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In the novel of life, retirement represents a vibrant new chapter – one that women over 50 with substantial wealth are uniquely positioned to design. This isn't just about financial security; it's about crafting a future that resonates with your values, ignites your passions, and fulfills your dreams. As we delve into this comprehensive guide, we'll explore the distinct challenges and opportunities that affluent women face when planning for retirement, offering actionable strategies to help you create the retirement you've always envisioned. Before you keep reading, be sure to download our free retirement cheat sheets to potentially help you live the lifestyle you want in retirement. Key Takeaways Women face unique retirement challenges, including longer life expectancies and potential career interruptions A diversified investment strategy is crucial for preserving and growing wealth in retirement Healthcare planning, including long-term care considerations, is essential for a secure retirement Maximizing Social Security benefits can significantly impact retirement income Estate planning and philanthropic goals should be integrated into retirement strategies Continuous financial education and working with trusted advisors are key to retirement success Tax-efficient withdrawal strategies can help preserve wealth throughout retirement Emotional and psychological preparation is as important as financial planning for a fulfilling retirement Understanding the Unique Retirement Landscape for Women As a woman over 50 with over $1 million in savings and investments, you're in a unique position when it comes to retirement planning. While your financial resources provide a solid foundation, there are several factors that make your retirement journey distinct from your male counterparts. The Longevity Factor On average, women outlive men by several years. According to recent data from the National Center for Health Statistics, life expectancy for women in the United States is 79.1 years, compared to 73.2 years for men. This means that your retirement savings need to last longer, potentially spanning three decades or more. Megan Waters, CFP®  at Covenant Wealth Advisors in Richmond, VA, emphasizes this point: "Women need to plan for a longer retirement horizon. This isn't just about having enough money – it's about ensuring that your wealth continues to grow and sustain your lifestyle for potentially 30 years or more in retirement." This longevity advantage brings both opportunities and challenges. On one hand, it means more time to pursue passions, travel, and spend time with loved ones. On the other, it requires careful financial planning to ensure your resources can support you for a potentially longer period. Career Interruptions and the Wage Gap Despite progress in recent years, women still face challenges in the workplace that can impact their retirement savings. The gender wage gap persists, with women earning about 82 cents for every dollar earned by men , according to the Pew Research center. Additionally, women are more likely to experience career interruptions to care for children or aging parents. Even for high-earning women, these factors can result in lower lifetime earnings and potentially smaller retirement accounts. It's crucial to account for these realities in your retirement strategy. Consider the hypothetical case of Sarah, a successful executive who took a five-year break from her career to care for her children. Despite returning to work and quickly advancing, this gap resulted in missed opportunities for salary increases, promotions, and retirement account contributions. Sarah had to adjust her retirement strategy to make up for this lost time, increasing her savings rate and exploring catch-up contributions to her retirement accounts. The Confidence Gap Research has shown  that women, despite often making excellent financial decisions, tend to be less confident about their financial knowledge than men. This "confidence gap" can lead to more conservative investment strategies or a reluctance to actively manage one's finances. For wealthy women over 50, bridging this confidence gap is crucial. It involves not only continuing to educate yourself about financial matters but also recognizing and valuing your financial acumen and decision-making abilities. Building a Robust Retirement Strategy Now that we understand the unique challenges, let's dive into strategies to build a retirement plan that ensures financial security and aligns with your personal goals. 1. Optimize Your Investment Strategy For women over 50 with significant assets, a well-diversified investment portfolio is crucial. Your strategy should balance growth potential with risk management , considering your time horizon and risk tolerance. Consider the following: Diversification : Spread your investments across various asset classes, including stocks, bonds, real estate, and alternative investments. This helps mitigate risk and can provide more stable returns over time. Regular Rebalancing : Review and adjust your portfolio regularly to maintain your desired mix of investments or asset allocation. This disciplined approach helps you buy low and sell high, taking emotion out of the equation. Tax-Efficient Investing : Utilize tax-advantaged accounts and strategies to minimize your tax burden and maximize growth. This might include maximizing contributions to retirement accounts, considering Roth conversions, or exploring tax-efficient investment vehicles like municipal bonds. Sustainable Investing : Many women are interested in aligning their investments with their values. Consider incorporating Environmental, Social, and Governance (ESG) factors into your investment strategy if this is important to you. Matt Brennan, CFP®  at Covenant Wealth Advisors in Reston, VA, advises: "Don't let fear drive your investment decisions. A well-diversified portfolio that aligns with your risk tolerance can help you weather market volatility while still providing the growth needed to fund a long retirement." 2. Plan for Healthcare Costs Healthcare expenses can be one of the largest costs in retirement , especially for women who tend to live longer. According to Fidelity's 2023 Retiree Health Care Cost Estimate, a 65-year-old couple retiring in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement. Consider these strategies: Medicare Planning : Understand your Medicare options and consider supplemental coverage to fill gaps. Medicare Part A and B don't cover everything, and you may want to explore Medicare Advantage (Part C) or Medigap policies. And be sure to talk to an advisor about how to avoid a sneaky penalty called, IRMAA Long-Term Care Insurance : Evaluate whether long-term care insurance makes sense for your situation. With women more likely to need long-term care, this can be a crucial part of your retirement plan. Health Savings Accounts (HSAs) : If eligible, maximize contributions to HSAs , which offer triple tax advantages. Contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses. Wellness Initiatives : Investing in your health now can pay dividends later. Consider allocating resources to fitness programs, nutritious food, and preventative care. 3. Maximize Social Security Benefits Social Security can be a significant source of retirement income, even for wealthy individuals. The key is to develop a strategy that maximizes your benefits . Consider these factors: Delayed Claiming : For each year you delay claiming benefits beyond full retirement age (up to age 70), your benefit increases by 8%. This can result in a significantly larger monthly benefit. Spousal Benefits : If you're married, divorced, or widowed, you may be eligible for benefits based on your spouse's work record. Understanding these rules can help you maximize your total benefit. Earnings Test : If you plan to work in retirement, be aware of how your earnings might affect your benefits. After you reach full retirement age, there's no penalty for working while receiving benefits. Taxation of Benefits : Up to 85% of your Social Security benefits may be taxable, depending on your overall income. Consider strategies to manage your taxable income to potentially reduce the tax on your benefits. 4. Create a Sustainable Withdrawal Strategy Developing a withdrawal strategy that ensures your wealth lasts throughout retirement is crucial. The traditional 4% rule may not be appropriate for everyone, especially given longer life expectancies and current market conditions. Consider these approaches: Dynamic Withdrawal Strategies : Adjust your withdrawal rate based on market performance and personal circumstances. This flexible approach can help your portfolio last longer in various market conditions. Bucket Strategy : Allocate your assets into different "buckets" based on when you'll need the money. For example, you might have a short-term bucket in cash, a medium-term bucket in bonds, and a long-term bucket in stocks. Income Flooring : Ensure essential expenses are covered by guaranteed income sources like Social Security, pensions, or annuities. This provides peace of mind and allows you to be more flexible with discretionary spending. Tax-Efficient Withdrawals : Plan your withdrawals to minimize taxes. This might involve strategically withdrawing from taxable, tax-deferred, and tax-free accounts each year. 5. Estate Planning and Philanthropy For many wealthy women, leaving a legacy is an important part of retirement planning. This might include providing for family members, supporting charitable causes, or both. Consider these elements: Updated Estate Documents : Ensure your will, trusts, and beneficiary designations reflect your current wishes. Review these documents regularly, especially after major life events. Gifting Strategies : Explore options for tax-efficient gifting to family members or charities. This might include annual exclusion gifts, direct payments for medical or educational expenses, or more complex strategies like grantor retained annuity trusts (GRATs). Charitable Remainder Trusts : These can provide income during retirement while supporting your favorite causes. They also offer potential tax benefits. Family Education : Consider setting up structures to educate younger generations about wealth management. This can help ensure your legacy is preserved and your values are passed down. 6. Continue Your Financial Education Staying informed about financial matters is crucial for managing your wealth effectively in retirement. Attend seminars and online retirement classes , read reputable financial publications, and consider working with a financial advisor who can provide personalized guidance. Some areas to focus on include: Tax Law Changes : Stay informed about changes in tax laws that could affect your retirement income and estate plan. Investment Trends : Understand new investment opportunities and how they might fit into your portfolio. Retirement Research : Keep up with the latest research on retirement spending patterns and longevity to inform your planning. 7. Prepare Emotionally for Retirement Retirement is not just a financial transition; it's a major life change that requires emotional and psychological preparation. For many women, particularly those who have had successful careers, retirement can bring questions of identity and purpose. Consider these strategies: Visualize Your Retirement : Spend time thinking about what you want your day-to-day life in retirement to look like. What activities will fill your time? What goals do you want to achieve? Maintain Social Connections : Plan for how you'll maintain and build social connections in retirement. This might involve joining clubs, volunteering, or taking classes. Consider a Phased Retirement : If you're not ready to fully retire, explore options for a phased retirement. This could involve reducing your work hours gradually or taking on consulting work. Explore New Passions : Retirement can be an opportunity to explore interests you didn't have time for during your working years. Consider allocating resources to new hobbies or learning experiences. 