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Retirement is near. So, you’re probably thinking, what are the top retirement questions to ask yourself before you take the plunge? After all, there is a lot at stake. Nearing retirement is exciting and rewarding. What kind of life do you want? What do you imagine yourself doing? SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how we can help fully integrate taxes, investments, and retirement income planning, click here for a free retirement assessment . Get more ideas than you thought were possible. Perhaps the idea of traveling, new hobbies, and volunteering, gets you excited. Or maybe the idea of making your own schedule and having better control over your time is a motivating factor. Free Download: 15 Free Retirement Planning Checklists [New for 2023] The future is yours. But, retirement is also one of the most critical phases of your life. Small mistakes can snowball into big problems. That’s why it’s imperative to identify opportunities and red flags in advance of taking the next step. Depending upon your retirement age, you have one chance to make your money last twenty five years or more. After helping hundreds of individuals across Virginia and the United States transition to and through retirement, we’ve learned a thing or two about financial planning for retirement. Our experience has taught us a lot about what works and...what doesn’t work. Part of the lessons we've learned include key retirement questions to ask before you take the plunge. So much so, we thought you may benefit from hearing a few insights that we've gathered over the years. Here are five retirement questions to ask yourself before you sail away into your golden years. 1. Do I have a spending and retirement income strategy that works? Probably the most glaring aspect of your retirement transition is figuring out how much you can spend each year to support your lifestyle and financial goals. Those approaching retirement can get a sense of their retirement spending by looking at their current household budget. Tracking your spending now can be a solid benchmark for future expenses. While some line items will change, many people find that their spending remains rather consistent in retirement. Once you have a better idea of how much you’ll be spending, compare that plan against the sources of income you’ll have to support it, like Social Security, part-time work, pensions, and withdrawals from your retirement accounts. Withdrawing from your retirement savings is the exact opposite of what you’ve been doing up to this point. Retirement represents a complete shift in the way you treat your savings, and an important element of this shift is deciding how to withdraw. Many retirees consider how much they should, can, or need to withdraw but the specific method is often overlooked. Building an efficient withdrawal strategy can bring immense value to your retirement income plan. If you have different accounts like a 401k, Roth IRA, and a taxable brokerage account, consider how much should come from each (including RMDs once appropriate). SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how we can help fully integrate taxes, investments, and retirement income planning, click here for a free retirement assessment . Get more ideas than you thought were possible. It can be prudent to take a portion of your annual withdrawal from each account rather than deplete one account at a time. But, the amount you withdrawal from your accounts depends upon your tax situation. Also, when you decide to start social security benefits can influence when and which retirement accounts you withdraw from first. Do you plan to take social security income at 62, full retirement age, or wait until age 70? The decision matters. Withdrawal planning is important for several reasons. With the right plan, you can reduce unnecessary taxes, take advantage of compounding investments, and prolong the longevity of your accounts. Don't forget, the cost of living rises over time due to inflation . So you'll want to make sure that your income increases every year. If you need help, talk to a financial planner who specializes in cash flow planning in retirement. 2. Have I accounted for my health both now and in the future? Healthcare costs are not only an important piece of a successful retirement plan but a practical reality of aging. Fidelity now estimates couples spend $295,000 on medical expenses alone in retirement excluding long-term care. Without a plan for your personal finances, you risk not being able to afford the care you need and putting the rest of your retirement savings at risk. If you are looking forward to an early retirement before age 65, you'll find that health insurance is expensive! Once you turn 65, and depending on the type of coverage you need or want, you’ll have some choices to make around Medicare. Most people qualify for Part A hospital coverage without having to pay a premium. However, you’ll have to pay a premium for Part B medical coverage. Depending on your income (specifically, your MAGI) you may also have to pay a surcharge. This alone may give you a planning opportunity. Long-term care is another often overlooked healthcare item, which is significant when you consider that the average daily cost of a private room in a nursing home is over $250. SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how we can help fully integrate taxes, investments, and retirement income planning, click here for a free retirement assessment . Get more ideas than you thought were possible. Medicare does not provide coverage for long-term care, so it’s essential to consider how you’ll take care of health expenses should they arise. Generally speaking, you can purchase a long-term care policy or set aside additional savings/investments to cover these expenses. Either way can work, but each requires unique planning, so it’s something you need to explore well before you need it. Free Download: 15 Free Retirement Planning Checklists [New for 2023] The important takeaway here is you can save a significant amount of money with proper planning—either directly through premiums or indirectly with additional protections from unplanned expenses. We've found that families can potentially save tens of thousands of dollars in healthcare premiums with the right planning and strategies. From health savings accounts (HSAs) to reducing taxable income, the right plan can help prepare you for inevitable healthcare expenses. And don't forget about the potential for downsizing your home in the future. The quality of your healthcare in the future has a direct relationship to where you live. 3. Am I excited about my retirement lifestyle? It’s easy to get lost in the many financial components of retirement planning, but paying heed to the personal side of retirement planning is just as critical. Considering your lifestyle wants, needs, and expectations helps you walk into retirement with purpose and confidence. What's on your bucket list? Planning for your ideal lifestyle is just as important as a well-structured investment plan. Ask yourself, How will I spend my time? How can I maintain and form new social connections? Where/how will I find meaning and fulfillment? How can I challenge myself, both mentally and physically, to maintain good health? The reality for most retirees that don’t have concrete answers to these questions is that retirement becomes dull and unfulfilling. Instead, make a conscious effort to build the retirement life you want one step at a time. For many, that involves something rather contradictory to the traditional idea of retirement—working. Over the last few years, many retirees have embraced second careers that bring them joy, fulfillment, purpose, and resources for their life. Maybe you volunteer to teach a hobby of yours or start a small business. These are compelling ways to stay engaged and motivated in your golden years. Whether it’s meaningful work or fulfilling hobbies, consider how you’ll spend your time before you make the leap. 4. Is my estate plan updated? Your estate plan should be updated periodically, especially in significant life transitions, making retirement the perfect opportunity to check-in on your documents. Even if you don’t think your estate is large enough to worry about because it is well below the estate tax exemption, there are plenty of reasons to give estate planning some time. Perhaps you have acquired new assets (house, boat, business, etc.) and need a plan for passing those along. If you haven’t clearly laid out how you want your assets to pass to heirs, then they may have to deal with the courts and go through the probate process. Avoiding probate alone is often reason enough to make sure you have a proper estate plan in place. You also want to check-in on your primary and contingent beneficiaries, update your power of attorney and medical directive, and ensure your trusts are funded properly. We often find that individuals prepare the right estate planning documents, but fail to properly establish their traditional IRA or life insurance beneficiaries. The result is a failed estate plan that you spent thousands of dollars creating. An experienced Certified Financial Planner ™ or CFP® should be able to help analyze your estate plan. Free Download: 15 Free Retirement Planning Checklists [New for 2023] 5. Do I have an income tax strategy in place? The way you pay taxes changes in retirement. Knowing how your income channels are taxed and making a plan for tax-efficient withdrawals in retirement will extend the life of your nest egg and give you more flexibility and freedom in your spending plan. Your 60s and 70 can be filled with fluctuations in taxable income. Your income from employment, savings withdrawals, annuities, pension payouts, and Social Security will likely all change during this time. Employer retirement benefits can also create tax opportunities and problems. Managing your taxable income is paramount to reduce taxes now and in the future, and with all of this variation, there are many planning opportunities. Should I do Roth conversions? When should I take Social Security? How can I maximize my giving while reducing taxes? Is my investment portfolio managed with taxes in mind? The answers to these and other retirement tax questions are often integrated because they affect each other. SPECIAL NOTE FOR INDIVIDUALS AGED 50+ WITH OVER $1 MILLION: Tying your $1 million+ portfolio to your retirement and tax plan can be hard. If you are interested in learning how we can help fully integrate taxes, investments, and retirement income planning, click here for a free retirement assessment . Get more ideas than you thought were possible. For example, consider your withdrawal plan. As we mentioned before, the way you withdraw can have a significant impact on your taxes. For example, it may be possible to reduce the taxes you pay on your Social Security benefits or Medicare Part B premiums because those factors are based on your other income sources. We’ve created a handy checklist to help you go through these considerations and others when you’re thinking through retirement. Feel free to grab a copy here: What Issues Should I Consider Before I retire? Conclusion Retirement can and should be a wonderful chapter in your life. But, it's important to know the right retirement questions to ask yourself before you transition to the next chapter in your life. There are just too many things that can go wrong if you don't plan ahead. That's why having a personalized financial plan can be so helpful. A plan can help address all the questions above and many more that we didn't discuss. As a start, the five key questions you may consider include: Do you have a spending and retirement income strategy that works? Have you accounted for your health both now and in the future? Are you excited about your retirement lifestyle? Is your estate plan updated? Are you prepared for your taxes? If you're able to confidently answer these questions, then I think that's a great start to maintaining financial security and peace of mind going forward. But, there's a lot more to think about and the devil is in the details. If you’re looking for a tailored retirement plan that addresses all of your retirement questions, schedule a call with our team today. Our financial advisors specialize in helping individuals and couples age 50 plus have enough money for retirement so you can enjoy life without the stress. Whether you're located in Virginia, California, Florida, or anywhere across the country, we offer comprehensive advisory services that can help. Contact us for a free consultation. Mark Fonville, CFP® Mark is a fee-only, CERTIFIED FINANCIAL PLANNER ™ helping individuals age 50 make better decisions with their money so they can enjoy retirement without the stress of money. He is also the President of Covenant Wealth Advisors and has been featured in the New York Times, Kiplinger, the Chicago Tribune, and more. 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.

