idea to take a look to ensure your earnings history is accurate. The maximum social security benefit an individual retiree can get is $3,148 a month for someone who files in 2021 for social security at Full Retirement Age according to AARP . Now, let’s assume your social security benefit will equal the maximum benefit and that your spouse’s benefit will equal 50% of your benefit or $1,574/month. The combined social security benefit in this scenario will be $4,722/month or $56,664 per year. This means that if your lifestyle costs $100,000 per year, then you will have to create an additional $43,336 per year from your portfolio above and beyond social security! Income Need - Social Security Income = Supplemental Portfolio Income Needed $100,000 - $56,664 = $43,336 So, how much in savings will you need at age 65 to create $43,336 per year in income without running out of money? Let's find out using the 4% rule: Annual Income Need/.04 = Retirement Savings Needed $43,336 / 0.04 = $1,083,400 While nothing is guaranteed, the 4% rule of retirement income planning says that you’ll need $1,083,400 in retirement savings to supplement your social security income. This assumes that your investment portfolio is prudently managed taking into account risk, return, taxes, and annual income needs. But, what if you have a more extravagant lifestyle and you need $200,000 a year in income to maintain your lifestyle. We can calculate how much retirement savings you should have as follows: Total Annual Expenses - Combined Social Security Annual Benefit = Income needed $200,000 - $43,336 = $156,664 Then, apply the 4% rule to your annual income needs as follows... $156,664/.04 = $3,916,600 This means you may need approximately $3,916,600 in retirement savings to create enough income above and beyond social security for your lifestyle! Clearly, this is just an example and many variables could change the outcome. For example, do you have a pension? Do you plan on delaying social security? What about taxes? Do you have a comprehensive withdrawal plan (how to withdraw funds from personal savings)? Have you factored in other savings accounts like an emergency fund? How much money is in tax-free Roth IRA accounts vs. tax-deferred accounts like a 401 (k) or IRA? All of these factors play an important role in determining how much retirement savings you should have in your nest egg. Those are excellent places to start, but you’ll want to tailor those targets to fit your specific situation. To get an accurate estimate of the amount you’ll need to have at retirement, take variables such as your age, salary, general health and family history, and tax brackets into consideration. You have one chance to make your retirement savings last. If you need help, contact us for a free consultation. Be as honest and realistic as possible throughout your planning. You want to create a plan that’s sustainable and provides you with the quality of life you deserve throughout your golden years. Since the point of saving for retirement is to replace income when you stop working, convert your savings amount into annual earnings expectation for retirement. Does the outcome seem like it will be enough, or do you need to readjust your estimate? Once you’ve arrived at a good estimated savings target, ask yourself the following questions: Are you on track or off base? What needs to change for you to hit, and ideally exceed, those targets? Perhaps you need to max out your retirement accounts, concentrate on higher savings rates, redirect current spending, etc. Comprehensive retirement planning is all about driving action now to make sure you are meeting your future goals. Tips To Invest For Retirement More Intentionally Once you know your goals and what they cost, the next step is setting yourself up to reach them. One of the most essential ways to save is taking full advantage of your tax-advantaged retirement accounts. In 2021, you can stash away up to $19,500 in your 401(k). That contribution limit increases to $26,000 for those over 50. At this point in your career, you want to take full advantage of your employer match—in fact, it's likely you're saving well above the limit. If you can contribute more—don’t let those funds go to waste. Even a small savings difference of 1% can turn into tens of thousands of dollars over time. Remember, you’ll pull money out of these accounts slowly over time. The majority of your savings will continue to compound throughout retirement, so the more you can get in there the better off you’ll be. As you near retirement, you may also be able to divert money away from things you no longer save toward. For example, the money you were contributing annually to your children’s education? Put that same amount annually into retirement investments. You won’t notice it “missing” because you were spending it on education all those years. Now, you’re redirecting it toward your future. When making your estimations, don’t forget about taxes . If most of your savings are in traditional 401(k)s or IRAs, you will pay current tax rates on all distributions you take from your accounts. With that being the case, you also want to diversify your savings into other avenues that are taxed differently. This situation is where Roth conversions or holding some of your savings in taxable accounts can give you some tax diversity and flexibility in retirement. Conclusion By now, you know your goals and how much you should save—and how far off that goal you may be. It’s time to meet with a financial advisor to create a strategy for your savings and investments that will keep you on track for your retirement goals. Various factors can influence how much retirement savings you should have on hand. For example, how much and when will you file for social security? Will you have a pension? How much will you spend in retirement? Is most of your savings in tax-deferred accounts, like a 401 (k) or IRA, or in taxable accounts like a brokerage or trust account? The answers to these questions can result in vastly different retirement savings needs. Covenant Wealth Advisors is a fiduciary investment advisory and financial planning firm that specializes in retirement planning. We know how to structure a savings plan to make sure you can retire on your terms and pay as little in taxes as possible. Need help getting on track? Contact our team of financial planners today . We help individuals all across the United States. For more retirement reading, be sure to download our must-have retirement planning checklists . About Mark Fonville, CFP® Mark is a personal financial advisor and the President of Covenant Wealth Advisors. He manages investment portfolio and provides retirement income planning for individuals age 50 plus who have over $1 million in investments. He has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule a call. Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. We provide investment advisory, financial planning, and tax planning services to individuals. Investments involve risk and does not guarantee that investments will appreciate. Past performance is not indicative of future results. 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.