8. Plan for Potential Cognitive Decline While it's not pleasant to think about, it's important to plan for the possibility of cognitive decline in later years. This is particularly crucial for women, given their longer life expectancies. Consider these steps: Advance Directives : Ensure you have healthcare and financial powers of attorney in place. Simplify Finances : As you age, consider simplifying your financial life to make it easier to manage. Communicate with Family : Have open discussions with family members about your wishes and the location of important documents. Consider Long-Term Care Options : Research long-term care options in your area and consider how you would pay for care if needed. Frequently Asked Questions How much should a 60-year-old woman have saved for retirement? While there's no one-size-fits-all answer, many financial experts suggest having 8-10 times your annual salary saved by age 60. However, for high-net-worth individuals, your target may be higher depending on your desired lifestyle in retirement. It's crucial to work with a financial advisor to determine a personalized savings goal based on your specific circumstances and aspirations. What is a good retirement age for a woman? The ideal retirement age varies based on individual circumstances, including financial readiness, health, and personal goals. For many women, retiring between 65 and 70 can maximize Social Security benefits and allow for additional saving years. However, if you're financially prepared and have a clear vision for your retirement, there's no reason you can't retire earlier. The key is to ensure that your financial resources can support your desired lifestyle for potentially 30 years or more. How does the 4% rule work in retirement? The 4% rule suggests withdrawing 4% of your retirement savings in the first year of retirement, then adjusting that amount for inflation each subsequent year. For example, if you have $1 million saved, you would withdraw $40,000 in your first year of retirement. While this can be a useful starting point, it may not be appropriate for everyone , especially given current market conditions and longer life expectancies. Many financial advisors now recommend a more flexible approach, adjusting withdrawal rates based on market performance and personal circumstances. How can I catch up on retirement savings if I'm behind? If you find yourself behind on retirement savings, there are several strategies you can employ: Maximize catch-up contributions: Once you reach age 50, you can make additional "catch-up" contributions to your 401(k) and IRA. Reduce expenses: Look for areas where you can cut back on spending to increase your savings rate. Delay retirement: Working a few extra years can significantly boost your retirement savings. Explore part-time work in retirement: This can provide additional income and allow your savings to continue growing. Reassess your investment strategy: Ensure your portfolio is appropriately balanced for growth while managing risk. How do I balance enjoying my wealth now with saving for retirement? Striking a balance between current enjoyment and future security is a common challenge for wealthy individuals. Here are some strategies: Define your priorities: Clearly identify what's most important to you both now and in the future. Create a comprehensive financial plan: This should include both your current lifestyle needs and your retirement goals. Request a free retirement plan from our firm, here. Set aside "fun money": Allocate a specific amount for current enjoyment, guilt-free. Focus on experiences: Often, experiences provide more lasting happiness than material possessions. Consider the long-term impact: Before making large purchases, consider how they might affect your long-term financial security. See How Our Financial Advisors Can Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Conclusion Retirement planning for wealthy women over 50 is a multifaceted process that goes beyond simply saving money. It involves strategic investment management, healthcare planning, tax optimization, and aligning your financial decisions with your personal values and goals. By understanding the unique challenges you face and implementing the strategies we've discussed, you can create a retirement plan that not only provides financial security but also allows you to pursue your passions, leave a lasting legacy, and enjoy the retirement you've worked so hard to achieve. Remember, retirement planning is not a one-time event but an ongoing process. Stay informed, remain flexible, and don't hesitate to seek professional guidance when needed. Your wealth provides you with options, but it's your vision and planning that will turn those options into a fulfilling retirement reality. Do you want to retire without running out of money? Contact us today for a free retirement assessment  to see how we can help you. Author: Megan Waters, CFP ® Megan Waters is a CERTIFIED FINANCIAL PLANNER™ professional and Financial Advisor at Covenant Wealth Advisors. Megan has over 14 years of experience in the financial services industry and graduated from the Honors College at the College of Charleston with a BS in Economics and a minor in Environmental Studies. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER ™ professional  with the assistance of AI.  No  advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Are you holding company stock in your retirement plan? If so, Net Unrealized Appreciation (NUA) could be your key to significant tax savings. This often-overlooked strategy allows you to potentially pay less in taxes on your employer stock when you retire, putting more money in your pocket when you need it most. This guide will walk you through much of what you need to know about NUA: what it is, how it works, and most importantly, how to use it to optimize your retirement savings. Whether you're years from retirement or actively planning your exit strategy, understanding NUA could make a substantial difference in your financial future.   If you want help understanding the best NUA strategy for your situation, talk to an experienced financial advisor by requesting a free personalized retirement assessment . Table of Contents: What is Net Unrealized Appreciation? How NUA Works in Retirement Plans Navigating NUA: Strategies and Considerations FAQs about Net Unrealized Appreciation What does net unrealized appreciation mean? How does NUA work in a 401k? How to report net unrealized appreciation? What are the disadvantages of a NUA? Conclusion What is Net Unrealized Appreciation?   Net unrealized appreciation (NUA) is the increase in value of employer stock held in a tax-deferred retirement savings plan like a 401(k). It represents the difference between the stock’s cost basis (what you originally paid) and its current market value.   For example, if you bought company stock at $20 per share through your 401(k), and now it’s worth $60, your NUA is $40 per share. Grasping this “hidden” gain within your retirement savings is crucial for tax planning. This allows investors to understand the advantages of appreciated employer stock. Such appreciated employer stock allows investors to strategize according to the rules available for this asset class when thinking about different investment strategies and capital gains implications during wealth management decisions for federal taxes. How NUA Works in Retirement Plans   When it comes to company stock in your 401(k), the IRS offers a special tax advantage through NUA that could save you thousands on taxes in retirement. While most 401(k) withdrawals are taxed as ordinary income (which could be as high as 37% in 2024), NUA allows you to pay potentially lower capital gains rates on a portion of your employer stock's value. However, timing is crucial - this tax break only applies when you take a lump-sum distribution or rollover of your entire 401(k) balance at once.   Like all 401(k) investments, your company stock grows tax-deferred while it stays in your retirement account. But here's where NUA offers a unique advantage: Instead of paying high ordinary income taxes on all your gains when you withdraw, you can potentially pay lower capital gains rates on your stock's appreciation. There's one crucial catch - you must take all your company stock out at once as part of a complete distribution or rollover of your retirement account. This isn't a strategy you can use piecemeal; it's an all-or-nothing decision that requires careful planning.   Let's break down how NUA taxation works: When you move your company stock from your retirement plan to a brokerage account, you'll pay taxes in two stages: Immediate Tax: You'll pay ordinary income tax (your regular tax bracket) on what you originally paid for the stock (the cost basis). Future Tax: When you eventually sell the stock, you'll pay the lower long-term capital gains rate (typically 15-20%) on all the appreciation that occurred while the stock was in your retirement account. For example, if you paid $10,000 for stock now worth $50,000: You'll pay ordinary income tax on the $10,000 basis immediately You'll pay long-term capital gains tax on the $40,000 appreciation when you sell Important Considerations: You must take all your retirement account assets out at once to qualify for NUA treatment If you don't follow the NUA rules exactly, all gains will be taxed at your higher ordinary income rate If you're under 59½, you may face a 10% early withdrawal penalty on the cost basis State taxes may also apply, depending on where you live Given the complexity of NUA rules and their significant tax implications, many investors work with a financial advisor to: Determine if NUA makes sense for their situation Time the distribution properly Understand potential penalties and exemptions Evaluate alternatives like IRA rollovers This decision requires careful analysis of your personal tax situation, retirement goals, and overall financial plan. For the most current rules and requirements, refer to IRS Publication 575 or request a free retirement assessment from Covenant Wealth Advisors . Navigating NUA: Strategies and Considerations   Investors use several approaches based on factors like income, potential gains, and available tax treatments for retirement savings plans and their distribution options including any Rollover IRA considerations.   Here’s a breakdown of common methods:               Rollover to IRA The simplest option is moving your company stock into a traditional IRA. While this keeps everything tax-deferred for now, you might pay more in taxes later. Here's why: Pros: No immediate taxes due Continues tax-deferred growth Simplifies your retirement accounts Cons: Loses the special NUA tax break All future withdrawals taxed as ordinary income (potentially 37%) 10% early withdrawal penalty if you take money out before age 59½ Think of it like trading a tax discount tomorrow for convenience today. While rolling over to an IRA is straightforward, it means giving up the chance to pay lower capital gains rates (typically 15-20%) on your stock's appreciation. 2. Lump-Sum Cash Out with NUA Election This strategy involves taking all your company stock out of your retirement plan at once and selling it for cash. While potentially powerful, timing and execution are critical. How it Works: Take a complete distribution of your company stock Sell the stock for cash Pay taxes in two stages: Now: Ordinary income tax on what you originally paid for the stock Later: Lower capital gains tax on the stock's appreciation when sold Key Benefits: Potentially lower overall taxes through capital gains rates Immediate access to funds Flexibility to reinvest as you choose Important Cautions: Must distribute ALL retirement plan assets at once to qualify Triggers immediate tax bill on your cost basis 10% early withdrawal penalty if under age 59½ You have just 60 days to decide whether to reinvest in an IRA Missing deadlines or steps could disqualify NUA treatment For example: If you paid $10,000 for stock now worth $50,000: Pay ordinary income tax now on $10,000 Pay lower capital gains tax on $40,000 when you sell Add 10% penalty on $10,000 if under 59½ 3. Lump-Sum In-Kind Distribution to Brokerage Account with NUA Election In our opinion, the most flexible NUA strategy involves moving your company stock directly to a regular brokerage account while keeping the shares intact. This approach gives you control over when to sell while preserving the tax advantages of NUA. How It Works: Instead of selling your shares immediately, you transfer them "in-kind" to a regular brokerage account. This means you keep the actual shares rather than converting them to cash. You'll need to take all your retirement plan assets out at once to qualify for NUA treatment, but you can then hold the stock as long as you wish. The Tax Timeline: When you transfer: Pay ordinary income tax on your original purchase price When you eventually sell: Pay lower capital gains rates on the stock's appreciation Any additional gains after transfer: Taxed based on how long you hold the shares Key Benefits: Maximum control over timing of stock sales Potential to capture additional market gains Flexibility to sell shares gradually over time Opportunity for tax-loss harvesting with other investments Important Considerations: Must distribute your entire retirement plan balance at once Immediate tax bill on the cost basis 10% early withdrawal penalty if under 59½ Concentrated position risk from holding single-stock May face state taxes depending on your location This strategy works best for those who: Believe in their company's long-term prospects Can afford to pay the immediate taxes Want to maintain control over their investment timing Are comfortable managing a brokerage account   FAQs about Net Unrealized Appreciation   What does net unrealized appreciation mean?   Net unrealized appreciation (NUA) is the difference between the cost basis of company stock in a retirement plan and its market value when distributed.   How does NUA work in a 401k?   When taking a lump-sum distribution of company stock from a 401(k), you can elect NUA treatment. This taxes the NUA at long-term capital gains rates upon sale, not as ordinary income.   The cost basis is still taxed as ordinary income at distribution.   How to report net unrealized appreciation?   NUA is reported on IRS Form 1099-R. Box 1 on this form will show the gross amount distributed from the retirement plan, with the taxable amount of this distribution shown in Box 2a. The NUA amount (the cost basis), which is essentially the difference between Box 1 and Box 2a, is reported in Box 6.   The NUA is generally taxed when the stock is sold according to rules pertaining to such income/gains. IRS Publication 575 provides details on reporting this amount.   What are the disadvantages of a NUA?   NUA requires a lump-sum distribution, meaning you withdraw all employer stock at once. The cost basis is taxed as ordinary income immediately. You'll also assume more market risk by holding a concentrated stock position and may forfeit the account protection afforded within a qualified retirement plan.   See How Our Financial Advisors Can Help You Retire With Confidence Retirement Planning  - Optimize your income and create a roadmap for a secure retirement. Investment Management  - Personalized investing to grow and protect your wealth. Tax Planning  - Identify tax strategies including Roth conversions, RMD management, charitable giving and more... Conclusion   NUA provides a valuable opportunity for managing your wealth tax-efficiently during retirement. You can maximize this tool by learning how NUA works, exploring different strategies, and consulting with a financial advisor.   