Retirement can be a blissful time of life, but it can also be a period of financial uncertainty. After all, with no steady paycheck, how do you know if you're on track to cover your expenses? That's where a retirement budget comes in. By setting a budget, you can make sure your nest egg lasts as long as you do. So, let's dive in and explore how to create a retirement budget that works for you. Assess Your Expenses First things first, you need to understand how much money you're spending. It might seem like a no-brainer, but many people don't have a clear idea of where their money is going. To get a handle on your expenses, start by reviewing your current spending habits. If you're like most people, you'll probably find that you're spending more than you realized on things like eating out or buying new clothes. But how do your expenses change in retirement? Well, it depends on your lifestyle. For example, if you're used to traveling frequently, you might find that your travel expenses decrease in retirement. Conversely, if you're planning on picking up a new hobby or two, you might need to budget for those expenses. In short, take some time to think through how your expenses might change in retirement. And don't forget to factor in inflation! While you might be used to paying a certain amount for groceries or utilities, those costs are likely to increase over time. So, make sure your budget accounts for rising prices. Determine Your Sources of Income Next, you need to know where your money is coming from. For most people, retirement income comes from a combination of sources. Social Security is one of the most common sources of income for retirees. Depending on your earnings history, you could receive a monthly benefit ranging from a few hundred dollars to several thousand. Retirement accounts are another source of income for many retirees. If you've been contributing to a 401(k) or IRA throughout your career, you'll likely have a substantial nest egg to draw from in retirement. Pension plans are also a common source of income, although they're becoming less common these days. If you own rental property, that can be a source of retirement income as well. However, rental income can be unpredictable and may require a lot of work. Plus, you'll need to budget for property maintenance and repairs. Calculate Your Retirement Income Shortfall/Surplus Now that you know your expenses and income sources, it's time to do some math. Subtract your expenses from your income sources to determine your retirement income shortfall or surplus. Ideally, you want to have more income than expenses. If you have a shortfall, you'll need to either reduce your expenses or find additional sources of income. For example, let's say you're estimating that you'll need $4,000 per month to cover your expenses in retirement. You expect to receive $2,500 per month from Social Security and $2,000 per month from your retirement accounts. That adds up to $4,500 per month in income, which means you have a surplus of $500 per month. Of course, not everyone will have a surplus. Let's say your expenses are the same, but you expect to receive only $2,000 per month from Social Security and $1,500 per month from your retirement accounts. That adds up to $3,500 per month in income, which means you have a shortfall of $500 per month. In this case, you might need to consider downsizing your home, finding a part-time job, or delaying retirement. Prioritize Your Expenses Once you've calculated your retirement income shortfall or surplus, it's time to prioritize your expenses. In other words, which expenses are most important to you? This can be a tough decision, as it often involves lifestyle choices and trade-offs. For example, let's say you're a foodie and love eating out at fancy restaurants. However, you also enjoy traveling and want to take a big trip every year. If you're on a tight budget, you might have to choose between the two. In this case, you might decide that travel is more important to you than dining out, and adjust your budget accordingly. The same goes for other expenses, like entertainment, hobbies, and healthcare. Think about what's most important to you and prioritize accordingly. That way, you can make sure you're spending your money on the things that bring you the most joy. Create a Retirement Budget Now it's time to put everything together and create a retirement budget. You can use a budgeting tool or spreadsheet to help you allocate your income sources to your expenses. Be sure to adjust your expenses as needed to make sure everything balances out. For example, let's say you've determined that you need $4,000 per month to cover your expenses in retirement. You'll receive $2,500 per month from Social Security and $2,000 per month from your retirement accounts. That adds up to $4,500 per month in income, which means you have a surplus of $500 per month. You might allocate your income sources as follows: Essential expenses (housing, food, utilities, healthcare): $3,000 per month Discretionary expenses (entertainment, hobbies, travel): $1,000 per month Savings: $500 per month Of course, your budget will look different depending on your personal situation. The key is to make sure you have enough money to cover your essential expenses, with some wiggle room for discretionary spending and savings. Monitor and Adjust Your Retirement Budget Creating a retirement budget is just the first step. You'll also need to regularly monitor and adjust your budget as needed. Life is unpredictable, and unexpected expenses can throw a wrench in your plans. That's why it's important to review your expenses and income regularly, and make adjustments as needed. For example, let's say you've been retired for a few years and your healthcare costs have increased. You might need to adjust your budget to allocate more money to healthcare expenses. Or, let's say your investments are performing better than expected and you have a surplus of income. You might decide to splurge on a big vacation or donate to a charity. In short, be flexible and willing to adjust your budget as needed. That way, you can make sure your retirement savings last as long as you do. Conclusion Creating a retirement budget can be daunting, but it's an essential step in ensuring your financial security in retirement. By assessing your expenses, determining your sources of income, calculating your retirement income shortfall/surplus, prioritizing your expenses, and creating a retirement budget, you can make sure you're on track to cover your expenses in retirement. And remember, be flexible and willing to adjust your budget as needed. Retirement should be a time of enjoyment, not stress! 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. Hypothetical examples are fictitious and are only used to illustrate a specific point of view.

Retirement planning is a crucial aspect of financial planning, and one of the most effective ways to save for retirement is through retirement accounts. There are several types of retirement accounts available, each with its own set of rules and benefits. However, you may be wondering, how many retirement accounts can I have? But first, be sure to download our free checklist: What accounts should I consider if I want to save more? In this article, we will explore the answer to that question and provide tips for managing multiple retirement accounts. The Basics of Retirement Accounts Before we dive into the specifics of how many retirement accounts you can have, let's first review the different types of retirement accounts available: 401(k): A retirement account offered by an employer, typically with contributions made through payroll deductions. Earnings grow tax-deferred until withdrawn in retirement. Traditional IRA: An individual retirement account that allows you to contribute pre-tax dollars, reducing your taxable income. Roth IRA: An individual retirement account that allows you to contribute after-tax dollars, but provides tax-free growth and withdrawals in retirement. SEP IRA: A retirement account for self-employed individuals or small business owners. Simple IRA: A retirement account for small businesses that allows both the employer and employee to make contributions. Comparison of Retirement Account Types Each type of retirement account has its own set of rules and benefits. Here is a comparison of some key features: Retirement Account Type Contribution Limit (2023) Employer Contributions Tax Benefits 401(k) $22,500 + $7,500 Catchup age 50+ Yes Pre-tax and tax-deferred growth Traditional IRA $6,500 No Pre-tax and tax-deferred growth Roth IRA $6,500 No After-tax and tax-free growth SEP IRA $66,000 or 25% of income Yes Pre-tax and tax-deferred growth Simple IRA $15,500 Yes Pre-tax and tax-deferred growth As you can see, the contribution limits and tax benefits of each retirement account type vary. Additionally, some accounts, like the 401(k), require employer contributions, while others, like the traditional IRA, do not. How Many Retirement Accounts Can You Have? Now, let's get to the question at hand - how many retirement accounts can you have? The short answer is that there is no limit to the number of retirement accounts you can have. However, the IRS does have rules that govern how much you can contribute to these accounts each year. Free Download: What Accounts Should I Consider If I Want to Save More? For example, in 2023, the contribution limit for a 401(k) is $22,500 while the contribution limit for a traditional IRA is $6,500. If you have multiple retirement accounts, you cannot exceed these contribution limits in total. However, you can spread your contributions across multiple accounts. It's important to note that contribution limits apply to each type of retirement account individually. For example, if you have two 401(k) accounts, you cannot contribute $22,500 to each account. Instead, you must stay within the $22,500 limit for all of your 401(k) contributions combined. Pros and Cons of Multiple Retirement Accounts Now that we've established that there is no limit to the number of retirement accounts you can have, let's discuss the pros and cons of managing multiple retirement accounts. Pros: Flexibility: Different retirement accounts have different rules and benefits, allowing you to tailor your retirement savings to your specific needs. Tax benefits: Depending on your income and tax situation, having multiple retirement accounts can provide additional tax benefits. Cons: Complexity: Managing multiple retirement accounts can be complex and time-consuming, especially if you have several different types of accounts. Overlapping investments: If you have multiple retirement accounts, it's possible that you may end up with overlapping investments, which can reduce the diversification benefits. Fees: Each retirement account may come with its own set of fees, which can add up over time. Tips for Managing Multiple Retirement Accounts If you do decide to have multiple retirement accounts, it's important to have a plan for managing them effectively. Here are some tips: Consolidate where possible: Consider consolidating similar retirement accounts to simplify your portfolio and reduce fees. Use a financial advisor: A financial advisor can help you develop a retirement savings plan that incorporates multiple accounts and meets your specific needs. Keep track of contribution and income limits: Be aware of the contribution and income limits for each type of retirement account and make sure you don't exceed them. Rebalance your portfolio: Regularly review and rebalance your retirement accounts to ensure you maintain an appropriate asset allocation. Free Download: What Accounts Should I Consider If I Want to Save More? Conclusion In conclusion, there is no limit to the number of retirement accounts you can have, but there are contribution limits that apply to each type of account individually. While having multiple retirement accounts can provide diversification and flexibility, it can also be complex and potentially costly. If you do decide to have multiple retirement accounts, consider consolidating where possible and working with a financial advisor to develop a retirement savings plan that meets your needs. By managing your retirement accounts effectively, you can set yourself up for a comfortable and secure retirement. Click here to get a free retirement assessment from Covenant Wealth Advisors 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. Hypothetical examples are fictitious and are only used to illustrate a specific point of view.

Financial planning is essential for everyone, but it is especially important for physicians who face unique financial challenges. Despite earning high incomes, many doctors struggle with managing their finances effectively. In this blog, we will discuss five common financial mistakes that physicians make and provide advice on how to avoid these pitfalls, enabling you to build a stable financial future. Before you get started, here are a couple of free resources to help with your journey: Important Numbers Every Tax Savvy Investor Should Know [New for 2023] 15 Free Retirement Planning Checklists Mistake 1: Not Creating a Budget One of the most common financial mistakes made by physicians is neglecting to create a budget. A budget is a crucial tool that helps you understand your income and expenses, allowing you to make informed decisions about your spending and saving habits. Without a budget, you may find yourself overspending on non-essential items and failing to save enough for future financial goals. Example 1: The Consequences of Poor Budgeting with Dr. Emily Thompson Dr. Emily Thompson, a successful pediatrician in her mid 40s, had always been confident in her ability to manage her finances. With a six-figure income, she never worried about living paycheck to paycheck. However, despite her high income, she never saw the need to create a budget, believing that she had more than enough money to cover her expenses and save for the future. Over the years, Dr. Thompson developed a taste for the finer things in life. She frequently dined at upscale restaurants, took lavish vacations, and splurged on designer clothes and accessories. Additionally, she purchased a luxury car and a sprawling home in an exclusive neighborhood, both of which came with hefty monthly payments. Since she didn't track her spending or set limits on her expenses, her lifestyle quickly began to exceed her income. One day, Dr. Thompson received an unexpected medical bill for a procedure that her insurance didn't fully cover. As she went through her bank statements to assess her financial situation, she was shocked to discover that her savings were nearly depleted. To make matters worse, she realized that her credit card balances had skyrocketed, and she had amassed a significant amount of high-interest debt. Dr. Thompson's situation quickly became dire when she was faced with an emergency home repair that she couldn't afford. She found herself borrowing from her retirement accounts to cover the costs, jeopardizing her financial future. With no budget in place, she had unknowingly spent herself into a financial crisis. Had Dr. Thompson created a budget early in her career, she would have had a clear