By including NUA in a well-defined financial plan, you gain more control over your retirement assets, minimize your tax burden within the bounds of any current laws that may apply during such year the income is received or any gains recognized and assets sold or amounts equal to gains withdrawn, ultimately improving your after-tax income in retirement. Consider the implications of a traditional IRA and Roth IRA as those have different income tax and gain tax treatments under relevant IRS publications that could apply depending on each person's specific needs for asset distributions and any tax planning and wealth management.   Do you want to retire without running out of money? Request a free retirement assessment today! About the author: Scott Hurt, CFP®, CPA Senior Financial Advisor Scott is a Financial Advisor for Covenant Wealth Advisors , a CERTIFIED FINANCIAL PLANNER™ practitioner and a Certified Public Accountant (CPA). He has over 17 years of experience in the financial services industry in the areas of financial planning, tax planning, and investment management. Schedule your free retirement assessment today   Disclosures:  Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER ™ professional  with the assistance of AI.  No  advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Ever find yourself wondering why adults often seem glued to news about the stock market, especially during tough economic times? Well, imagine the stock market as a giant mood ring for the economy. When things are going well, stock markets shine bright with optimism. But when a recession hits, that ring can turn stormy and unpredictable. For example, the chart below illustrates consumer sentiment since 1980. Consumer sentiment refers to the overall attitude of individuals toward the economy and their personal financial situation. Notice how consumer sentiment declined drastically in 2008 and 2020 when recessions hit the United States. This chart reports three measures of consumer sentiment from the University of Michigan Surveys of Consumer Sentiment. The index of current economic conditions (ICC) is constructed from questions regarding individual's financial well being relative to a year ago and individuals perception timing of large purchases for their home such as an appliance. The index of current economic conditions (ICE) is derived from expectations for individual's financial situation in one year, expectations for the country as a whole in one year, and expectations for volatility in the next five years. The index of consumer sentiment is derived from all of the components of the ICC and the ICE. That’s what we’re diving into today: the whirlwind world of the stock market during a recession. You see, a recession is not just a word that economists throw around; it’s a period when the economy slows down, and things like jobs and money become a bit harder for everyone to hold onto. During these times, the stock market becomes a roller coaster of highs and lows, making it a fascinating, if somewhat nerve-wracking, spectacle to observe. But why does this happen? And what does it mean for you and your retirement? That’s exactly what we’re going to explore. We’ll break down the complex dance between recessions and stock market behavior into bite-sized, easy-to-understand pieces. Think of it as decoding a secret language of money and markets, where every twist and turn tells us something about the health of the economy. Armed with this knowledge, you’ll not only be able to follow along at the next cocktail party, but you’ll also understand the signs and signals of economic change yourself. So, buckle up! We’re about to embark on a journey through the ups and downs of the stock market during a recession, and by the end, you’ll be more informed about this important aspect of our economy. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Understanding Recessions Definition of a recession and its causes A recession is like a cold that the economy catches, leading to a significant decline in economic activity. Imagine the economy as a bustling city that suddenly slows down, with fewer people shopping, working, and investing. Technically, a recession is defined as two or more consecutive quarters of negative economic growth. The National Bureau of Economic Research (NBER) describes it as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” But what causes this economic slowdown? Think of it as a domino effect. It often starts with decreased consumer spending—when people tighten their belts, businesses see less revenue. This can lead to increased unemployment as companies cut back on staff to save costs. Additionally, a decline in international trade can exacerbate the situation, as global economic ties mean that trouble in one part of the world can ripple outwards. All these factors contribute to a decline in economic activity, creating a perfect storm that we call a recession. Historical examples of recessions and their effects on the economy History has shown us that recessions can leave a lasting mark on the economy. Take the 2008 global financial crisis, for example. Triggered by the housing market collapse, this recession led to widespread job losses and a significant decline in stock prices. The S&P 500 index, a key indicator of stock market performance, plummeted by over 38% in 2008 alone. It was a stark reminder of how interconnected and fragile our financial systems can be. Another notable example is the 2001 dot-com bubble burst. Fueled by speculative investments in internet-based companies, the bubble eventually burst, leading to a sharp decline in stock prices and a slowdown in economic growth. Similarly, the 1990 recession, caused by a combination of factors including high interest rates and reduced consumer spending, saw the stock market decline by over 20%. These historical examples highlight the profound impact recessions can have on the economy. They serve as a reminder that while economic growth can be robust, it is also susceptible to significant downturns. Understanding these past events can help us better navigate future economic challenges. How Does a Recession Affect Retirees? In the world of economics, a recession  takes center stage, casting its shadow on financial landscapes. Defined as a big decline in economic activity, a recession marks a period of reduced production and higher unemployment. It’s like a storm that sweeps through, leaving few sectors untouched. As the economic winds shift, the impact on financial markets can be seismic. Picture the stock market as a sailboat navigating unpredictable seas. There are many reasons why a recession takes place, and understanding the source of a recession has been a focus point for economists. One example is the Great Recession that followed the housing bubble  of 2007. The housing market  was surging with high prices, speculative investments, and a spike in subprime mortgage lending. As the bubble expanded, the inevitable burst sent shockwaves through the economy. This triggered the 2008 Great Recession. This recent history is a stark reminder that economic euphoria can quickly transform into a sobering downturn. The housing market crash  serves as an example of how connected markets can amplify a recession, leaving lasting scars on economies and households alike. However, the bright side is that recessions tend to be relatively short-lived compared to periods of economic growth. For example, consider the graph below. This chart shows the S&P 500 price index with the start of bull and bear markets adjusted to zero. The returns for each period show the relative price returns from the start of the bear or bull market to the end of the market cycle. Bear markets are defined as declines from the prior highest market level that extend beyond -20%. Subsequent bull markets begin from each bear market bottom. Date Range: January 3, 1956 to December 6, 2024. Source: Clearnomics, Standard & Poor's You can see that bear markets – measured by 20% dips in the stock market – typically occur once a decade and usually only last for a year or two. On the other hand, bull markets (periods of extended growth) tend to last for years at a time. In fact, Americans enjoyed around a decade of uninterrupted stock market growth during the 2010s–until the Covid-19 pandemic reversed the market briefly. Now, let’s zoom in on a group that’s extra sensitive to these downturns: retirees. For those who have bid farewell to the daily grind, the safety of their financial nest egg becomes paramount. Understanding stock market behavior can help retirees who rely on their investments to fund their lifestyle in retirement. The ebb and flow of the market can impact retirement savings, pension funds, and an investment portfolio. As such, retirees should take control of their finances to weather the storms of a recession and ensure a smooth journey throughout retirement. How the Stock Market Reacts During a Recession Here’s how the stock market may react during challenging economic times: Price Plunge:  One of the most immediate and noticeable reactions is the nosedive of falling stock prices. Investors, gripped by fear and uncertainty, engage in a frenzied sell-off, causing a sharp decline in stock prices. Volatility Takes Center Stage:  If the stock market were a rollercoaster, a recession would be the loop-de-loop. Volatility becomes the name of the game, with daily price swings resembling heart-stopping twists and turns. Sector-Specific Impact:  Not all sectors are created equal, and a recession highlights differences. Defensive sectors (like utilities and healthcare), may weather the storm better than cyclical sectors (like manufacturing and finance). Flight to Safety:  Investors, like migratory birds seeking warmer climates, often flock to “safe-haven” assets during a recession. While not guaranteed, government bonds and other low-risk investments such as cash and money markets have historically become the go-to choices to preserve capital. While these trends are common during recessions, the stock market is complex. Many factors can influence its behavior. Investors, therefore, often find themselves navigating uncertain waters. Common Challenges Faced by Retirees in a Recession Retirees can face many challenges during a recession. Their financial well-being is often tied to the performance of financial markets. Here are some common challenges, along with examples to illustrate the impact: Portfolio Value Decline: Challenge:  Retirees can have a large portion of their savings invested in the stock market. During a recession, the market may experience a downturn, leading to a decline in the value of investment portfolios. Example:  Imagine a retiree who had diligently saved for years, only to see the value of their retirement portfolio  drop due to a market downturn. This can jeopardize their planned income and lifestyle. Growth stocks, which are characterized by high potential for above-average earnings growth, often struggle during economic downturns, further impacting retirees' investment  portfolios. Reduced Income from Investments: Challenge:  Retirees often rely on investment income, such as dividends and interest. During a recession, companies may cut dividends, and interest rates may decrease. Example:  A retiree counting on steady dividends from their stocks may find their income stream reduced if companies slash dividends to conserve cash in a downturn. Impact on Pension Funds: Challenge:  Some retirees receive pension income, which can be affected by the financial health of the companies or entities providing the pensions. Economic downturns can strain pension funds. Example:  While rare, a retiree relying on a pension from a struggling company may face the risk of pension cuts. Healthcare Costs and Inflation: Challenge:  Healthcare expenses tend to increase with age, and retirees may face rising medical costs during a recession. Example:  Consider a retiree on a fixed income trying to cover healthcare expenses. If medical costs rise or inflation outpaces their income growth, maintaining the same standard of living becomes challenging. Impact on Real Estate Values: Challenge:  Many retirees own real estate as an investment or as their primary residence. A recession can lead to a decline in property values, affecting the overall net worth of retirees. Example:  A retiree planning to sell their home to fund their retirement may face difficulties if the housing market leads to a lower-than-expected sale price. Navigating these challenges requires careful financial planning. Retirees may find it beneficial to work with financial advisors  to develop strategies that help reduce the impact of recessions on their financial well-being. Strategies for Retirees to Navigate Economic Downturns In the tumultuous waters of a recession, navigating the stock market by focusing on what you can control may help protect your money when you need it most. Here are a couple of strategies that can serve as a foundation in these challenging times: 1. Diversification and Asset Allocation: One fundamental pillar of weathering a recession is a well-diversified portfolio. Try to avoid putting all your financial eggs in one basket. Diversify across different asset classes, such as stocks, bonds, and cash equivalents. While stocks are volatile, government bonds can act as a more stable anchor. Strategic asset allocation, based on risk tolerance and financial goals, can also help create a resilient portfolio. Many investors think they are diversified when they are not. We’ve seen this first hand at Covenant Wealth Advisors . 