understanding of her income and expenses, allowing her to make informed decisions about her spending and saving habits. A budget would have helped her identify areas where she could cut back, allocate funds to emergency savings, and prioritize her financial goals. By neglecting this crucial financial tool, she jeopardized her financial stability and put her future at risk. To create an effective budget: List your monthly income sources, including salary, bonuses, and investments. Identify all your fixed and variable expenses, such as mortgage, utilities, food, and entertainment. Allocate funds to savings and investment goals, such as emergency funds, retirement accounts, and college savings plans. Track your spending regularly to ensure you stay within your budget. To maintain your budget, consider using budgeting apps or software, and review your budget periodically to make necessary adjustments. Mistake 2: Ignoring Student Loan Management The average medical school graduate carries a significant amount of student loan debt. Ignoring this financial burden can lead to higher interest costs and a longer repayment period. To effectively manage your student loans: Understand your loan terms, including interest rates, repayment options, and potential forgiveness programs. Consider refinancing or consolidating your loans to secure a lower interest rate or more manageable monthly payments. Research loan forgiveness and repayment assistance programs, such as Public Service Loan Forgiveness (PSLF) or income-driven repayment plans. Example 1: The benefits of managing student loan debt with Dr. Andrew Martinez Dr. Andrew Martinez, a dedicated family practitioner in his mid-30s, was well aware of the heavy burden of student loan debt he carried after completing medical school. With over $200,000 in loans, he knew that managing this debt would be crucial to his long-term financial success. Determined to tackle his student loans head-on, Dr. Martinez devised a comprehensive strategy to reduce his debt as efficiently as possible. First, Dr. Martinez took the time to understand the terms of each of his loans, including interest rates and repayment options. He discovered that some of his loans had significantly higher interest rates than others, making them prime candidates for prioritizing in his repayment plan. Next, he researched refinancing and consolidation options, ultimately choosing to refinance his high-interest loans to secure a lower interest rate and more manageable monthly payments. This decision saved him thousands of dollars in interest over the life of the loan. Dr. Martinez also explored various loan forgiveness and repayment assistance programs. He learned that he qualified for the Public Service Loan Forgiveness (PSLF) program due to his work at a nonprofit hospital. By enrolling in an income-driven repayment plan and making consistent monthly payments, he would be eligible for loan forgiveness after ten years of service. To further accelerate his loan repayment, Dr. Martinez committed to living frugally and directing any extra income, such as bonuses or tax refunds, towards his student loan debt. He also set up automatic payments to ensure that he never missed a payment and potentially jeopardized his eligibility for forgiveness. Thanks to his diligent management of his student loan debt, Dr. Martinez was able to pay off a significant portion of his loans and secure forgiveness for the remaining balance. By actively addressing his debt, he freed up funds for other financial priorities, such as saving for a down payment on a house, investing for retirement, and creating an emergency fund. His proactive approach to student loan management set the stage for a stable and secure financial future. By actively managing your student loans, you can reduce your debt burden and free up funds for other financial priorities. Mistake 3: Inadequate or Improper Insurance Coverage Insurance is an essential part of any financial plan, providing protection against unforeseen events that can negatively impact your finances. Physicians, in particular, should prioritize acquiring adequate malpractice, disability, and life insurance coverage. Common insurance pitfalls include: Underestimating the amount of coverage needed or opting for the cheapest policy without considering the quality of coverage. Relying solely on employer-provided coverage, which may not be sufficient or portable if you change jobs. Neglecting to review and update policies regularly, leading to gaps in coverage as your financial situation evolves. Example 1: The consequences of being underinsured with Dr. Sarah Mitchell Dr. Sarah Mitchell, a skilled anesthesiologist in her late 40s, had always been diligent about her career and patient care. However, she paid little attention to her insurance needs, assuming that her employer-provided coverage was sufficient. Unfortunately, her lack of attention to her insurance coverage would eventually lead to serious financial consequences. One day, while on her way to work, Dr. Mitchell was involved in a severe car accident that left her with multiple injuries. Her recovery would require months of physical therapy and time away from her practice. As the primary breadwinner for her family, Dr. Mitchell was concerned about maintaining her financial stability during her prolonged absence from work. Confident that her employer-provided disability insurance would cover her income during her recovery, she was shocked to discover that the policy only provided 60% of her base salary, and her additional income from overtime and bonuses was not covered. This significant reduction in income made it difficult for her family to keep up with their mortgage payments, medical bills, and other living expenses. In addition to her inadequate disability insurance, Dr. Mitchell had opted for a minimal life insurance policy, believing that her high income and savings would be sufficient to support her family in the event of her passing. However, her recent accident and the resulting medical bills had depleted much of her savings, leaving her family financially vulnerable. Had Dr. Mitchell taken the time to evaluate her insurance needs and supplement her employer-provided coverage with appropriate individual policies, she could have avoided the financial strain her family faced during her recovery. A comprehensive disability insurance policy with coverage for her full income, including overtime and bonuses, would have provided her with the financial security she needed. Additionally, a more robust life insurance policy would have ensured her family's financial stability in the event of her passing. Dr. Mitchell's experience serves as a cautionary tale about the importance of thoroughly evaluating one's insurance needs and obtaining adequate coverage to protect against unforeseen events that can impact one's financial well-being. To ensure you have the appropriate coverage, consult with a trusted fee-only financial advisor who can help you evaluate your needs and recommend suitable policies. Periodically review your insurance coverage to ensure it remains adequate as your circumstances change. Mistake 4: Neglecting Retirement Planning Starting retirement planning early is crucial for physicians, as a late start can lead to inadequate savings and reduced financial security in later years. To effectively plan for retirement: Understand the various retirement savings options available to you, such as 401(k) plans, IRAs, and Roth IRAs. Maximize employer-sponsored retirement benefits, including contribution matching programs. Develop a long-term investment strategy that balances risk and return, taking into account your age, risk tolerance, and retirement goals. Regularly review and adjust your retirement plan as needed, considering factors such as changes in income, inflation, and market conditions. Example 1: Dr. Robert Anderson neglects planning for retirement Dr. Robert Anderson, a respected cardiologist in his early 50s, had spent the majority of his career focused on providing exceptional care to his patients. Although he had earned a substantial income over the years, he had never given much thought to retirement planning. Instead, he believed that his high earnings would naturally provide him with a comfortable retirement. As Dr. Anderson approached his 50s, he began to realize that he had not saved enough to maintain his desired lifestyle during retirement. His only retirement savings were in his employer-sponsored 401(k) plan, to which he had contributed the minimum amount required to receive the employer match. He had not explored other retirement savings options such as IRAs or back-door Roth IRAs or taxable brokerage accounts for better tax management in retirement, nor had he developed a comprehensive investment strategy to grow his nest egg. Concerned about his financial future, Dr. Anderson sought the advice of a financial planner, who informed him that he would need to significantly increase his retirement savings to avoid a drastic reduction in his standard of living during retirement. Unfortunately, given his age and proximity to retirement, Dr. Anderson had limited time to make up for the lost years of savings and compound interest. To address the shortfall in his retirement savings, Dr. Anderson was forced to make some difficult decisions. He began aggressively contributing to his 401(k) plan and evaluated the potential for a back-door Roth IRA and Mega Backdoor Roth IRA to take advantage of the tax-free growth. He also had to reevaluate his investment strategy, striking a delicate balance between growth and risk as he approached retirement age. In addition to ramping up his retirement savings, Dr. Anderson had to make significant lifestyle adjustments. He downsized his home, postponed his plans for luxury vacations, and delayed his retirement by several years to give him more time to save and grow his investments. Dr. Anderson's story illustrates the importance of early and consistent retirement planning. By neglecting this crucial aspect of financial planning, he jeopardized his financial security during his retirement years and was forced to make considerable sacrifices to compensate for his lack of foresight. Pro Tip: You rely on checklists when helping patients. Be sure to download our free retirement planning checklists to help you avoid major retirement planning mistakes. By prioritizing retirement planning, you can build a comfortable nest egg that ensures your financial security throughout your golden years. Mistake 5: Lack of Investment Diversification A well-diversified investment portfolio is essential for managing risk and optimizing returns. However, many physicians make the mistake of concentrating their investments in a single asset class or sector. This lack of diversification increases the risk of significant losses during market downturns. To create a diversified portfolio: Spread your investments across various asset classes, such as stocks, bonds, real estate, and cash. Diversify within asset classes by investing in different sectors, industries, and geographical regions. Consider using low-cost index funds, exchange-traded funds (ETFs), or professionally managed mutual funds to achieve diversification without the need for constant monitoring. Periodically rebalance your portfolio to maintain your desired risk level and asset allocation. Example 1: Dr. Samuel Green learns the importance of proper diversification, the hard way Dr. Samuel Green, a renowned neurosurgeon in his early 50s, had managed to accumulate a substantial net worth of over $2 million through his diligent retirement savings and disciplined investment in taxable accounts. Confident in his financial success, Dr. Green had invested the majority of his wealth in the healthcare sector, particularly in biotechnology and pharmaceutical companies, as he believed his industry knowledge would give him an edge in generating significant returns. Unfortunately, Dr. Green's overconfidence in his investment strategy led to a lack of diversification in his portfolio. When an unexpected global event caused a major disruption in the healthcare industry, the stocks of biotechnology and pharmaceutical companies plummeted. Dr. Green's heavily concentrated investments in these sectors experienced significant losses, resulting in a drastic reduction in the value of his retirement and taxable investment accounts. Realizing the gravity of his situation, Dr. Green sought the advice of Covenant Wealth Advisors who emphasized the importance of diversification to protect his portfolio from future market downturns. To create a more diversified portfolio, Dr. Green was advised to: Reallocate his investments across various asset classes, such as stocks, bonds, and real estate, to reduce his overall risk exposure. Diversify within asset classes by investing in different sectors, industries, and geographical regions to avoid over-concentration in any single area. Consider using low-cost index funds, exchange-traded funds (ETFs), or professionally managed mutual funds to achieve diversification without the need for constant monitoring. Periodically review and rebalance his portfolio to maintain his desired risk level and asset allocation. Overlay proper tax management across his portfolio to help improve after-tax returns. By following Covenant's recommendations, Dr. Green began the process of diversifying his investment portfolio to reduce risk and better protect his assets from future market fluctuations. Though it would take time to recover his losses, Dr. Green learned a valuable lesson about the importance of diversification in ensuring long-term financial stability. Pro Tip: You rely on checklists when helping patients. Be sure to download our free retirement planning checklists to help you avoid major retirement planning mistakes. By maintaining a diversified investment portfolio, you can reduce risk and potentially enhance long-term returns, helping you achieve your financial goals. Conclusion In summary, the five common financial mistakes physicians make are neglecting to create a budget, ignoring student loan management, having inadequate or improper insurance coverage, neglecting retirement planning, and lacking investment diversification. By addressing these issues and implementing the suggested solutions, you can build a strong financial foundation and secure your financial future. It's important to educate yourself about personal finance and maintain discipline in managing your finances. However, don't hesitate to seek professional financial advice tailored to your specific needs and circumstances. Remember, the sooner you start planning and avoiding these mistakes, the better prepared you will be for a prosperous and secure financial future. We help. Contact us for a free consultation to see how we can better manager your financial health. Author: Mark Fonville, CFP® Mark is the CEO of Covenant Wealth Advisors, a fee-only financial planning and investment management firm helping physicians build, preserve, and enjoy their wealth through improved financial health. 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. Hypothetical examples are fictitious and are only used to illustrate a specific point of view.

You've worked hard for your money. That's why it can be so disappointing to see much of your earnings paid out to Uncle Sam. Paying too much in taxes can make you feel like your running on a treadmill, never actually moving forward as hard as you try. The problem is that many investors and even financial advisors don’t take retirement tax planning seriously. After all, it takes time and specialized skills to fully integrate your retirement tax plan with your life plan. These two requirements are often big enough barriers to avoid taking the necessary steps. Depending upon your situation, the little known secret is that retirement tax planning has the potential to save you hundreds of thousands of dollars over time. That's why retirement tax planning is integral to your total financial plan and something you should keep current. A proactive retirement tax plan can set you up for success today and tomorrow. I can speak from experience. After having advised hundreds of families over the past seventeen years on retirement tax strategies and investing in retirement, I’ve learned that retirement tax planning may strengthen your financial security, help you maintain your lifestyle in retirement, and help you keep more money in your pocket. Ultimately, there are many reasons that you or your financial advisor should do tax planning. It’s worth it for those who are willing to invest a little extra time getting started. You’ve worked hard for your retirement savings, and you deserve to pay no more in taxes than you are legally required. To help you on your journey through your next chapter in life, here are seven critical benefits of retirement tax planning based on real-world experience. Oh, and don't forget your free cheat sheet to help you quickly put it all in context. 1. Retirement Tax Planning May Keep More Money In Your Pocket Of course, no one likes paying taxes, but it is inevitable as long as we have public roads, education, and national defense. We all do our part to pay for it, but just because you value things that taxes provide doesn’t mean you have to be careless about what you pay. What if you're overpaying? The truth is that you may not know until you get help. Vanguard estimates that investors may add an additional 0.60% per year in after-tax returns by implementing a single tax strategy called asset location. That’s $6,000 more per year in returns on a $1 million portfolio for one strategy. As another example, the state of Virginia has a program whereby taxpayers can purchase tax credits at a discounted rate of between 8-12%. The result is the potential for saving $800 to $1,200 in taxes on every $10,000 in credits purchased per year. That’s money that could be spent on date night with your spouse or an extra round of golf. I remember working with a new client several years ago. They were charitably inclined and had given $15,000 a year to different charities over the past ten years or more. They were confident that they had been giving in the most tax-efficient manner. After a quick review of their tax return, we discovered that their tax preparer had not properly implemented the strategy they thought they were following. As a result, I estimate that this mistake cost them between $3,000 to $4,000 per year in additional taxes over a ten-year period. That’s potentially $30,000 to $40,000 in tax overpayments to the IRS that could have gone right back into the client’s wallet, paid for a great vacation, or provided additional funds to give more to charity. The good news is that you don’t need to be an expert in retirement tax planning. A Certified Financial Planner who focuses on tax planning should be able to help you create a tax plan that ensures you retain as much of your hard-earned money as you legally can. There are many strategies available to help you, including: Tax-loss harvesting—strategically selling assets at a loss to offset more significant gains. Tax-gain harvesting—strategically realizing gains at lower tax rates to create smaller gains in the future. Asset location—housing securities in the most tax-efficient accounts. This can help determine the proper asset allocation for your risk tolerance, time horizon, and goals. Balancing tax buckets, like taxable, tax-deferred, and after-tax accounts. Charitable giving—optimizing your giving efforts to maximize your donation and save money on your tax bill. State tax credits - Virginia and other states provide land preservation tax credits that may be purchased, thus reducing your overall tax liability. Reducing your taxes spills over into other areas of your finances. When you proactively manage your adjusted gross income (AGI), you may have more control over taxes in other areas such as Social Security benefits, Medicare premiums, net investment income tax, and more. There are a lot of pieces, and you can gain the most value by thinking about them comprehensively. Don’t employ individual tactics without considering how they fit into the big picture! 2. Retirement Tax Planning Could Make Your Money Last Longer A retiree's most palpable fear is running out of money. That’s understandable, considering the effect that could have on your lifestyle. Tax planning may help your nest egg last longer by allowing you to keep more of it. One of the best ways to accomplish this goal is with a custom withdrawal strategy. If you are deliberate about when you will withdraw, from which accounts you will withdraw, and how much, you can navigate your taxes most efficiently. That sometimes means intentionally taking a taxable distribution or doing a Roth conversion even if it causes your taxes to go up one year. Michael Kitces reports that implementing partial tax conversions has the potential to increase your net after-tax wealth. Why? Because a strategy like a Roth conversion can potentially lower your average taxable income long-term and maximize the number of assets you transition to your heirs. The traditional rule of thumb is to take money from your taxable accounts first, then tax-deferred, then tax-free accounts like a Roth IRA. Here’s the dirty little secret when it comes to the order of account withdrawals in retirement. Traditional rules of thumb don’t always work best. Tax planning can help provide the personalized insights necessary, so you don’t pay more in taxes when creating the cash flow you need. Retirement Reminder: Don’t neglect your planning window during your pre-RMD (required minimum distributions) years from age 60 to age 72! This is often a time when your income is lower, so you may consider building up your after-tax bucket with Roth conversions while you are subject to a lower tax rate. Prioritizing Roth accounts will also give you more planning flexibility later by reducing your RMDs from your tax-advantaged retirement accounts. But, Roth conversions aren’t right for everyone, and your personal tax situation will help dictate if they are right for you. 3. Retirement Tax Planning May Help You Reduce Capital Gains Taxes Building a portfolio of low-cost investments can help save you money over the long term and may allow your investments to compound at a faster rate. That’s good, but if you hold your investments in taxable accounts, those gains are taxable when you sell. But if you consider your investments as part of a comprehensive tax plan, and coordinate it with your charitable giving to be tax-efficient, it may save you money. Instead of realizing a massive gain and paying the tax bill, what if instead you donated investments to charity? If you donate appreciated assets directly, rather than selling them first, you may avoid the taxable gain entirely. What if you don’t want to give to charity? When markets or individual investment positions are down, tax-loss harvesting can help preserve current losses on paper, allowing you to offset future gains. You have to do it correctly, and this will likely involve a multi-year strategic giving plan to ensure you take full advantage of the available itemized deduction—and we can help! 4. Retirement Tax Planning Can Better Position You for Future Tax Law Changes Benjamin Franklin once said there is nothing certain in life except death and taxes. I would like to add another to that list, which is changes to the tax code. Politicians make a name for themselves through legislation. Legislation often includes changes to our tax code and tax rates. As you can see in the chart below, individual income rates have changed numerous times since the early 1900s. If you aren’t prepared, those tax law changes can cost you money and weaken your financial position. In my experience, most people wait to plan until it’s too late. Procrastination isn't planning, it’s reacting. Reacting puts you on the defensive and in a weak position when it comes to reducing taxes. The truth is that nobody knows what tax rates will be in the future. But, tax planning in retirement can help you develop a long-term road map in an effort to diversify your taxable income. When tax laws change, you may be in a better position to react. 5. A Proactive Retirement Tax Plan Enables You To Pass More Money To Your Heirs Retirement tax planning can also spill over into your estate plan. By growing your accounts with taxes in mind, you may have more to pass on to beneficiaries and contribute to family generational wealth. For example, would your heirs rather inherit $1 million in a Roth IRA or $1 million in a Traditional IRA? A Roth IRA, of course! That’s because every dollar withdrawn from a Roth IRA is tax-free, whereas every dollar withdrawn from a Traditional IRA (under normal circumstances) is fully taxable at the federal and state level. That may mean transferring assets strategically and not simply building up a large estate may help maximize generational wealth. Lastly, it could also make sense to give some money away while you're alive, so you don't exceed the federal estate exemption of $12.06 million (double for married couples) in 2022. 6. You Can Increase The Value of Charitable Donations You don’t donate for the tax benefit, but for the good it does. However, when you think about charitable giving from a tax perspective, you'll actually be able to boost the overall value of your gift. As noted before, donating an appreciated asset would be more valuable than donating cash you already paid taxes on. Other excellent strategies to consider include qualified charitable distributions or QCDs, donor-advised funds, tax deduction bunching, and more. Which methods you employ depend on your tax bracket, savings, values, and goals. 7. Retirement Tax Planning Helps You Gain Peace of Mind Life is full of stress. From worrying about your health to family members to your career, there is enough to worry about without also having to worry about the taxes you pay. Proactive tax planning isn’t a one-time thing or something you put into a silo to think about on its own. Retirement tax planning is a long-term, comprehensive, multi-year process. Creating that plan is worth every bit of the effort it requires, especially if you have professional help to take the brunt of the load off of you. It can help you feel confident and prepared for the future while also providing the peace of mind you need to enjoy life. The less you pay in taxes, the more you have at your disposal. Saving all this money on taxes presents an excellent opportunity to reinvest those savings toward your long-term goals. Paying fewer taxes could allow you to put more away for retirement, maximize Roth accounts, convert tax-deferred balances, or save for your health in an HSA. The point is that it’s your money, and you have options. Paying unnecessary taxes should be the last thing on your priority list! Find A Financial Advisor To Help At Covenant Wealth Advisors, we specialize in retirement tax planning, investing in retirement, and retirement income planning and have the experience, resources, and capacity to help you. We also encourage you to collaborate with your tax professional to ensure you implement the proper strategies on your annual tax return. If you’d like to learn more about how you could benefit from a well-thought-out retirement and tax plan, watch our video on how we help and give us a call. Scott Hurt, CFP®, CPA Scott is a fee-only financial advisor and fiduciary at Covenant Wealth Advisors serving clients across the United States. He specializes in retirement tax planning and 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.

Are you getting ready for your golden years? Being a physician offers you a challenging and rewarding career, but you likely don’t plan to do it forever. Moving toward successful retirement requires planning and preparation if you want to live comfortably—especially if you’re hoping to retire early. What steps do you need to take in the years leading up to retirement? Get a quick breakdown of everything to keep in mind with our retiring physician checklist to make sure that you are in good shape for your financial future. Meet with a Financial Advisor It likely goes without saying that you’ll benefit from expert help behind you as you move away from that steady paycheck in your practice. A financial advisor can help you start planning as soon as possible—and the earlier you can meet with them, the better off you will be in retirement. Set a Budget Income often takes a substantial hit when you transition into retirement . This is why it is crucial to set a new budget to ensure that you have enough money to live off when your career no longer supports you. Set Goals Understand what you want to do in retirement: travel, charitable giving, paying for a grandchild’s college tuition, or something else entirely. Knowing your goals helps you budget accordingly. Maximize Employer Benefits Many employers offer assistance to those who are focused on the future, matching employee contributions to retirement savings accounts. Take full advantage of these matches and start to contribute the maximum allowed to your retirement. Even if your employer doesn’t offer a match, it will still benefit you to contribute as much as you can toward whatever doctor retirement benefits are offered through your employer – whether that is a 401(k), 403(b), 457(b), 401(a), HSA , or a combination of these. If you are old enough to qualify, don’t forget about catch-up contributions. Map Out a Succession Plan If you own your own practice, then you need to think about what will happen to the reputation you built after you retire. Plan out who will take it over, whether that means passing on the business to family or selling it, and what role you will play in the business in your golden years. Use Vacation Days Take advantage of the perks offered by your employer including those vacation days you have saved up over the years. This is a great way to continue receiving your steady paycheck, maximize the benefits your employer offers, and take some much-needed time away from your work instead of allowing those vacation days to go unspent. Rebalance or Reallocate Your Portfolio As you look toward retirement, you want to make sure you have enough after-tax liquidity in order to cover your expenses. For many physicians, this means rebalancing their portfolio so that they can withdraw some of their money if and when the need arises instead of waiting around for something to sell. Immediately before retirement, you will likely need to rebalance again to optimize your portfolio for income and preservation. Have a Withdrawal Plan When you have multiple retirement savings accounts, understanding which one to pull from first often poses a problem. Partner with a financial advisor to help you understand the implications of pulling from each account and to make a game plan for which accounts you will tap into first. Build a Tax Plan Just because you no longer have a steady stream of income from an employer doesn’t mean that you will be exempt from taxes. A financial advisor can help you come up with core strategies that will help minimize the taxes you will pay in your retirement on the money that you worked hard to earn. Tax planning in retirement is one of the most important items to address to help make your money last. Explore Health Insurance Options One of the perks of working is that you have access to benefits like health insurance, but these go away when you retire. You won’t be eligible for Medicare until age 65. For physicians who are retiring before age 65, you will need something else to cover you until it kicks in. Do some research now on where to get coverage and how much it will set you back so that you can budget accordingly. With proper advice from a financial advisor and tax planning, it’s possible to substantially reduce the premiums you pay out of pocket for private health insurance. Refinance Your Mortgage Do you still hold a mortgage on any of your properties? Maybe you have a high interest rate on your mortgage or you want to lower monthly payments to help out your budget. Refinancing your mortgage, if applicable, is a great step prior to your official retirement because you may not get approved once you are no longer employed. Pay Off Debt Paying off debt may not be for everyone, but it is something you will want to consider as you make a budget and meet with a financial advisor. Some physicians will be better off putting their money toward investments that have a higher rate of return. However, paying down debt could be necessary to reduce monthly expenses. Prepare for Retirement with Confidence In case you haven’t already gathered from this retiring physician checklist, one of the most important things you can do to prepare for your golden years is to meet with a financial advisor. A qualified financial advisor like the ones you will find at Covenant Wealth Advisors can walk you through each step of this checklist to make a comprehensive retirement plan that works for you. This is not necessarily a one-and-done type of appointment. Rather, you should meet with them multiple times leading up to retirement to ensure that you are on the right track and can make small adjustments as needed. Are you on track to retire early? Download the Financial Planning Kit for Doctors Considering Early Retirement 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.