2. Regular Portfolio Checkups and Rebalancing: The market is a dynamic force. That’s why it’s good to conduct regular checkups on your investment portfolios. Assess whether the asset allocation (your mix of stocks, bonds, cash, etc…) still aligns with your long-term goals and risk tolerance. Rebalancing can help during a recession, as market movements can skew the original allocation. This chart shows the current composition of a stock and bond portfolio that was created in 2009, but never rebalanced. Stocks and bonds are represented by the S&P 500 and Bloomberg Aggregate Bond Index, respectively. The white dotted lines show the starting allocation. Source: Clearnomics, LSEG Selling some assets that have performed well and reallocating funds to underperforming or more stable investments can help maintain a balanced portfolio. 3. Secure Income Streams: Retirees should explore income-generating investments, such as dividend-paying stocks and bonds. Dividends can provide a steady cash flow, even when other capital gains  are elusive. Also, consider investments less prone to market volatility, like high-quality bonds. This can ensure a consistent stream of income during market uncertainties. Pro tip: Consider avoiding an over concentration of your portfolio in only dividend paying stocks. Too much exposure to dividend stocks can create additional problems. In times of economic uncertainty, having a financial lifeboat is essential. Maintaining an emergency fund  with enough cash to cover several months’ worth of living expenses is a wise move. This fund acts as a safety net, allowing you to avoid selling investments during market downturns . Despite the general trend of declining corporate earnings during recessions, there are instances where certain recessions induced by inflation or Federal Reserve rate hikes can yield positive stock market returns . 5. Long-Term Perspective and Behavioral Discipline: Investing is a marathon, not a sprint. Try to maintain a long-term perspective and resist the urge to make impulsive decisions based on short-term market moves. Emotional discipline is key during market downturns; panic selling or making drastic changes to the investment strategy can have lasting consequences. For example, this chart tracks the performance of four portfolio allocations: 100% stocks, a 60%/40% stock bond split, 40%/60% stock bond split, and a 100% bonds. The chart is reindexed to the beginning of 2008 to show performance relative to the Great Recession. The dotted vertical lines show the annotated performance events. The 100% stock portfolio  is represented by the S&P 500, while the other three use iShares U.S. Bond indices before expenses and fees. Staying focused on long-term financial goals and trusting your retirement plan  can help you weather the storms of a recession with greater resilience. These strategies, in alignment with individual financial circumstances, may empower you to navigate the stock market in a recession and steer your financial ship toward calmer waters. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... What Happens to the Stock Market in a Recession? In this article, we've uncovered strategies for navigating a recession. From diversification and regular portfolio checkups to securing reliable income and maintaining cash reserves , you now have a toolkit to navigate the financial storms. As the economy evolves, staying informed is a retiree's compass. Keep abreast of market trends, reassess portfolios regularly, and make adjustments when necessary. Planning ahead is the name of the game. Engage with financial advisors , stay attuned to the pulse of the economy, and be ready to adjust sails in response to changing winds. Navigating a recession during retirement is like sailing uncharted waters. It requires a mix of financial wisdom, resilience, and a steady hand. While economic downturns are inevitable, they should not dictate the course of your golden years. With the right strategies, a long-term perspective, and adaptability, retirees can weather the storms. In the grand scheme of retirement, recessions are temporary. Armed with knowledge and good planning, retirees possess the tools to not only survive but thrive amidst the financial ebbs and flows. We hope that you've found this article valuable when it comes to learning about ‘What happens to the stock market in a recession?'  Would you like to know more about how to better manage risk in your investment portfolio before, during, and after a recession? Request a free retirement assessment where we tackle everything from investing, to taxes, to cash flow leading up to and through retirement. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement comfortably. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Disclosures:   Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Imagine having the ability to pinpoint the precise moment the next recession commences, enabling you to exit the market and weather the storm from a safe distance. Sounds ideal, doesn't it? This is an enticing notion, however, evidence suggests that sidelining your investments during a recession may actually undermine your portfolio's potential returns. A financial advisor with investment expertise may be able to help you create a plan to navigate future economic uncertainty. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Dimensional Fund Advisors, a mutual fund company, undertook a straightforward study. They examined the initiation dates of all recessions from January 1947 to December 2022, as recognized by the National Bureau of Economic Research. Next, they computed the returns of the Standard & Poor's 500 index for the subsequent one, three, and five years post-recession declaration. The final step involved averaging those returns to demonstrate how investors' portfolios typically performed during the economic downturns. The findings might be disheartening for those intending to retreat to the market fringes during recessions. Average market returns one year after the onset of a recession were moderately positive, at 6.4%. Three-year and five-year returns were even more robust, with increases of 43.7% and 70.5% respectively over those durations. Upon scrutinizing the data, researchers discerned a pattern. Market downturns, or bear markets, seemed to reach their nadir prior to official recession announcements, with recoveries initiating shortly thereafter. Market trends often leaned towards growth during a recession, possibly because investors anticipated a swift conclusion to the recession, with prosperous periods resuscitating corporate well-being. The conclusion is unequivocal: even if you could determine the exact moment a recession is declared (which isn't feasible), future market fluctuations remain unpredictable—and often counter to conventional wisdom. It seems that resorting to chance, such as tossing dice, hurling darts, or interpreting turtle shells, might serve as equally reliable predictors of future trends. Source: https://www.advisorperspectives.com/articles/2023/06/16/tax-equity-stock- economic-forecasting-swedroe http://elink.dimensional.com/m/1/62855187/02-b23156- d6a1f395214f448b94d84ebf9de8f870/2/25/34a9e829-8ec4-4cb8-9c7c- 1de76cfbf3d1 Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Typical retirement planning paradigms suggest that our annual retirement spending remains consistent, merely adjusting for inflation affecting living costs, travel, dining out, and the like. However, is this an accurate depiction of reality? A financial advisor with retirement income planning expertise may be able to help you create a plan to navigate future economic uncertainty. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... A recent analysis conducted by the RAND Corporation looked into the expenditure trends of elderly Americans who participated in the Health and Retirement Survey run by the University of Michigan. The study observed a yearly decline of approximately 1.7% in the real spending of single retirees post-65, and a slightly higher 2.4% drop for retirement households. There might be several reasons for this spending reduction. One could speculate that living expenses become less manageable as people age. However, the research discounted this factor as they discovered that even the richest survey participants exhibited similar expenditure decline as those possessing less wealth. Interestingly, they observed an upward trend in the proportion of budget allocated towards gifts and donations as retirees aged, across all wealth brackets. A more plausible reasoning, suggested but not yet substantiated by the study, is that retirees in their younger years (60s and early 70s) have more energy and are therefore more likely to dine out and travel. As they get older, they might lose interest in high-end goods like new vehicles and fashionable clothing. The yearly expenditure for the median retiree household aged 65-69 was noted as $28,505 (single) or $53,990 (couple), whereas those in their 80s spent $26,094 and $38,885 respectively. Naturally, these figures varied significantly as retirees have different lifestyle preferences, some extravagant and others modest. The breakdown of expenses revealed a significant drop in travel and leisure costs with age, while healthcare expenses remained fairly consistent, particularly for couples. In all age groups, housing consumed the largest part of the budget (23-25%), followed by food (16-19%) and utilities (12-17%). Contrary to popular belief that health expenses increase substantially with age, this study revealed that healthcare outlay was relatively stable. Reference was made to a previous study that highlighted an average out-of-pocket cost of $6,800 for medical services during the last year of life for most individuals. In fact, households of people over 80 spent an average of just 14% on healthcare, compared to 9.4% for the youngest retirees. A minor segment, about 10% of the sample, accounted for a whopping 42% of out-of-pocket healthcare expenditure in the twilight years—a potential risk that could be mitigated by investing in long-term care insurance. In conclusion, traditional models of retirement spending, which assume a constant expenditure rate adjusted for inflation, may not hold true in real-life scenarios. Research indicates a trend towards declining spending in retirement, irrespective of wealth levels, with changing preferences and lifestyles likely playing a part. Interestingly, contrary to common belief, healthcare costs remain relatively stable for most retirees, except for a small proportion who might benefit from long-term care insurance. These insights can significantly influence retirement planning strategies, encouraging a shift from conventional paradigms towards models that consider the dynamic nature of expenditure and lifestyle changes in the golden years. Talk to a financial advisor to help you navigate your retirement planning. About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Source: https://www.rand.org/pubs/research_reports/RRA2355-1.html Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

At a glance, the concept of investing in bonds might seem straightforward. When you buy a bond, you're essentially lending money to entities like corporations, local city organizations, or even the U.S. government. In return for this loan, these entities agree to pay you interest. This interest is typically paid out on a monthly or quarterly basis over the bond's lifespan, also known as its 'term'. Once the term concludes, you're repaid the initial amount you invested, known as the face value of the bond. It sounds like a simple and secure way to grow your money, doesn't it? However, the world of bond investments is layered with intricacies. A financial advisor with expertise in bond investing may be able to help you create a plan to navigate future economic uncertainty. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Taking a trip down memory lane to the late 1990s provides a glimpse into these complexities. Investors were hit with a realization that bonds, despite their initial appearance, were laden with underlying risks. A notable instance from this era was the downfall of a hedge fund named Long-Term Capital Management (LTCM). Despite being managed by esteemed financial experts, some of whom were Nobel laureates, LTCM faced a catastrophic collapse. The fund's failure stemmed from its misplaced bets on bond rates, which did not align with the prevailing interest rate movements. LTCM wasn't an isolated case. In a similar vein, high-yielding bonds were the culprits behind the downfall of multiple savings and loan associations in the previous decade including Lincoln Savings and Loan Association . The situation became so notorious that a common jest at the time was: if you ventured out to buy a toaster, you'd end up with a savings and loan association (S&L) thrown in as a complimentary gift. All these historical instances underscore the importance of understanding and respecting the complexities of bond investments. While we firmly believe bonds can and should be a valuable component of a diversified portfolio, it's crucial to approach them with a well-researched and informed strategy. Unraveling the Intricacies of Bond Values and Returns Bond values and the returns they generate are influenced by an array of factors, making the terrain of bond investments both fascinating and challenging. One of the most predominant factors affecting bond values is the "interest rate risk." Here's a simple breakdown: if prevailing interest rates rise after you've purchased a bond, the value of your bond might decrease. Why? Because newer bonds being issued in this environment of higher interest rates become more attractive. Think of it this way: if two stores were selling similar quality chocolates, but one store offers a larger quantity for the same price, most buyers would naturally gravitate towards the store providing more value for their money. Similarly, why would investors