Retirement planning is tricky for everyone, but it holds a particular struggle for those with a high income such as physicians. You may be used to a higher quality of life that may be difficult to maintain after retirement. It opens the door to thinking about the details – how you will live your life without the constant worry that your money will run out. Everyone needs a clear plan for retirement, but you may find that there are some physician retirement investment strategies that work better than others to achieve your financial goals. Here are our top five tips to help you achieve financial freedom and peace of mind when it comes to your retirement savings account. 1. Set Goals for After Retirement The ability to live your life comfortably while in retirement is only the first step toward making sure that you have the money you need. While budgeting for current expenses is important, you also need to think about additional goals like travel or paying college expenses for grandchildren. You should have a quick snapshot of how much money you need to retire comfortably . Physicians still need to stick closely to their budget, even if they are high earners. Everyone needs a budget to help them define their expenses and accurately forecast their financial future. The key here is to align your budget with your goals so that you ensure that you have enough money for everything that matters to you. 2. Prioritize Your Health Your finances are not the only thing that you should be planning for when it comes to retirement. In the present, you need to invest in yourself through things like exercising and eating healthy. This is especially true for physicians who often work long hours and are more prone to burnout. The question is: what does this have to do with your retirement investment strategy? Health costs are a top expense for people in retirement. Unexpected medical bills can seriously derail your retirement plans, so minimize your risk by prioritizing yourself in the here and now. You may even want to consider maxing out your HSA contributions that can be used to cover any unexpected medical bills in retirement. 3. Max Out Employer-Offered Retirement Accounts It might seem like common sense or obvious advice, but many people put off contributing to their retirement accounts. No matter what type of retirement savings plan your employer offers, consider maxing out your contributions. This is even more important when your employer offers to match contributions up to a certain percentage. Whether you have a 403(b), a 401(k), a 457(b), or a 401(a), you should take advantage of these types of accounts. A health savings account (HSA) is also a great tool to contribute pre-tax dollars that will grow tax-free, and can be withdrawn to cover healthcare expenses without taxes. Many physicians incorrectly use their HSA which can be a big mistake. Here’s how to use an HSA for retirement . If you can, be sure to take advantage of catch-up contributions that increase your savings once you reach a certain age. You can make catch-up contributions at age 50 for 401(k)s and IRAs or at age 55 for HSAs. 4. Diversify Your Investment Accounts You’ve heard about proper investment diversification. But, have you heard about diversifying your investment accounts as well? Taxes in retirement will sneak up on you if you haven’t prepared in advance. That’s why it’s important to think about the types of accounts that you invest in over time. There are three major categories of investment accounts from a tax perspective: Tax deferred accounts - 401(k), 403(b), IRA Taxable accounts - Brokerage account, savings account, or revocable trust account Tax-free accounts - Roth IRA, Roth 401(k), or Health Savings Account Diversifying your investment savings across these three buckets is crucial for helping you access money whenever you need it most. To this end, you should look for investment options beyond those that are offered by your employer, such as taxable accounts and tax-free accounts. Doing so will help you better manage your taxes in retirement because taxation of withdrawals differs depending upon the type of account you own. Be sure to take your tax bracket into account when maxing out some of these accounts to ensure that you will not be placing yourself in a position to pay more taxes upon withdrawal. Why does this matter? Consider this scenario: you are experiencing high rates of burnout and want to retire early. If all of your funds are in a 401(k), you will have to pay early withdrawal penalties that you could avoid if you had some of your retirement savings located in taxable brokerage accounts or trusts. You should also consider maintaining adequate liquidity within these accounts by having some money invested in cash or CDs. Consider what would happen if you had a surprise emergency expense and all of your money was tied up in the stock market. You might be forced to sell shares during an unfavorable market just to cover your expenses. Keeping money in different types of accounts can help you better manage your risk and make your savings last longer. 5. Work with a Financial Advisor Are you having a hard time figuring out what physician retirement investment strategies are the right fit for you? This can be a complex topic for anyone to navigate, especially if they are trying to do it on their own. Instead, work with a financial advisor to analyze your current portfolio and help you estimate if you are on the right track to retire on your own terms. A solid financial adviser can use tools like the Monte Carlo simulation to help you determine your odds of meeting your retirement spending goals. While a one-time strategy session might be a great way to start, you need more than a “one and done” financial planning session. For the best results, you need to meet with an advisor multiple times leading up to retirement so that you can stay flexible and make adjustments to your savings plan as needed. Are You Considering Early Retirement? The chance to retire early is an exciting prospect for anyone, but especially for physicians who work long, demanding hours and dream of a well-deserved break. Are you dreaming about early retirement but aren’t sure how feasible it is with your current assets? Are you looking for financial resources to put you on track when planning early retirement? Download our free guide, The Financial Planning Kit for Doctors Considering Early Retirement . Our all-in-one retirement planning kit includes a printable worksheet and checklist to identify considerations for retirement planning and actionable strategies to help you plan for an early retirement. Grab your free copy now! 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.

No matter how old you are or where you may be in your career, it’s never too early to begin thinking about and saving for your retirement. Most people are familiar with the basic types of retirement savings accounts, but retirement plans for physicians offered through a hospital can be much different than those offered in other professions. For doctors thinking about retirement, it’s essential to understand how your doctor retirement benefits might require a different strategy. Here’s a quick breakdown of some retirement accounts that can benefit doctors later in life. 403(b) A 403(b) account is offered by non-profit entities, meaning that some hospitals and certain state and local government positions may fall into this category. In many ways, you will find that this type of retirement savings account is similar to the better-known 401(k). Physicians will make contributions to this account directly from payroll deductions and will see relatively high rates of contribution limits ($22,500 for 2023). If you are over the age of 50, you can also make catch-up contributions of $7,500 during the 2023 tax year. The good news is that your earnings from a 403(b) plan are tax-deferred until withdrawal if you have a traditional 403(b). Roth 403(b)s may not be available from all non-profit employers, but if you do have access to one, your withdrawals will be tax-free after age 59 1/2. Benefits: Low administrative costs Comes in both traditional and Roth at some employers Catch-up contributions of $7,500 per year after age 50 Additional catchup contributions of $3,000 per year ($15,000 total) for long service terms of 15 years 401(k) A 401(k) is a tax-advantaged retirement savings account sponsored by your employer that gives you the freedom to choose where and how your money is invested. You will be presented with a number of investment methods, typically a variety of mutual funds. Oftentimes, your employer will offer a match for what you invest based on a percentage of your salary and how much you personally contribute to the 401(k). You will find that there is quite a bit of crossover between the 401(k) and the 403(b). The major difference is that a 401(k) is offered by for-profit hospitals and other organizations as opposed to non-profits. Like the 403(b), this type of retirement savings account comes with a $22,500 pre-tax limit in 2023 with a $7,500 catch-up amount for individuals over age 50. Contributions cannot go over $66,000 per year ($73,500 for those over age 50) when combining pre-tax contributions, company match, and after-tax contributions. You may opt for a traditional 401(k) where funds are taxed upon withdrawal or a Roth 401(k) where funds are taxed upon the initial investment. Benefits: Can take loans against 401(k) Freedom to select your own investment vehicle to some extent Employer matching Ability to take withdrawals starting at age 55 for those who leave the workforce 457(b) Doctors who would like to save enough to retire early may want to consider using a 457(b) if their non-profit employer offers this type of account. Oftentimes, you will resort to this retirement savings account once you have maxed out contributions to a 403(b) but still want to save more for retirement. These accounts have the same pre-tax contribution limits as a 403(b), at $22,500 annually. The major benefit of choosing a 457(b) account is that you can access your funds earlier. As soon as you leave your position at the company, you can make withdrawals – regardless of your age. If you think that you may be in a position to retire early, then this is the retirement savings that you will want on your side. The only downsides to a 457(b) relate to what to do if you leave your position. This account tends to be more challenging to transfer if you switch employers. You may have to liquidate the account if you leave your position. Benefits: No 10% penalty for early withdrawals May be able to take out a loan against the balance Can be rolled into a Traditional IRA 401(a) This is a lesser-known type of retirement savings account, but many hospitals will put it on the table for physicians. If you have this type of account available to you, contributions to it are less flexible than others like the 401(k). Your employer will set mandatory contribution rules where they contribute a set percentage into your account. They may require employees to contribute a percentage of their pay as well, though this depends on the employer. No matter what the situation may be, these rules are fixed until the employer dictates otherwise. Unlike many of the other retirement savings accounts utilized by doctors, you will not have a Roth option. While you do have flexibility when it comes to selecting investments, you will not be able to withdraw money until you reach the age of 59 1/2, regardless of whether you decide to leave your position early. Benefits: Reduces your taxes on current income May be funded entirely by the employer or require contributions from both Control over how the money will be invested Withdrawal possible via a rollover or a lump-sum withdrawal Health Savings Account A health savings account (better known as an HSA) is another effective means of saving for the future for doctors. These are designed to be used to cover healthcare costs, but they can be great retirement savings accounts as well – especially since individuals often face additional health expenses as they age. The benefits of HSAs are that you can make contributions based on pre-tax dollars, your earnings grow without taxes, and paying for medical expenses with this type of account is tax-free. You can also invest the money in this account in a similar manner to a retirement account. In the upcoming tax year, HSA contribution limits have increased as they have with many of the other types of retirement savings accounts. If you intend to use the HSA for yourself only, you can contribute $3,850 per year or $7,750 for family coverage. Doctors over the age of 55 can make a catch-up contribution of $1,000. Not to mention, employers can make contributions too – and these do not count toward your income for the year. Benefits: Money compounds tax-free for future use Reduces taxes in retirement Ability to write a check to pay yourself back for medical expenses in retirement As a word of caution, HSAs are only available if you have an HSA qualified health insurance plan. Plan Your Retirement with Confidence No matter what retirement savings accounts are offered to you, you need the right support and expertise to know how to take advantage of them. Covenant Wealth Advisors specializes in retirement planning and advice for physicians. Work with our experts to get on track to retire early and on your own terms! Wondering if you’re on track to retire early? Download the Financial Planning Kit for Doctors Considering Early Retirement – a complete toolkit to help you gauge how far your retirement nest egg will go and the feasibility of early retirement. The Early Retirement Planning Kit includes: Your Cheat Sheet to Early Retirement The Physician’s Roadmap to Planning Early Retirement Checklist For Early Retirement & Retirement Retirement Lifestyle Goals Worksheet Grab your copy 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.

Charitable work is an important part of many people's lives, whether through financial contributions, dedicating time and talents, or a combination. It’s also a great way to establish your legacy and set a precedent for future generations. For high-net-worth families, it's essential to have a strategic plan, so you and the organization get the most out of your charitable gifts. Here are a few smart ways high-net-worth families can be more intentional about their giving , including qualified charitable distributions and donor-advised funds. First, Create A Charitable Giving Plan You should view charitable giving as another component of your overall financial plan. And if you're nearing retirement, charitable giving should always be integrated into your high net worth retirement plan because it impacts so many different areas of your finances. Like your retirement, estate, and taxes, creating a defined strategy that guides your giving is essential. Doing so brings more intentionality and purpose to the practice. One of the most significant parts of charitable giving is planning for it. Why? Because it forces you to think deeply and critically about the organizations you want to support, how much you want to give, and the most strategic ways to do so. To create your plan, you’ll need to consider the types of organizations you want to support. You might do this by yourself, with a spouse, or include other family members. Is your desired organization of choice a qualified 501c3? You’ll want to check to be sure so you can take advantage of tax benefits. Also, think about how much you plan on giving each year. The amount may fluctuate yearly, but if you have an idea in mind, you’re more likely to follow through and have something to plan with. That last part is key because charitable gifts affect your larger plan, namely regarding tax planning. It's also important to think about how you donate. Work to prioritize giving in the most effective ways possible—which is seldom writing a check or donating cash. You’ll want to ensure the ways you give accomplish two primary goals: Increase the value of the gift to the charity, and Lower your taxable income. Let’s explore some of those methods in more detail. Pro tip : It’s important to note that you don’t have to report your charitable gift to the IRS via the annual gift tax exclusion. The rules work differently for charitable contributions. An individual can deduct up to 30% of their AGI if gifting non-cash assets that were held for at least a year to a public charity. Donate Appreciated Assets As a high-net-worth individual, it’s important to understand the impact of properly managing gains and losses in taxable investment accounts. Harvesting losses to offset realized gains , the wash-sale rule, and maybe even strategic tax-gain harvesting during a low tax year are all things you or your advisor should understand. But if you are charitably inclined, did you know you have another tool that may be even more tax-efficient? If you have an investment with a significant unrealized gain, you might consider donating that appreciated security directly to your charity of choice. That’s because when you donate assets to charity, you aren’t required to pay taxes on any unrealized gain . You'd be able to give more than if you sold the asset, paid taxes on the gain, then donated what's left. Or, you can give the same amount you otherwise would have but avoid a tax bill. Either way, you and the charity are better off. Of course, the charity won’t have to pay any taxes when they sell the asset either! Gifting appreciated securities is an excellent way to give to causes you care about while managing your tax liability. This strategy is beneficial if you itemize deductions because you can deduct the donation's fair market value. Consider a QCD A qualified charitable distribution (QCD) is a donation from an IRA to a qualified charity. It allows you to donate up to $100k ($200k for a couple) without including the distribution in your taxable income. Unlike many tax benefits, you don't have to itemize to take advantage of a QCD. A QCD isn’t really a deduction but prevents the distribution from being included in your taxable income in the first place, so it's perfect for people taking the standard deduction. QCDs can count as your RMD too, so it can be a great way to manage taxes in retirement. By donating all or a portion of your RMDs, you reduce your income tax and can give more to charity. If RMDs push you into a higher tax bracket, consider donating a portion to keep you in a more modest tax bracket. But QCDs do come with drawbacks, and you shouldn’t complete one in a vacuum. In some cases, you might be better off taking the distribution from your IRA and offsetting the gain by donating an appreciated asset worth even more. Although the QCD is a simple strategy that can make a big impact, high-net-worth individuals often fail to implement it correctly. We see this all of the time when working with high-net-worth clients. To help, here’s a free cheat sheet on how to implement a QCD the right way . Working with a financial advisor is a great way to ensure you’re executing this tool correctly. Open and Contribute To a DAF A donor-advised fund is like a charitable investment account. To fund a DAF, you donate appreciated assets, cash, collectibles, real estate, or other investments into a designated account. The gift is considered “complete” once you fund the DAF. You can’t take the money back, but you get to direct the investments and choose when designated charities receive distributions. The money in the account grows tax-free, increasing what the charity ultimately receives. DAFs are a good way to bunch donations so you can itemize. Let’s look at an example of how bunching works. Suppose you plan to donate $20k per year to a charity, but your itemized deductions fall short of the standard deduction of $5k. You don’t get any tax benefit from your annual donation. If you’re able, you could contribute several years' worth of gifts to the DAF in a single year, say $60k, and then direct distributions to the charity over the next three years. Donating in this way allows you to clear the itemization hurdle and claim a larger deduction. DAFs can be anonymous, helping you maintain privacy, but there are some downsides to consider. They can be expensive to maintain with administrative, management, and investment fees and often have high account balance minimums. Why Giving Money Away, Now Will Help Your Estate Later While charitable giving plays an important role in your personal and financial strategy, it can also be helpful in estate planning. Estate taxes may not be high on your list of concerns right now, given that the federal estate exemption sits on a tall chair of just over $12 million (double for married couples). But, it will return to $5 million when the Tax Cuts and Jobs Act expires in 2026 unless new legislation is passed. Giving money intentionally provides tax benefits now, but it also sets you and your beneficiaries up for even more tax efficiency later. There are also several estate planning vehicles that can catalyze your charitable efforts, including a grantor retained annuity trust (a GRAT), charitable remainder or charitable lead trust, defective grantor trusts, and other irrevocable trusts that will streamline the wealth transfer process all while bringing your charitable giving legacy to the next generation. Keep in mind that these strategies are incredibly complex so you may benefit from the assistance of a certified fiduciary financial planner. Our wealth management firm specializes in helping high-net-worth families find financial freedom through comprehensive retirement planning. If you’d like to get started on a more tax-friendly giving strategy and ensure your gift is making as much impact as possible, give us a call . We’d love to help you. About Scott Hurt, CFP®, CPA Scott is a personal financial advisor with Covenant Wealth Advisors, a fee-only financial planning and investment management firm. He advises individuals age 50 plus on retirement income planning, investing, and tax planning strategies for a successful retirement. Schedule a call. 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. 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Social Security is an essential component of retirement income and it can comprise a significant portion of your cash flow. The Social Security Administration (SSA) estimates benefits replace about 40% of pre-retirement income, making it an integral cash flow planning resource. But all good things come with a cost. What cost do you have to consider with Social Security? Taxes. So, how is social security taxed ? Download our powerful tax, investment, and savings cheat sheet for more helpful tax tips and insights - new for 2021! The answer not only tells you how much of your Social Security check you get to keep but is itself a planning factor since there are strategies to help reduce taxes on your benefits. Keep reading to learn about the different tax components of social security. When Will Your Benefits Be Taxed? (And By How Much) You are subject to federal income taxes on your Social Security retirement, disability, and other benefits as soon as you start receiving them. But not all of your benefits are taxable. This area can get a bit more confusing. Your benefits are taxed as income—but you’re only responsible for the portion of your income the SSA deems taxable. So how much of your social security benefits does the IRS consider taxable? It depends on your other income sources. But the income thresholds for taxing Social Security benefits are relatively low. Do you and your spouse make more than $32,000 combined? If so, you will likely pay tax on some of your Social Security income. Most filers need to pay tax on benefits if they have multiple retirement income channels like a 401k, traditional IRA, Roth IRA, pension, real estate, earned income, and other investments. From a federal tax perspective, up to 85% of your benefits may be taxable. Some states also levy state taxes on Social Security income, but Virginia isn’t one of them. There are only 13 states that tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. We’ll look specifically at how your income is calculated in the next section, but for now, it’s helpful to absorb the basic idea that a portion of your benefits are taxed based on your sources of income. Retirees, understanding the fundamentals allows you to draw a critical connection: the importance of reducing your taxable income in retirement. There are planning decisions to reduce your income calculation to determine your Social Security taxes without reducing your actual income. To get started, plan ahead for what your tax bill might look like in retirement based on all of your income sources, including Social Security. Doing so helps you make choices now that can lower your taxes and avoid unexpected tax bills come tax season! How Does The Social Security Administration Calculate Your Income? Before we look at the formula, understand that it is somewhat complicated to calculate how much of your Social Security is taxable. We recommend using a reliable online calculator through a reputable source or contact your accountant to help you. You can also get a rough estimation by filling out an SSA worksheet . So how is your income calculated? The Social Security Administration uses a figure they call your “Combined Income.” Your combined income is a combination of: Your Adjusted Gross Income ½ of your Social Security benefit Nontaxable interest such as the interest you receive from municipal bonds. As an example, say your AGI (which you get from your tax return) is $75,000 and you receive $2,000 in tax exempt interest. You also get a Social Security benefit of $24,000. Your “Combined Income” is 75,000 + 2,000 + 12,000 = $89,000. So, how is that number used to figure out how much of your benefit is taxable? Assuming you're married filing jointly for the 2021 tax year if your combined income is: Between $32,000 and $44,000, you may have to pay income tax on up to half of your social security benefits. More than $44,000, up to 85 percent of your benefits may be taxable. In this example, your benefits are 85% taxable. Note that if your combined income is below the lower threshold of $32,000, then your benefits are not taxable. Your filing status influences these thresholds. Remember that your AGI in retirement is a function of how you take withdrawals from your accounts. You can actively influence it by being deliberate with your savings, thereby reducing taxes in retirement. For example, withdrawals from a Roth account do not count toward your AGI, while withdrawals from traditional tax-deferred accounts do. Roth conversions, taking partial withdrawals from different account types, and keeping some of your savings in a taxable account are great ways to reduce your future AGI. The bottom line is that effectively managing your income (tax bracket and tax rate) can help reduce the taxable portion of your Social Security benefits. Are Spousal and Survivor Benefits Taxed? As you are likely aware, there are more benefits associated with Social Security than simply individual retirement benefits, like spousal and survivor benefits. Are these benefits taxable as well? Yes. Spousal and survivor, as well as disability benefits, follow the same tax rules as your own benefits do. There is a technicality to bear in mind. When a surviving child collects Social Security benefits, those checks are taxable to them. In most cases, a minor child would not have much (if any) other income, so the formula often results in none of the benefits being taxable. How To Factor Social Security Income Tax Into Your Financial Plan You may not have a ton of control over how your Social Security is taxed. For many taxpayers, and most of our clients, taxation of Social Security benefits is unavoidable, especially if you and/or your spouse have a sizable pension. This is also true later in life when you start to have larger required minimum distributions from IRAs and other retirement accounts. However, you won't know unless you specifically consider it in your plan. Social Security plays an important role in your retirement plan, so maximizing every dollar you can is only a good thing. Factor Social Security taxes into your retirement income plan and see if you can insulate other areas with tax-efficient measures like maximizing Roth accounts, asset location, tax-loss harvesting , or other ways to reduce your AGI. Contact us to see if we can help you reduce the taxes on your Social Security benefits as part of a comprehensive retirement income plan. We're passionate about proactive tax planning at Covenant Wealth Advisors and will work with you and your tax professional to create a plan that maximizes every dollar possible. Disclosures Founded in 2010, Covenant Wealth Advisors is a fee-only financial planning and investment management firm located in Richmond and Williamsburg, VA. We specialize in helping individuals age 50 plus design, execute, and protect a personalized financial plan for retirement. Contact us to see how we can help you enjoy retirement without the stress of money. 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.