opt for older bonds, which pay less interest, when they could buy new bonds that offer higher interest payouts? Now, diving deeper into the realm of risks, where do the significant challenges lie? Generally, bonds with longer durations, such as those maturing in 20 or 30 years, tend to lure investors with their higher interest rates compared to their shorter-term counterparts. This is generally true throughout history, however there are periods where short-term bonds provide a higher yield than long-term bonds. This is known as an inverted yield curve and has happened preceding recession in the past as illustrated in the chart below. For example, as of August 25th, 2023, 2-year bonds are yielding 0.78% more than 10-year bonds. During periods of a normal yield curve, investing in long-term bonds might seem like a lucrative proposition at first glance. However, there's a catch. Longer-term bonds are particularly sensitive to shifts in interest rates. This means that if interest rates rise, the value of these long-term bonds can decline more dramatically than those of shorter-term bonds. So, while the allure of higher yields from long-term bonds can be tempting, investors must tread with caution. Rising interest rates can erode the value of these bonds substantially, serving a tough lesson on the repercussions of interest rate fluctuations. In essence, while bonds can be a strategic component of an investment portfolio, it's essential for investors to understand the intricate dance between bond values, interest rates, and bond durations to make well-informed decisions. The Influence of Bond Ratings on Their Value Bond values don't just waver based on interest rates; they're also significantly influenced by the bond's rating. At its core, a bond rating serves as a measure of the creditworthiness or financial strength of the organization issuing the bond. In simpler terms, it's an assessment of how likely the issuer is to repay the borrowed amount along with the promised interest. Several established agencies specialize in providing these ratings. While each agency has its unique scale and criteria, the overarching objective remains consistent: to evaluate the issuer's reliability. For instance, when you invest in Treasury bonds, you're essentially buying a promise from the government. Given the stability and financial might of the government, there's a high degree of confidence that they will honor this promise, repaying both the interest and the principal amount. This reliability is also seen with top-tier, or "blue chip," corporations and certain municipalities. As you can see in the chart above, lower risk bonds such as U.S. treasuries and the U.S. Aggregate bond index have also provided lower returns relative to investment grade bonds or high-yield bonds. Municipal bonds often derive their backing from the revenue anticipated from the specific project they finance, adding another layer of security for investors. However, not all bonds share this level of reliability. Enter the realm of "junk bonds." These bonds come from issuers who might not have a sturdy financial footing. Their shaky status makes them a riskier bet for investors. Recognizing this, investors typically expect a higher return or yield to justify the added risk, considering the possibility that the issuer might default. In layman's terms, defaulting means the borrower might run into financial troubles and might not pay back the full amount, sometimes only returning a fraction of the borrowed sum. Bond ratings aren't static; they fluctuate based on the financial health and performance of the issuing entity. Companies can and do evolve. A firm facing financial challenges might turn its fate around, either by improving its business model or restructuring its debts. Such positive transformations can lead rating agencies to upgrade its bond rating, which in turn boosts the value of its bonds, even those already in circulation. Conversely, if a company hits a rough patch and its financial prospects dim, rating agencies might downgrade its rating. Such downgrades can make its bonds less attractive, marking them as riskier propositions for investors. In summary, while bonds offer a plethora of investment opportunities, it's paramount for investors to understand the underlying ratings and their implications, ensuring a balance between risk and reward. Navigating the Risks of Tempting Bond Yields In the world of investments, high returns often come hand in hand with high risks, and the bond market is no exception. When the economic clouds darken, signaling a potential recession on the horizon, a unique danger emerges. Investors are often drawn to bonds that dangle the carrot of attractive yields. However, there's a catch: these bonds often belong to the lower rating tiers, making them inherently riskier. Why does this matter? When an economy dives into a recession, companies, especially those with shaky financial foundations, are more vulnerable. A significant portion of these firms might face downgrades in their credit ratings, while some might even shutter their operations entirely. Consequently, those alluring yields that initially grabbed an investor's attention can plummet, often falling short of initial expectations. Interestingly, this risky segment of the bond market has its set of avid supporters. Several mutual funds have carved out a niche, predominantly investing in these so-called "junk bonds." However, a word of caution: not all these funds are transparent about the origins of their impressive yields. Every year, like clockwork, some investors pit the modest yields of stable Treasury or blue-chip corporate bonds against the siren call of the substantially higher yields of junk bond funds. On the surface, opting for the latter might seem like an obvious choice, promising higher returns. However, here's the crux of the matter: in the financial world, there's a strong correlation between the safety of an investment and its yield. Bonds with lower yields often bring with them the comfort of longer maturity lengths and solid credit ratings, indicating they're a safer bet. Conversely, while the pursuit of higher yields can be exhilarating, it's a journey riddled with pitfalls. These heightened risks are not always apparent or sufficiently acknowledged by investors. In essence, while the allure of high yields in the bond market can be hard to resist, it's imperative for investors to thoroughly assess the landscape, understanding that with greater rewards often come greater risks. An informed approach to bond investments can strike the right balance between safety and yield. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Summing Up the Bond Investment Landscape Bond investments, often perceived as the stable bedrock of a diversified portfolio, indeed have a myriad of facets to consider. Whether it's navigating interest rate risks, understanding bond ratings, or assessing the true origins of enticing yields, investing in bonds requires a nuanced approach. The historical misadventures of institutions like LTCM remind us that even the most knowledgeable can falter if they overlook the intricate dynamics of the bond market. With the stock market's inherent volatility, having the right bond strategy becomes imperative to offset risks and stabilize a portfolio. However, chasing higher yields without grasping the accompanying risks can be a perilous endeavor. In short, while bonds can act as a counterbalance to the unpredictabilities of stocks, it's crucial to understand the tradeoffs and intricacies they present. Making well-informed bond investment decisions ensures a harmonious blend of safety, yield, and risk management within a holistic investment strategy. Do you want to know what bond strategy is best for your particular situation? Request a free retirement assessment from one of our experienced financial advisors today! About the author: Mark Fonville, CFP® CEO and Senior Financial Advisor Mark is the CEO of Covenant Wealth Advisors  and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine. Schedule your free retirement assessment today   Source: https://www.investopedia.com/ask/answers/111414/what-causes-bonds-price-rise.asp https://www.getsmarteraboutmoney.ca/invest/investment-products/bonds/factors-that-affect-bond-prices-and-how-to-monitor-them/ Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Market downturns, though unpredictable, provide a plethora of opportunities for the discerning investor. Preparation and understanding are crucial in navigating the fluctuating waters of investment, especially during a downturn. When markets stagnate or decline, it's essential to recognize and seize these fleeting opportunities to optimize one's investment portfolio and financial standing. Stock market downturns and corrections can be worrisome, a financial advisor can help you better navigate the specific strategies you may want implement for your personal portfolio Let’s imagine Bob and Alice, a married couple, both 58, who have amassed over $1 million in various investments. They’re wise, knowledgeable, and intent on maximizing the potential of their wealth, regardless of market conditions. We will use their hypothetical situation to illustrate the various opportunities available during a market downturn. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... 1. Harvesting Losses One of the most apparent strategies during a downturn is tax-loss harvesting , where investors sell positions that have gone down, booking a loss for tax purposes, and subsequently buy a similar (but not identical) investment, likely also at a lowered price due to unfavorable market conditions. By doing so, they maintain almost equivalent market exposure while acquiring a loss to offset gains or income on the subsequent year’s tax return, up to $3,000 of income. Free Download: 15 Free Retirement Planning Checklists to Help Make Your $2 Million Last For instance, if Bob and Alice see that their shares in a technology company have declined, they can sell those shares, realize a loss, and potentially invest in another similar technology company whose shares are also undervalued. This strategy allows them to leverage the downturn to their advantage, reducing their taxable income while still keeping a similar investment profile. 2. Roth Conversion Another significant opportunity is performing a Roth conversion , wherein investors pay taxes on the value of shares or cash moving from their IRA into a Roth, ensuring they won’t have to pay taxes on that money ever again. If Bob and Alice expect to be in the same or a lower tax bracket in the future, a Roth conversion at lower valuations means a lower tax bill today than it would be post-market recovery, especially beneficial if tax rates increase. 3. Gifting and Transfers People who make annual gifts to their children or heirs can leverage a market downturn as well. For example, Bob and Alice can transfer $17,000 each year to their heirs without incurring a gift tax. If they choose to transfer investments that are temporarily undervalued, such as depressed ETFs, the gift could significantly increase in value when the market recovers, providing more value to their heirs in the long run. 4. Buying Opportunities Lastly, a downturn is often synonymous with a buying opportunity. Curiously, many consumers understand the value of purchasing discounted items in retail or online stores, but the principle seems to escape them when applied to stocks. Buying at depressed prices is often a wise strategy for long-term investors. For example, if Bob and Alice observe that a usually high-performing stock is available at a lowered price due to market conditions, they can purchase more of this stock, betting on its recovery and subsequent increase in value when the market stabilizes or grows. 5. Diversify Away From Concentrated Stock While seizing these opportunities, it’s crucial for investors like Bob and Alice to maintain a diversified investment portfolio to mitigate risks associated with market volatility. But, they have too much money invested in Apple computer and they know they need to diversify away from this highly concentrated position. Bob and Alice realize that a down market is a great time to sell concentrated positions because the tax impact on the sale will be lower than when markets were higher. Free Download: 15 Free Retirement Planning Checklists to Help Make Your $2 Million Last This might be a great time to sell that stock and reinvest into a more diversified portfolio. Balancing between various asset classes and investment vehicles allows for a more resilient portfolio, capable of weathering the uncertainties of market downturns. For instance, Bob and Alice can allocate their investments across different sectors like technology, healthcare, and consumer goods, and employ a mix of stocks, bonds, and real estate investments. This diversified approach may help them maintain greater stability. While there are many potential benefits of diversification, it does not guarantee against loss. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Concluding Thoughts Market downturns, while seemingly daunting, can be fruitful grounds for informed and strategic investors. By optimizing tax positions through harvesting losses, utilizing Roth conversions, leveraging gifting opportunities, and capitalizing on buying undervalued stocks, investors can not only preserve but also enhance their wealth in challenging times. Bob and Alice’s hypothetical journey illustrates how, with careful planning and a proactive approach, it’s possible to turn market downturns into financial opportunities. So, the next time the market faces a downturn, remember the chances it brings, and consider how best to capitalize on them to fortify and expand your financial horizons. In conclusion, a market downturn is not necessarily a time to panic but rather an occasion to reflect, strategize, and act with prudence and insight. It is these informed decisions and actions that distinguish the successful investor from the rest, ensuring long-term wellbeing and the potential for prosperity. By observing and learning from the hypothetical examples and principles discussed, you can navigate market downturns with increased confidence and efficacy, making the most out of every financial situation. Talk to a financial advisor at Covenant Wealth Advisors to help you navigate an investment plan for retirement. Disclosure: Covenant Wealth Advisors "CWA" is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