You've worked hard for your money. Now it's time to enjoy it. Finding the best investments for income in retirement will be paramount to your success. Even with a investment review cheat sheet , making your money last won't be easy. According to the most recent longevity data from the Social Security Administration, a 50-year-old male can expect to live another 30 years, while a 50-year-old female can expect to live for 33 more years. At age 60, men and women can expect to live another 22 and 25 years, respectively. These statistics highlight the jarring reality that retirees will most likely need to sustain income for decades. Reaching retirement is a significant milestone and also a time of powerful financial and investment changes. One of those changes is converting your growth portfolio into an income portfolio. Download Now: Free Investment Portfolio Checklist So, what are the best investments for income in retirement? Here's what we'll cover to help answer that question: Overview Understanding Diversification ETFs and Low-Cost Index Mutual Funds Immediate Annuities Individual Bonds and Bond Funds Real Estate Investments Dividend Paying Value Stocks Small Company Stocks Conclusion Overview The best investments for income in retirement should help you create sustainable income for the rest of your life. Your investments should also help you maintain financial security. To accomplish these goals, you’ll need to construct an investment portfolio with different investments, each working to complement the other. Unfortunately, there is no single investment that will solve your retirement income problems. After helping people invest for nearly twenty years, I know this from experience. The good news is that once you know what you're trying to accomplish, finding the best investments gets a little easier. While every situation is different, each investment you select should serve as a building block to improve your overall portfolio in the five areas below: Risk Return Cost Taxes Income For example, ask yourself the following questions: How does the investment I'm considering help me better manage the risk in my portfolio? How does the investment I'm considering help me get the returns I need? How does the investment help reduce my costs? Is the investment tax efficient? How does the investment help my portfolio create the income I need to maintain my lifestyle? Remember, no investment is perfect for all situations. But when combined together, the best investments for income in retirement should create a total portfolio that helps you create sustainable income for life. Understanding Diversification In your working years, growing your portfolio may be a primary concern. But when you retire, your attention often turns toward reducing risk and making your money last. That’s where portfolio diversification* comes into play. Diversification is one of the most critical elements of an investment strategy. It is a foundational building block of any investment plan. Whether you’re a novice investor or in your retirement prime, diversification is a mainstay for any long-term portfolio. So, when picking investments for retirement, diversification is a telling factor. Why does diversification hold so much value? Diversification seeks to manage your portfolio’s exposure to risk and has the potential to increase your portfolio's efficiency. An efficient portfolio has the potential to do two main things: Increase expected returns Reduce fluctuations in overall portfolio value While not guaranteed, proper use of diversification may accomplish these two objectives relative to a portfolio that is not adequately diversified. For example, did you know that all stocks from 1994 to 2020 had a compounded average annual return of 8.2% per year? However, if you exclude the top 25% of performers each year the return drops to -4.7%! That’s why diversification matters. If you aren't diversified enough, evidence suggests that there is a high probability that you can end up owning the worst performers. When it comes to diversifying your investments for income in retirement, remember that your fundamental risk is having too much exposure to a single investment. Before retirement, you have time to make financial adjustments or work a little longer if something happens. Your golden years don’t offer the same flexibility. What factors make a portfolio diversified? There are many factors that contribute to a well diversified portfolio including: # of holdings Exposure toward stocks, bonds, real estate, or guaranteed income sources Exposure toward value companies and growth companies Exposure toward large and small companies Exposure to guaranteed income sources such as pensions or social security. In practice, the best investments for income in retirement should contribute toward your overall game plan. When it comes to creating a retirement income portfolio, the sum of the parts is always more powerful than the individual components by themselves. In practice, we believe a diversified portfolio should contain thousands of stocks and bonds across many industries and sectors. Owning just a handful of stocks simply doesn’t cut it. You can achieve a diversified portfolio by being deliberate in your asset allocation (mix of investments) and selecting a mix of index funds, exchange-traded funds (ETFs), mutual funds, stocks, and bonds. Remember, your asset allocation should also consider your retirement age, risk tolerance, and retirement goals. Here is an example of an asset allocation we actually use with clients at Covenant Wealth Advisors. This portfolio may be great for some investors. But it may be terrible for others. It all depends on your personal goals, risk tolerance, tax situation, need for income, and more. Go global You should also pay particular attention to geographic diversification. International diversification should always be considered when selecting the best investments for retirement income. Why? Investors have a well-documented tendency to heavily invest in companies that are geographically close to them. This habit is called home-country bias. Unfortunately, "home bias" is as harmful to your retirement income portfolio as concentrating too much in any one industry or sector from a risk perspective. To consider how undiverse a portfolio composed primarily of investments in the United States is, just consider the size of the non-U.S. equity market. The chart below shows the world market capitalization of stocks across different countries. As illustrated in the chart below, the United States represented 57% of the global equity market capitalization in 2020. That’s certainly a lot for one country, but the other 43%, nearly half the opportunity, lies outside the United States! That means the best investments for income in retirement may also be located beyond U.S. borders. Remember, too, that the power behind diversification lies in how the investments relate to each other when creating a complete portfolio. When one investment lags, will there be another investment in the portfolio to pick up the slack? If all of your investments are going up at the same time, by definition, you aren't diversified! When one investment "Zigs" the other should "Zag". The point here isn’t to try and guess which investment will outperform another in a given year—you simply can’t. The point is to remember proper diversification and to hold broad exposure to many parts of the global economy. Now that you have a firm understanding of why diversification is so important in retirement, let’s talk about tax efficiency. Double Down on Tax Efficiency When it comes to choosing the best investments for retirement income, don’t forget about taxes! Once you reach retirement, managing your taxes is one of the best ways to get more out of your savings and increase their longevity. The investments you select, your withdrawal plan, and even timing strategic decisions like Roth conversions or tax-loss harvesting can all affect how much you will owe in income taxes. The secret? Keep taxes top of mind from beginning to end. Proactive tax planning is all about balance, so try to keep a multi-year perspective because sometimes it makes sense to increase your taxes one year to reduce them even more, the next. Your retirement income plan should consider tax-efficient investments. After all, it’s how much you earn on an after-tax basis that determines your true return in the first place! Now that you know the key considerations for a sound retirement income portfolio, let’s dive into the best investments for income in retirement. 1. ETFs and Low-Cost Index Mutual Funds ETFs make excellent retirement investment vehicles for creating a portfolio designed to provide you with adequate income. There are several reasons why ETFs are so valuable. ETFs generally have lower costs. Investment fees can reduce your total returns over time, so managing your fees should be a top priority both before and during retirement. ETFs are designed to operate more efficiently than comparable mutual funds, resulting in lower costs on average. These costs include the administrative expenses of running the fund, management fees, trading costs, and fees associated with marketing the fund. ETFs are generally tax-efficient. The ETFs structure also makes them extremely tax-efficient. Compared to mutual funds, it’s much easier to control your capital gains with an ETF. Why? Because ETFs do not pass capital gains through to individual investors. Instead, you only incur capital gains on ETFs when you sell them. This allows you to push more of your capital gains into favorable long-term tax brackets and time the realization of gains to take the best advantage of offsetting capital losses. ETFs offer better liquidity. Mutual funds can only be redeemed once per day at their net asset value, which must be tallied after the market closes. ETFs, however, trade just like stocks. This allows you to reallocate your portfolio in real-time rather than once a day. ETFs are great for diversification. For most indexes that exist, you can find at least one ETF that tracks it. This allows you to quickly build a portfolio with the broadest diversification. 2. Immediate Annuities In the finance world, there is a lot of confusion about annuities. That’s because there are many different types, each with different purposes, and they often get lumped together. In my experience, I’ve found that many annuities simply don’t make sense from a cost perspective. Additionally, they often tie up your money for years on end. Unfortunately, financial advisors often recommend them because of the fat commissions they receive after selling them to unassuming investors. Annuities can be very expensive, complex, and many have withdrawal penalties. For the most part, I don’t like annuities! However, not all types of annuities are unnecessarily complex and expensive. One particular type of annuity that you may consider as you allocate your investments for retirement income is an immediate annuity. When used appropriately, immediate annuities can bring a steady stream of income to you and your family. Unlike other annuities where you pay an insurance company and benefits are distributed at a much later date, you receive the benefit of an immediate annuity “immediately” after you purchase the product. In simple terms, with an immediate annuity, you give an insurance company a sum of money, and in exchange, that company provides a guaranteed income stream. Breaking down immediate annuities There are some decisions to make about your immediate annuity. First, you’ll have to decide on the type of payment you want to receive. There are two basic types of immediate annuity payments: fixed and variable. Fixed payments are a set dollar amount that doesn’t adjust over time. Variable payments will fluctuate based on the performance of some underlying benchmark such as an index. Depending on the company issuing the annuity, you may be able to choose an inflation adjustment option, but the tradeoff will be a lower starting payout. Another choice you’ll have to make is the period over which the annuity will provide an income stream. You can choose to have your annuity payout over your lifetime or for just a set number of years. A lifetime payment option makes sense when you want to guarantee a certain minimum amount of income for the rest of your life. A fixed period called a period certain option helps bridge a known time span such as the time between retirement and the start of a pension benefit. Shopping for immediate annuities As you shop for an immediate annuity, you’ll be comparing payout rates on different contracts. Pro tip: Don’t confuse the payout rate on an immediate annuity with a rate of return on investment. They are not the same thing. For example, a 5% payout on an annuity that costs you $100,000 will provide you with a $5,000 payment, but that is partially a return of the principal amount. The most important thing to remember about annuities is that they are insurance products. For the most part, i nsurance products are designed to protect, not invest. An immediate annuity is a supplementary tool for creating income in retirement, not for growing your retirement account. An annuity is suitable for ensuring that you have a known amount of income coming in. The tradeoff is that you may lose the flexibility you would have if you kept that money invested in stocks, bonds, and ETFs. An immediate annuity may be a good option for you if you need to guarantee a portion of your income. But, they aren’t great for everyone, which is why you should get professional advice. 3. Individual Bonds and Bond Funds Bonds are one of the primary asset classes of investments , so most investors are familiar with them. But there is much more to using bonds for retirement income than simply deciding on an allocation and receiving interest payments. Interest payments are nice and can certainly be a part of your income plan, but you can get a lot more out of your bonds with specific strategies designed to optimize your retirement income, manage taxes, and provide balance and liquidity in your retirement portfolio. Some investors question bonds because interest rates are so low as of 2021. Don’t fall into the trap of pursuing bonds for their yield alone. High-yield bonds, for example, have a high risk of default. In fact, we almost never recommend them to clients nearing retirement due to their high risk. The right bonds can be a powerful contributor to creating a stream of income in retirement. The various types of bonds Like annuities, there are different types of bonds and the differences matter. Corporations, state and local governments, and the U.S. Treasury all issue bonds. Some federal agencies, such as the FHA also issue bonds. Companies issue corporate bonds to finance their operations, research, and expansion. The interest you receive from corporate bonds is taxable, and the interest rate will usually be a little higher than comparable bonds of other issuers. State and local governments issue municipal bonds. These are often referred to in short as muni bonds. While the stated interest rate on muni bonds will be lower than comparable corporate bonds, it generally received tax-free. Because of that, the net income you keep could be higher on a muni bond relative to a taxable bond depending upon your federal and state tax rates. U.S. Treasury bonds are backed by the money-creating authority of the Federal government, making them the safest form of debt security. The interest is also not taxable at the state and local levels. Each type of bond can be purchased individually or through an ETF or mutual fund. In addition to the interest income that bonds provide, they also serve to protect your principal investment and provide a basis for rebalancing your portfolio to take advantage of market volatility. Let’s take a look at how this concept works. Bond strategies to consider When equity markets fall, your portfolio becomes mismatched. The more stable bond position in your portfolio, then, will need to be reallocated to reinstate your portfolio back to your appropriate allocation. This shift naturally causes you to buy stocks when prices are lower without timing the market. One strategy involving bonds that that some investors consider for retirement income planning is the bond ladder. With this strategy, you invest in bonds with staggered maturities so that a known amount of principal matures at regular intervals. For example, you may build a bond ladder to have bonds that mature every six months for ten years. This strategy is a way to guarantee that you have a certain amount of liquid savings available without having to worry about selling equities in a lousy market. Over the long term, the total return you receive from bonds has a higher likelihood of generating lower returns than what you’d get on stocks. But that isn’t the point of buying bonds. Three fundamental reasons drive the value for owning bonds in a retirement portfolio: Short-term, high-quality bonds are generally more stable than stocks. Bonds provide a source of income, tax-free in some cases. Bonds may provide a source of liquidity for major purchases in retirement, especially when the stock market is down. Bond ladders may be great for some investors. But, at Covenant Wealth Advisors