Understanding typical fees for financial advisors is crucial for anyone seeking financial guidance. These fees will have a dramatic impact on your retirement and overpaying in fees can take a significant chunk out of your nest egg. Being aware of the fee structures, such as percentage-based, hourly, and flat fees, can help you make informed decisions. This can help with finding a financial advisor that aligns best with your goals. So, why are fees so important in financial planning? The main reason is they can impact your savings and returns. Over the course of 20 years, someone with a $100,000 portfolio paying 1% in fees would pay roughly $28,000 . That can feel like a lot of money. But, according to Northwestern Mutual, nearly 35% of Americans seek the help of a financial advisor . At our firm, Covenant Wealth Advisors, there are many reasons why folks decide to pay for a relationship with a financial advisor including: Expert Guidance: Financial advisors possess specialized knowledge and expertise in financial planning, investments, taxes, and retirement planning. They can offer informed advice tailored to your personal financial goals. Personalized Financial Plan: Advisors can help you create a customized financial plan that aligns with your short-term and long-term objectives, risk tolerance, and life circumstances. Investment Management: They provide insight into investment opportunities and can manage your investment portfolio, ensuring it remains aligned with your financial goals and risk tolerance. Risk Management: Financial advisors can help identify potential risks in your financial plans and suggest strategies to mitigate them, such as diversifying investments or obtaining appropriate insurance coverage. Time and Stress Reduction: Managing finances, especially investments, can be time-consuming and stressful. An advisor can handle these tasks, allowing you to focus on other areas of your life. Tax Optimization : Advisors can provide guidance on tax-efficient investing and strategies to minimize tax liabilities, which can enhance your overall financial health. Retirement Planning : They can assist in creating a robust retirement plan, ensuring you have a strategy for accumulating and managing wealth to support your lifestyle in retirement. Estate Planning: Financial advisors can offer advice on estate planning, helping to ensure that your assets are distributed according to your wishes and in a tax-efficient manner. Regular Monitoring and Adjustments: Financial advisors regularly review your financial situation and make necessary adjustments to your financial plan, responding to life changes or shifts in the market. Education and Empowerment: They can educate you about financial matters, helping you to make more informed decisions and feel more confident about your financial future. While there is a lot of potential value that can be gained from working with a financial advisor, it’s important that you understand the typical fees you may pay. Next Steps: Finding the right financial advisor can be difficult. To make it easy, we've created the quick quiz below. Once you complete it, you'll gain access to our calendar so you can schedule a free retirement assessment. This article covers financial advisor fees, providing a guide for you to understand and prepare for the costs. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Types of Financial Advisor Fees Financial advisors charge fees based on different structures. Here are some types of fees you may encounter: Fee-Only A Fee-Only financial advisor only earns compensation directly from their clients. This reduces conflicts of interest with commissions and third-party incentives. Fee-Only structures can take many forms, such as hourly rates, where clients pay for the time spent on financial planning or consultations. Fixed fees involve a set amount for services, providing clarity on costs. Some Fee-Only advisors may also charge a percentage of the assets they manage. This can align their interests with the client's investment success. Commission-Based A Commission-Based financial advisor earns compensation through commissions on financial products and services they sell to clients. Instead of charging direct fees, these advisors receive payment from others. Examples of products that might have commissions include mutual funds and insurance policies. When a client buys or sells these products, the advisor might receive a commission. Fee-Based Hybrid Structure A Fee-Based financial advisor uses a hybrid structure that combines both fees and commissions. In this model, the advisor may charge clients a fee for financial or investment planning., similar to a Fee-Only advisor. Also, they may earn commissions on financial products they recommend or sell. This dual-source compensation can create conflicts of interest. The advisor might recommend products that not only align with the client's needs but also offer them higher commissions. Performance-Based A Performance-Based financial planner charges fees that are tied to the performance of the client's portfolio. Instead of a flat fee or a percentage of assets under management , these advisors earn a fee that’s contingent upon achieving investment benchmarks. While this fee structure aligns the advisor's compensation with the client's investment success, it also introduces legal and ethical concerns. In some areas, performance-based fees may be subject to regulatory scrutiny due to conflicts of interest. Advisors might take excessive risks to boost their compensation. Understanding Fee Percentages and Structures Different fee structures can have a big impact on your bottom line. Being well-informed about these percentages and structures allows you to make sound financial decisions. Here are a couple of common fees and their structures: Percentage of Assets Under Management (AUM) AUM is a fee structure where financial advisors charge a percentage of the total assets they manage for a client. Advisors typically calculate this fee annually and deduct it directly from the client's portfolio. The percentage ranges can vary but often fall between 0.5% to 2% of AUM. For larger portfolios, the dollar amount paid in fees is higher. However, the percentage remains the same. This means that as your portfolio grows, the total fees paid also increase proportionally. For smaller portfolios, the dollar amount is lower, but the percentage may be higher. Many advisors also have minimum AUM requirements for new clients. Flat Fees and Hourly Rates Flat fees involve a predetermined, fixed amount for financial services, regardless of the time spent. Hourly rates, on the other hand, involve charging clients based on the time spent on providing financial services. Choosing between flat fees and hourly rates depends on your financial situation and the type of services you require. If you need ongoing financial planning, a flat fee might be more cost-effective and predictable. For sporadic advice and consultations, hourly rates offer flexibility and may be a better choice. Additional Fees and Expenses Account and Transaction Fees Account-related fees often include maintenance fees. These are charges for ongoing management of your investment account. These fees may cover admin costs, account statements, and other services. Transaction fees are charges incurred when buying or selling securities. These fees are from transactions, such as buying or selling stocks, bonds, or mutual funds. Expense Ratios of Mutual Funds and ETFs Expense ratios show the annual costs associated with managing mutual funds and exchange-traded funds (ETFs). These ratios are a percentage of the fund's net assets. They cover various expenses, including management fees, admin costs, and other expenses. To find and compare expense ratios, investors can look at the fund's prospectus. This document shows detailed information about its fees and expenses. Many financial and investment platforms also display expense ratios for mutual funds and ETFs. When comparing expense ratios, it's essential to consider the type of fund and its investment objectives. Generally, lower expense ratios are preferable, as they leave more of the fund's returns for investors. Comparing Fees Among Different Advisors Comparing fees enables you to assess the value you're getting in return for the cost. Advisors offer varying levels of service and expertise, and comparing fees helps you gauge whether they align with your financial goals. Here are some things to consider when doing your research: Download Free: 25 Questions to Ask a Financial Advisor Before You Hire [Free Checklist] 1. Questions to Ask Prospective Advisors What’s your fee structure? Do you charge a percentage of AUM, hourly fees, or flat fees? Can you provide a breakdown of all fees and expenses I might incur? Do you earn commissions on financial products you recommend? Are there any performance-based fees? How often do you assess and calculate fees? Are there any penalties or fees for early termination of the advisory relationship? Do you receive any third-party compensation or incentives for recommending products or services? Can you estimate the total cost of your services based on my financial situation and investment goals? 2. Average Financial Advisor Fees: Researching average rates in the market can help you compare fees, and also help you avoid expensive advisors. The chart below outlines average financial advisor fees in 2023. 3. Using Fee Comparisons to Choose an Advisor Understand the Fee Structure: Comprehend the advisor's fee structure. Understand how these fees will impact your overall costs. Consider the Full Package: Look beyond fees and consider the package of services. A higher fee might be justified if the advisor provides more services and has a track record of strong investment performance. Consider Your Financial Goals: Choose an advisor whose fee structure aligns with your financial goals. If you have specific needs or preferences, ensure the advisor's services match them. When and How to Negotiate Fees With Your Financial Advisor Negotiating fees with your advisor can be a daunting task, but it’s appropriate in certain scenarios. It's one of those conversations worth having if you feel it's necessary. Here are some tips for when and how to negotiate fees: When to Negotiate: Change in Financial Situation: If your financial situation has changed, it's a reason to discuss adjusting fees. Performance Issues: If the advisor's performance has not met expectations, it can be a basis for fee negotiation. How to Negotiate: Research Comparable Rates: Before negotiating, research and compare rates in the market. Knowing the industry standard can strengthen your position during negotiations. Highlight Your Loyalty: If you've been a loyal client, emphasize your commitment to the relationship. Advisors may be more willing to negotiate fees to retain loyal clients. Propose a Win-Win Solution: Instead of outright asking for a reduction, propose a solution that benefits both parties. This could involve adjusting the fee structure based on performance metrics or introducing a tiered fee arrangement tied to account size. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Financial Advisor Fees: Finding the Best Solution Financial advisor fees can directly impact your financial outcomes. But, at the same time, you are always going to have to pay a fee if you want someone to manage your money professionally. This is why it’s important to be aware of different fee structures. Clear knowledge of fee structures can help you make more informed financial decisions. You can compare the value of the financial advice to the overall costs. This enables you to budget and assess the impact on your portfolio. It’s good to choose an advisor whose fees align with your financial goals. Taking an active role in understanding and negotiating fees is a big step toward financial empowerment. Don't hesitate to ask questions, seek transparency, and compare fees to ensure you're getting the best value. Negotiating fees is a normal part of the process and can lead to an arrangement that better suits your goals. By having these conversations, you not only control costs but also can foster a better relationship with your financial advisor. This strengthens the foundation for your financial success. Remember, your financial well-being is a partnership, and being proactive about fees is a key aspect of that partnership. If you have over $1 million in savings and investments, be sure to conduct our free retirement assessment to find the strategy that works best for you . Additional Resources Interested in learning more about fee structures for financial advisors? Check out these resources: Financial Advisor Calculator by Range Financial Advisor Fees Comparison By Michael Kitce’s blog Fee Advisory Bulletin by the Securities and Exchange Commission How Much Does a Financial Advisor Cost by Nerdwallet Average Fees For Financial Advisors in 2023 by Harness Wealth 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. Schedule your free retirement assessment today Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice. Registration of an investment advisor does not imply a certain level of skill or training.