we prefer using well-diversified mutual funds or ETFs for most of our clients. The reason is that it’s less expensive to purchase bonds through a mutual fund or ETF, and it’s easier to diversify the holdings. Here are some examples of low-cost, well-diversified bond fund investments: Fidelity Short-Term Bond Index (FNSOX) Vanguard Ultra-Short Term Bond Fund ((VUSFX) iShares S&P Short-Term National Muni Bond ETF (SUB) 4. Real Estate Investments Real estate is an asset class with unique characteristics that make it an attractive investment for retirement income. Let’s examine three special types of real estate investing along with their benefits and drawbacks. Rentals Rental real estate provides steady cash flow in the form of rent that will generally keep pace with inflation over long periods. It’s not risk-free, however. Tenants do not always pay rent on time, and you may have vacancies between tenants. You are also on the hook for damages and property updates, among other variables. If rental real estate is part of your income plan, make sure to account for these periods of lost rent in your projections. REITs Not everyone is interested in being a landlord in retirement. Real estate investment trusts, or REITs, allow you to invest in real estate without the need to manage the property and collect rent. REITs pull money together from many investors to invest in many properties, similar to how a mutual fund pools investor money to buy stocks. Not only do REITs handle all the administration and management required, but they are legally obligated to pay out at least 90% of their income to investors. REITS can be purchased through well diversified mutual funds and ETFs including: DFA US Real Estate Securities Portfolio (DFREX) Vanguard Real Estate ETF (VNQ) iShares US Real Estate Index (IYR) Reverse Mortgage If you own your home, then a reverse mortgage provides you with a way to access the equity you have built. A reverse mortgage is a loan that homeowners age 62 or older can take to access the value in their home. That value can be received via a lump sum, fixed payments, or a line of credit. Unlike a traditional mortgage, you don’t make regular payments on the reverse mortgage. The loan must be paid in full once you move out of the house or pass away. As the name describes, with a reverse mortgage, your lender sends you a monthly payment from your home’s equity. While flexible and convenient, a reverse mortgage effectively builds your debt balance up over time rather than paying it down. Should you use a reverse mortgage? Before you decide, you need to understand that it can be expensive and risky. You will have to pay fees associated with the reverse mortgage, and interest accrues on your debt balance. The origination fee alone could cost you as much as 2% of your home's value, and then there will be ongoing mortgage insurance. A reverse mortgage could also cause you or your heirs to lose the home. If you fail to upkeep your taxes and insurance, then the bank can foreclose on you. If your heirs cannot pay off the debt balance when you pass away, then the bank will sell the home to pay off the debt. Any remaining equity, if any, may go to your heirs. There are some powerful tax advantages to reverse mortgages as well. Reverse mortgages are not an investment per se, but they can be a great addition to your overall retirement income strategy If used the right way. 5. Dividend Paying Value Stocks Value stocks can often produce dividends for retirement income. You can either invest in dividend stocks directly or through a mutual fund or ETF. What are value stocks? Value stocks are companies that have low prices relative to other fundamentals such as book value or sales. Value stocks tend to be less “expensive” or undervalued and generally pay a higher dividend than their counterpart, growth companies. History has shown that value companies have outperformed growth stocks over time. For example, in the chart below, notice that value companies beat growth companies 81% of the time over 10-year periods from 1926 to December 2020. Past performance is no guarantee of future results, but understanding the performance of value over time can provide greater insights into strategy going forward. Diversification across value stocks is essential because there is some risk that companies may pause their dividend payments if business slumps and cash flow becomes tight. If you rely on the dividend from a single company, this could put a significant portion of your retirement income in jeopardy. Additionally, while value stocks have higher expected returns going forward, they also tend to be more volatile. You can mitigate the risk of having too few holdings by looking for mutual funds or ETFs that target a diversified bucket of value stocks. Examples of value funds include: DFA U.S. Large Value (DFLVX) DFA U.S. Core Equity 1 (DFQTX) Vanguard Value ETF (VTV) 6. Small Company Stocks The best investments for income in retirement would not be complete without including small company stocks. What are small company stocks? Small-cap stocks can be defined as companies located in the United States or abroad that represent less than 10% of market capitalization by size. Some say that small company stocks are stocks that have a market capitalization of $2 billion or less. It really depends on the state of the market at the time. Many investors investors invest in index funds that track the S & P 500. This popular benchmark represents the largest 500 companies in the United States. It’s important to own big companies. But a well-diversified income portfolio in retirement should also include exposure to smaller companies. Why? Similar to value companies, history has shown that small company stocks have historically outperformed their larger counterparts. While there is no stock that outperforms all the time, and there are certainly no guarantees, owning small company stock in your retirement income portfolio can help increase expected returns. Higher returns may help make your money last longer. Another reason you may consider small companies as an investment for your portfolio is that large companies don’t always perform well. For example, from 2000 to 2009 US large companies averaged a negative return over the ten year period known as the “lost decade.” Here are a few examples of small-company stock investments that are well-diversified, low-cost, and tax-efficient: DFA US Small-Cap Portfolio (DFSTX) Fidelity Small-Cap Index (FSSNX) Vanguard Small-Cap Index ETF (VB) How The Best Retirement Investments Fit Together Unfortunately, it's not enough to simply select the best retirement investments to create income in retirement. Your investments should be part of an overall asset allocation that matches your risk tolerance, income needs, return objectives, and tax situation. Your asset allocation is the most important factor when building a portfolio for retirement. Don’t just focus on chasing the investment that provides the most cash flow or the highest yield. When creating income in retirement, we prefer a total return approach . Total return investing places greater emphasis on diversification than investing strictly for yield. Income is generated from capital gains, dividends, and interest rather than just dividends or interest alone. The result is a retirement portfolio that has greater potential to make your money last longer in retirement. We believe that a total return approach is superior to seeking investments that strictly focus on maximum yield. Here is the difference between both approaches: Ultimately, chasing high yield investments alone can leave you undiversified, expose you to unnecessary and inefficient risks, and increase the taxation on your retirement income. Conclusion Choosing the best investments for income in retirement is a meticulous and comprehensive process. Before you choose any investments, you should determine the right asset allocation for you. This starts with assessing your risk tolerance, income needs, and spending requirements going forward. Investing for income in retirement is about finding the right balance. A total return approach that incorporates a diversified mix of index ETFs, immediate or fixed annuities, bonds, real estate investments, and dividend-paying value stocks, and small company stocks is an excellent way to sustain your income and protect your principal for the long term. But, it’s not the only way and every situation is different. With every moving piece, and as vital as it is to get it right, it’s worth having a qualified professional help you. A retirement financial advisor will have the knowledge and experience to identify opportunities to reduce your risk, build and maintain a diversified portfolio, and manage your distributions in the most tax-efficient way possible. Devote some time upfront to finding an advisor that is capable of guiding you through the best retirement possible. At Covenant Wealth Advisors, we can help you find the best investments for retirement, put together a plan, and manage it as you go, so you can focus on living in retirement. Do you need help selecting and managing the best investments for income in retirement? We would be glad to help you with your own investment plan. Call us today to get started. About Mark Fonville, CFP® Mark is a personal financial advisor and the President of Covenant Wealth Advisors. He advises individuals age 50 plus on retirement income planning, investing, and tax planning strategies for a successful retirement. 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 serving clients across the United States with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. *Diversification does not guarantee against loss. 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.

Effective investment management requires periodic rebalancing. Without it, you’ll execute something other than your intended plan. But what is it, and how often should you do it? This article will explain how portfolio rebalancing works and help you understand its benefits. While reading, you may wonder how these tips could impact your rebalancing plan. Consider requesting a free Portfolio Checkup with one of our financial planning experts today. What Is Portfolio Rebalancing? Before we get into what rebalancing is, let’s set the stage. When you create a portfolio, you (and your financial team) blend specific investments in a combination appropriate for your risk tolerance, risk capacity, time horizon, and goals. Here, you’re building a diversified portfolio that helps you reach your financial goals. At a high level, you can think about the appropriate investment portfolio as a mix between stocks and bonds. For example, a retiree might hold 60% equities and 40% fixed income in their retirement accounts. As markets move, each investment will react in different ways. Some markets may fall while others rise, or they may simply move at different rates. Over time, these differences will likely cause your portfolio to become out of balance, which can impact those measures we set at the beginning. For instance, the initial 60% stocks and 40% bonds portfolio might become 70% stocks and 30% bonds. This indicates that equities carry too much weight in that investment account. Regular rebalancing re-aligns your portfolio and helps keep it functioning at its best for you. But to do that, you’ll need to buy and sell assets to maintain appropriate portfolio allocations and asset mixes. Let’s bring some simple numbers into the mix. Say you have a $1 million portfolio. In this example, $600,000 would be the “right” amount to have in stocks. But after some market shifts, it has grown to $700,000. At the same time, your bond holdings should be $400,000 but are instead at $300,000. To correct this, you’d sell $100,000 worth of stock investments and buy $100,000 worth of bonds. While this example focuses on stocks and bonds, there is a lot of diversity in the asset classes you’re investing in, like exchange-traded funds (ETFs), target date funds, bond funds, index funds, mutual funds, and more. Your specific allocations depend on your goals and investment strategy. No matter your mix of investments, stock markets regularly shift and change and often experience volatility, so it may not be wise to check and rebalance your portfolio after every single market fluctuation. Trading too much can create excessive taxation and pull your investments even further out of whack. Instead, it’s helpful to set guardrails that help you know when your portfolio is “off” target. How Frequently Should You Rebalance? There is no single correct rebalancing frequency. What is suitable for you depends on your circumstances, including your level of knowledge, tax situation, and the tools you have available. However, regardless of how or when you choose to rebalance, you must set a regular time to evaluate your investments—monthly, quarterly, annually, etc.—to determine if a rebalance is necessary. You may or may not need to make any changes when you check, but unless you check, you won’t know. Regular monitoring helps you make more informed investment decisions. At Covenant, we don’t use time-based rebalancing. Instead, we track variance from your intended target and rebalance it as your portfolio mix falls outside of your ideal target asset allocation by a specific percentage. For example, if you have a 60/40 portfolio and we rebalance when your allocation drifts by 5%, we would rebalance any time the stock portion fell to less than 55% or increased to more than 65%. This strategy takes a more holistic approach to your ongoing asset allocation and larger investment goals. We also think it’s imperative to be flexible enough to allow for changes outside your predetermined windows should the markets drastically shift. Sometimes the immediate effect is severe enough to warrant that extra attention. A typical example is if the markets crash right as you retire. It may not make sense to rebalance after taking your income withdrawal if it would require you to sell stocks because you’d lock in the loss. What Benefits Come From Rebalancing? Rebalancing is necessary because it ensures your portfolio remains aligned with your short, medium, and long-term goals. Look at your accounts in combination with each other, as each account may have different goals. Suppose you have a portfolio invested for long-term goals like retirement income, but the stock allocation has fallen significantly. In that case, you may actually be holding a portfolio that is better suited for medium or short-term goals like purchasing a vacation home in the next 5 years. You shouldn’t invest for retirement the same way as a major upcoming purchase. Be specific, too. For example, consider whether you have raised enough cash for the quarter to cover monthly income distributions or future cash needs. If not, make sure you don’t sell the wrong investments and push your portfolio even further out of balance. Rebalancing check-ins also give you a chance to evaluate how your allocations are working for you. If you need to make larger strategic decisions about your allocation, this is a perfect time. For example, are there tax benefits like tax-loss harvesting that you can employ with your rebalance? What about net unrealized appreciation in retirement accounts as you start the transition into retirement? Before You Rebalance, Set A Strategy So you’ve decided that a regular rebalancing cadence is good. Great! But don’t start just yet. There are some cons to consider. Perhaps the most significant is that selling too frequently can increase potential capital gains exposure. This trade-off can be tricky at times. If your portfolio drifts too far out of balance, it may misalign with your goals. But if markets move fast and you rebalance too frequently, you’ll end up creating a good amount of tax drag with short-term capital gains. This is one reason we often recommend setting a range that you allow your portfolio to drift within before it triggers any trades. It would be best if you also considered the types of accounts that are more tax-friendly for rebalancing, like a 401k and IRA and not a taxable brokerage account. You may be able to adjust these accounts and leave your taxable accounts alone, thereby shielding the entire move from capital gains taxes. If you employ this strategy, remember to look at each account and its role in the larger financial picture. If you touch one account, will you need to adjust another? Would doing so significantly alter your broader plan? You also need to consider the transaction costs when buying and selling different assets. Get Rebalancing Help Remember, your goal when rebalancing is to maintain diversification and risk exposure long-term. The bottom line is there’s a lot to think about when it comes to rebalancing your investment portfolio. Do you understand how rebalancing can help your overall portfolio management but are not sure you want to tackle it on your own? Reach out to your financial advisor for help. Rebalancing is an important component of your personal finance health. Each of our clients has a rebalancing strategy that we monitor and implement. We can help you too. Start by requesting your free Portfolio Checkup . Broderick Mullins, MBA Broderick 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.