Embarking on the golden years of retirement should be a time of laughter, adventure, and making the most of each precious moment. However, let's not shy away from the reality that life's journey includes preparing for tough times – even the unimaginable. As you get closer to retirement, it becomes more important to address the difficult topic of preparing for the potential death of a spouse. In addition to the money aspects, the emotional and practical challenges of a loss can be overwhelming. To help you get financially organized, we've put together this free kit of handy guides, checklists, and workflows that touch on many aspects of getting organized in retirement. So be sure to download them here. In this article, we will explore strategies to help retirees navigate the challenges of this sensitive subject. You’ll find guidance on both emotional preparation and practical steps to ease the burden during such a challenging time. By taking steps now, retirees can better prepare for the inevitable and honor the memory of their spouse. Organizing Documents for the Death of a Spouse Few notes are as crucial as the organization of documents. Picture it as the conductor orchestrating a harmonious finale to a lifetime of shared melodies. Among the most vital aspects of this preparation is the compilation and sorting of documents: The will and testament Power of attorney Trust, titles, and property deeds Advance directives Funeral instructions Insurance policies Detailed account information These documents can help form the foundation of a plan. They can serve as a guide for the legal, financial, and emotional aspects that follow the loss of a spouse. In the digital age, our lives rely on passwords, security questions, and two-factor authentication (2FA) codes. It’s essential to control access to accounts and share them at the right times. Planning for the death of a spouse includes protecting digital assets and also ensuring that trusted family members or advisors can access the info.  See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Here is a step-by-step approach to securing and organizing info: Step 1: Choose a Secure Platform Select a reliable and secure platform for storing information. Consider encrypted password managers or dedicated secure vaults. Popular options include LastPass , 1Password , and Bitwarden , to help ensure that your data remains encrypted. Step 2: Compile and Organize Information Gather information, such as passwords and any other details. Then organize to make it easy for your trusted contacts to find information when needed. Be thorough but mindful of the sensitivity of the data you're storing. Step 3: Set Up Secure Access Implement an access protocol to safeguard the information. Create a strong master password and consider authentication measures, such as biometrics or hardware keys, to add an extra layer of security. Step 4: Document Emergency Procedures Clearly outline emergency procedures and contact information for people who will have access. Include instructions on accessing the information, what it contains, and any actions they may need to take in case of an emergency. Step 5: Share Responsibly Select trustworthy family members to share access with, ensuring they understand the importance of keeping it safe. Let them know the purpose of their access and the role it plays in supporting your wishes and obligations. A wealth advisor can play a role as well. They can assist families with organizing and managing financial documents. Their expertise goes beyond investment strategies and covers a wide approach to financial planning. Advisors can organize, safeguard, and optimize the use of essential documents.  Contact one of our advisors  today to get a free retirement assessment that covers many aspects of your financial life, including getting organized. Reviewing and Updating Financial Plans Having a financial plan in retirement  can help you navigate retirement with confidence. This plan serves as a roadmap, guiding you through the challenges of post-career life. It can include budgeting, investment strategies, risk management, and estate planning.  A well-crafted financial plan ensures that retirees can maintain their desired lifestyle and provides a safety net for expenses and potential healthcare needs . Reviews and updates of a financial plan are essential. This helps your plan remain relevant, effective, and aligned with your goals. Life is dynamic, and events such as marriage, the birth of a child, or the death of a spouse can impact your finances. Regular reviews help you to adapt your financial strategies. Periodic reviews can help you find new opportunities, adjust investments, and improve tax strategies. You can reassess risk tolerance and investments to align with current financial goals. Wealth advisors can customize financial plans for retirees, recognizing challenges that arise during this pivotal stage of life. As people approach retirement or are already retired, a wealth advisor tailors their financial plans, such as preparing for the death of a spouse.  Pro Tip: For individuals with over $1 million in savings and investments, we can help create a plan for you, help you get organized, and help provide the financial security you need. Contact us today for a free assessment. Think of revisiting financial documents as giving your finances a spa day – refreshing, rejuvenating, and essential for overall well-being. It’s paramount to maintain an up-to-date financial strategy. Here are some documents to revisit regularly: Insurance coverage  is a pillar of financial security, providing a safety net for unforeseen events. Regular reviews ensure that coverage aligns with your needs, accounting for changes in income and lifestyle. Adjusting coverage can help protect you and your loved ones. Revisiting and updating beneficiaries on accounts and policies is crucial. Life events such as marriages, divorces, births, or deaths may require changes to beneficiaries. Ensuring that these designations reflect your intentions helps prevent potential conflicts or oversights. Estate planning documents , including wills, trusts, and power of attorney, should also undergo reviews. Life changes may impact the effectiveness of these documents. Regular reviews with legal professionals can lead to adjustments, ensuring that the estate plan meets one's wishes and aligns with current laws and regulations. Revisiting these documents can lead you to a well-rounded financial plan. Regular updates not only safeguard you and your family but can also provide peace of mind. A proactive approach to document maintenance can ensure that your financial strategy remains strong. Moving to a Single Income Moving from a dual to a single income can be a big financial hit. Here are some aspects to consider: 1. Budgeting and Lifestyle Adjustments: The first step is to reassess and adjust your household budget. Find areas where you can cut back. Evaluate discretionary spending, explore alternatives, and prioritize essentials.  2. Emergency Fund and Financial Cushion: Build up your emergency fund for a single-income scenario. Having a financial cushion helps cover unexpected expenses. It can also provide peace of mind during times of financial uncertainty. 3. Retirement Planning: Assess the impact on your retirement savings, especially if the spouse who lost income contributed to retirement accounts. Consider adjusting contributions and optimizing your retirement portfolio in a way that aligns with your goals. Free Download: Avoid Costly Retirement Mistakes with Our FREE Checklists 4. Understanding Pension and Social Security Entitlements: If one spouse is entitled to a portion of a pension or social security in the event of death, it's crucial to understand the arrangement. Review the pension and social security plans to determine the entitlement and the duration of the benefits. Check out this free flowchart  that helps find if you’re eligible for social security benefits as a surviving spouse. 5. Life Insurance: In a single-income scenario, life insurance might become more important. It can provide financial support for the surviving spouse and any dependents in the event of death. Review existing life insurance policies and consider whether adjustments make sense. Asking questions like: How much life insurance is adequate? Do I need a $500,000 policy or more? Is my life insurance premium deductible? Do I have too much life insurance? Moving from a dual-income to a single-income scenario requires better financial management. By addressing these points, you can navigate with greater financial resilience and confidence. How to Optimize Investment Portfolios Managing investment portfolios and retirement income is a process that involves many factors. There can be a lot that goes into planning this, and without a game plan, it can be overwhelming. Here are strategies to consider: Optimizing Investment Portfolios 1. Diversification: Spread your investments across different assets to lower risk. Diversification can help balance your portfolio's performance during various market conditions. 2. Asset Allocation: Adjust your asset allocation based on your risk tolerance, time horizon, and financial goals. As you approach retirement, consider a more conservative allocation to protect capital. 3. Income-Generating Investments: Consider the potential implications of including income-generating assets, such as dividend-paying stocks and ETFs , to create reliable streams of income during retirement. 4. Stay Informed: Keep yourself informed about market trends, regulations, and geopolitical events that may impact your investments. Consider professional advice for a well-informed investment strategy. We wrote a comprehensive guide to implementing an investment portfolio review here .  Managing Retirement Income 1. Create a Withdrawal Strategy: Develop a withdrawal strategy that balances income needs with preserving the longevity of your savings. The 4% rule is a common guideline for retirement withdrawals. 2. Emergency Fund: Maintain an emergency fund to cover unexpected expenses. This can prevent the need to sell investments at inopportune times. 3. Social Security Optimization: Maximize your Social Security benefits by understanding the optimal timing for claiming. Delaying benefits can result in higher monthly payouts. 4. Tax Planning: Be mindful of taxes when withdrawing from retirement accounts . Plan withdrawals to minimize tax liability. 5. Consult with Financial Advisors: Seek advice from advisors who specialize in retirement planning. They can provide guidance based on your financial situation and goals. Whether you’re dealing with the death of a spouse or not, speak with a professional  from Covenant today and get a free retirement assessment to help plan and prepare.   Optimizing investments and retirement income requires a dynamic approach. Regular assessments, adjustments, and staying informed are key elements of a successful retirement strategy. Importance of Long-Term Care Planning Long-term care planning can help with health-related expenses, such as nursing home care or in-home assistance. These services can be costly  and may not be fully covered by health insurance or government programs. By planning for long-term care needs, you can look into long-term care insurance options, and establish a financial safety net. This not only safeguards your assets but can also reduce the financial burden on yourself and your loved ones. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Conclusion Exploring financial planning unveils a crucial lesson – adaptability is the cornerstone of financial resilience. From the organization of documents to moving through life stages, the ability to adapt to change emerges as a common thread. The world of finance is dynamic and comes with many challenges and opportunities. Whether optimizing investment portfolios, managing retirement income, or looking into long-term care, the lesson echoes: continual learning and flexibility are the keys to financial well-being. We hope that you’ve found this article valuable when it comes to learning about “How to Prepare for the Death of a Spouse.” If you’re interested in reading more, please subscribe below  to get alerted of new articles as we write them. 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. Schedule your free retirement assessment today   Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond VA, Reston VA and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.

When you think of your future retirement, what comes to mind? Do you envision spending your golden years in a quiet house by the seaside, taking long walks by the water? Do you picture lots of time spent with family? Are you hoping to devote your time to hobbies like volunteering or travel? Everyone has their own retirement hopes and dreams, but one thing is for sure — you will need financial resources to draw upon. Once you leave the workforce for good, your regular paycheck goes away. Instead, you'll rely on a combination of savings, Social Security, and other resources to see you through the following decades. Ensuring you have adequate funds is critical for a stress-free retirement, but it can be challenging to know where to start. Whether you're in your 40s or just a few years away from saying goodbye to the office for good, you can benefit from our comprehensive guide to comfortable retirement strategies. Determine Your Retirement Financial Goals Retirement lifestyle planning begins by identifying how much money you'll need to support yourself once you stop working. Start by considering your SMART retirement goals and basic needs, such as housing, food, clothing, transportation, and medical care. Later, you can tack on additional discretionary expenses, such as travel and entertainment. If you have a mortgage, determine whether you can pay it off before retiring or whether you'll still need to make payments on it for a few years. If you can eliminate your mortgage debt, you can free up hundreds or thousands of dollars each month for other expenses. Not everyone owns their own home — some prefer to rent, avoiding the long-term commitment of a mortgage and providing greater flexibility. However, if you plan to continue renting in your golden years, keep in mind that rental prices aren't set in stone. Inflation and market demand influence rental rates, and housing costs can increase significantly compared to what you're paying now, especially if you're several decades away from retiring. Grocery costs are another major expense, but they can go up or down depending on your household size and other factors. For example, if you have young kids at home, you're responsible for ensuring they have food on the table. However, they'll likely be self-sufficient adults by the time you retire, and your food expenses will decrease. Transportation costs may also impact your retirement. While you won't need to worry about your daily commute to the office, you will still have errands to run, such as shopping and doctor's appointments. Ideally, you'll have a paid-off vehicle you can use. However, you'll still need to pay for car insurance, repairs, and gas. Be sure to plan for the purchase of a new vehicle or two depending upon how long you tend to hold onto cars. Another significant retirement expense is medical costs. Once you reach age 65, you can enroll in Medicare. While hospital coverage is typically free for most enrollees, you must make monthly premiums to obtain other benefits, including basic medical care and prescription drug coverage. Some retirees may find they eventually need long-term care, which can be unpredictable. If you retire in your 50s or early 60s, you'll want to plan for private insurance and out of pocket costs which can be expensive! Download FREE: Get the Same Checklists We Use to Help Our Clients Retire Finally, consider what type of lifestyle you hope to have in retirement. Frequent travel, dining out, and entertainment expenses can all impact the amount you need to retire comfortably. Include those expenses in the goals you set for yourself. Once you tally all your expenses, you should have an idea of how much you'll spend each year in retirement. However, keep in mind that you can't predict inflation rates and price changes, so what you pay in the future may be quite different from today's dollars. Take a look at this graph, which compares annual spending by categories, along with the average annual inflation rate over time: Source: J.P. Morgan Asset Management A good rule of thumb is to save at least 25 times your cost of living needs being sure to exclude expenses that will be covered by social security or other sources of guaranteed income. For instance, if you plan on spending $100,000 per year, and you receive $30,000 per year in social security, you would aim for $70,000 x 25 = $1,750,000 in retirement savings. That's a very rough estimate, and your personal circumstances can increase or decrease the amount you need, so consider your expectations carefully. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Establish Your Retirement Savings Strategies Saving for retirement should be a line on your monthly budget, like your mortgage payment or electricity bill. Remember that you're the eventual beneficiary of your retirement savings, so treat it with the importance it's due. If you don't yet have a monthly spending plan, create one. Determine what your monthly income is and how much you pay for your expenses. Ideally, you'll have some money left over each month for your retirement savings. While you should commit a regular portion of your monthly income to retirement, you may find it harder to accomplish at specific points in your life. For instance, if you have young children, you may need to cover daycare expenses, which go away as your kids grow older. Other significant fluctuating costs include student loans, auto payments, and credit card debts. The more you can commit to saving each month, the quicker you will reach your retirement goals. Starting early while you're in your 20s makes it easier to achieve your objectives since your money will have a long time to grow. However, even if you're beginning in your 40s or 50s, it's still completely doable — you'll just need to earmark more cash toward your retirement savings. Once you determine how much you can allocate toward your retirement savings every month, make an effort to stick with it. You can always increase it as your wages grow or your monthly expenses decline. As a general rule of thumb, consider saving 15% or more of your earnings toward retirment. You may need to save more if you are starting late. Consider Your Investment Account Options for Retirement Several investment vehicles can help you reach your retirement goals. Most people use a combination of options for retirement planning purposes. Traditional and Roth IRAs There are several different IRA investment options, including the traditional IRA and Roth IRA . Both require you to open your own account with a provider, such as Fidelity . Once opened, you can contribute money, which can go toward mutual funds, stocks, bonds, exchange-traded funds (ETFs), or other types of assets. The primary difference between a traditional IRA and a Roth IRA is their approach to taxes. In a traditional IRA, your contributions can be tax-deductible (if you are within income thresholds). If you qualify, that means that every contribution you make reduces your taxable income for the year up to a maximum amount set by the IRS. Roth IRA contributions are made after-tax, so you can't deduct them from your annual returns. However, when it comes time to withdraw your money from your Roth IRA, you won't owe any taxes on your withdrawals if doke after age 59 1/2. All your contributions grow tax-free over time. Like traditional IRAs, the IRS limits the amount you can invest yearly. Income limitations also restrict people from investing in a Roth IRA if their earnings exceed a certain amount. Traditional 401(k) The 401(k) is the gold standard of employer-administered retirement plans. It allows participants to contribute part of their earnings, usually a percentage amount, toward investment assets such as stocks, bonds, and ETFs. Employers can choose to match their employees' contributions, which can help build the 401(k)s value over time. The IRS limitations for employee contributions to a 401(k) are $22,500 in 2023 , and individuals age 50 or over can contribute an additional $7,500. That's much higher than IRA contribution limits, which are $6,500 for people under 50. However, since you make contributions before tax, you will owe tax on the withdrawals in retirement. Roth 401(k) Some employers offer a Roth 401(k) , which combines different features of the Roth IRA and the traditional 401(k). Under a Roth 401(k), all your contributions are after-tax, so you won't owe Uncle Sam any money on your withdrawals in retirement age. Your employer can also match your contributions, which can help you grow your retirement savings quickly. The IRS limits contributions to a Roth 401(k) are the same as traditional 401(k). However, if you have both a Roth 401(k) and a traditional 401(k), the maximum combined contributions to each can't exceed the annual limits. SIMPLE IRAs Many small businesses offer their employees SIMPLE IRAs as an alternative to the 401(k). A SIMPLE IRA works similarly to the 401(k) in that it allows employers to supplement their employee's contributions with a match. However, it's typically cheaper and easier to set up than a traditional 401(k). Employees who participate in a SIMPLE IRA can contribute up to $15,500 in 2023, per the IRS. They can choose between various investment assets, including stocks, bonds, and ETFs. The SIMPLE IRA also allows for catch-up contributions of $3,500 for people aged 50 or older. Simplified Employee Pension Plans A Simplified Employee Pension (SEP) plan is ideal for freelancers or self-employed entrepreneurs with one or more employees looking to save for retirement. You must own your own business to open a SEP, and you can contribute up to the lesser of 25% of your compensation, or $66,000 in 2023. Like IRAs, you can establish a SEP with any financial institution that offers them, including banks and brokerages. However, only employers can contribute to a SEP. If you're not a business owner, you'll rely entirely on the contributions your employer makes for you. You can't make any to the plan yourself. Other Retirement Income Solutions Saving for retirement is only one part of the puzzle. You may have income from various other sources, too. Traditional Pension In a traditional pension, the onus of saving for retirement flips from the employee to the employer. The employer provides a guaranteed retirement benefit for workers based on their time with the company, average salary, and age. The payout can be monthly, annually, or on a lump-sum basis once the employee reaches their retirement years. These days, it's uncommon to find companies offering a traditional pension plan. Most organizations offer employees 401(k)s, SIMPLE IRAs, or other defined contribution plans, which are less costly and risky to employers. However, some government employees , such as military and civil service workers, may be eligible for a traditional pension plan. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire You're in luck if you have access to a traditional pension plan. You'll receive regular payments during your retirement courtesy of your employer. Depending on your years of service, annual earnings, and other factors, you may find the pension is enough to support you through your retirement, especially when combined with Social Security. However, check with your plan's administrator to understand what you can expect from your future payments. Annuity Options Life insurance companies, brokerages, and banks sometimes offer annuities , which can provide a guaranteed income stream for a period of time. Some people purchase annuities to supplement their retirement income and receive the proceeds as monthly, quarterly, annual, or lump-sum payments. In some cases, annuity payments can last the remainder of their lives. Several forms of annuity options exist, including fixed, variable, and indexed. In a fixed annuity, you receive a specified amount of future payments at a guaranteed interest rate. Variable annuities allow you to select from various investment options, such as mutual funds, which you can use your premium payments to purchase. Your future income from a variable annuity will vary depending on your rate of return and the plan's expenses. An indexed annuity ties your future payout to a specific stock market index, such as the S&P 500. You'll receive earnings based on it's performance and initial investment amount. Annuities aren't for everyone, and they have certain advantages and drawbacks. If you want to incorporate them into your retirement planning, it's smart to speak with a financial advisor who can help you determine whether they're an appropriate alternative for your circumstances. Social Security Benefits Most American tax payers will qualify for Social Security benefits in their retirement years. Social Security provides recipients with monthly benefit checks at a set amount for the remainder of their lives. The amount you receive depends on your average earnings throughout your lifetime and when you start receiving your benefits. To qualify for Social Security in retirement, you must earn at least 40 working credits. Each credit equals three months of work, so most people work ten years before they can qualify for benefits. Social Security uses your highest 35 years of earnings to determine the amount of your check, and what you receive will likely only be a portion of your regular pay. Thus, most people don't rely entirely on Social Security to support them in their golden years. Instead, they combine Social Security with retirement savings plans and other alternatives. A sound retirement plan will provide guidance on how to optimize your social security benefits so you don't leave money on the table. Continue Working No rule says you must quit working at age 65 or 67. Whether you worry that you won't have enough money to sustain your remaining years or simply enjoy working and can't picture yourself without a job, full or part-time work is a viable option. It can keep you busy, and the paycheck can supplement your retirement savings, Social Security benefits, and other income sources. If a full or part-time job isn't appealing, you can look at passive income opportunities. For instance, you might consider buying and renting a property or investing in a local business that needs your cash. Both options can provide steady earnings without committing to a regular weekly workload. Downsizing Another way to free up income for retirement is downsizing. To do so, look at your current living situation and see where you could cut costs that eat into your retirement income sources. Start with your home. Are you living in a large house with multiple bedrooms you no longer need? Is the house paid off, or do you have several more years of mortgage payments? You can consider selling your home and using the proceeds to buy something much smaller, such as a one or two-bedroom condo. Shifting to a smaller home can reduce your monthly mortgage, electricity bills, and property insurance costs. Another downsizing option is moving to a cheaper area. If you're no longer dependent on your location because of a job, young children, or other reasons, you can move somewhere with a lower cost of living. For instance, a move from New York City to a small town in Tennessee could cut your living expenses significantly, freeing up more money for a comfortable retirement. Don't Overlook Long-Term Care Planning The prospect of needing long-term care may not concern you when you're young or healthy (or both), but life can change on a dime. As you age, your risk of developing health conditions requiring long-term care rises. The Administration for Community Living (ACL) estimates that nearly 70% of people age 65 or older will need some form of future long-term care. Unfortunately, Medicare doesn't cover the costs of long-term care, even if you buy additional Medicare coverage, such as Medigap. Instead, you must foot the bill yourself or rely on your loved ones to pay for it. Some people may qualify for free long-term care through Medicaid, but only if they meet stringent financial requirements. You can protect yourself from draining your retirement savings for long-term care costs with an insurance policy. Various insurance companies offer long-term care policies, which provide coverage benefits if you become unable to perform basic living activities, such as bathing or getting dressed. Your policy will cover the cost of nursing homes, assisted living facilities, or in-home care. There are two types of long-term care insurance policies : traditional and hybrid. A traditional policy provides long-term care benefits, but you may lose all the premiums you pay if you never need them. Some companies offer options you can add to the policy, such as a return of premiums if you never use it for an additional fee. A hybrid long-term care policy combines life insurance or annuities with your long-term care benefits. Under a hybrid policy, you may be able to access your funds during your lifetime, helping to supplement your retirement income. If you opt to include life insurance, your survivors will receive the death benefits from your policy once you die, assuming you never need long-term care. Long-term care insurance providers offer different levels of coverage and benefits, and premiums will vary depending on when you purchase your policy and your current health status. You can minimize costs by buying a plan early, such as in your late 40s or 50s, rather than waiting until you're already retired. Incorporate Tax-Efficient Retirement Planning to Minimize Your Future Liabilities Unfortunately, taxes don't entirely disappear once you retire. Even if you don't work, you'll likely owe taxes on some sources of retirement income, including Social Security benefits. The key to minimizing your future liabilities is understanding where your income sources will come from, which will help determine your tax bracket. Other factors, like the state you live in, can also impact your taxes. Three primary elements can impact your future retirement tax liabilities. Let's take a look at each. When You Begin Receiving Social Security Benefits Source: J.P. Morgan Asset Management Your Social Security benefits will likely be a significant component of your retirement income. Currently, you can begin receiving your Social Security benefits at age 62 , though you'll only receive a portion of the benefit. Waiting until you reach full retirement age entitles you to 100% of your benefits. Delaying retirement even longer provides you with additional benefit increases each month until you reach age 70. Social Security benefits are partially taxable at the federal level, and some states tax them, too. If you start drawing Social Security while still earning a regular paycheck, your tax bracket will be higher, forcing you to pay more than you would if you no longer had a job. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire To minimize your tax liabilities (and maximize your future Social Security benefits), you can delay collecting Social Security until you reach full retirement age or even longer. During that time, you can continue to work or rely on other sources, such as an IRA or 401(k), to fund your retirement. Depending on your retirement savings plan, you may not need to pay taxes on your withdrawals. Let's consider a hypothetical example of Janet, a single female earning a $100,000 salary at 62. She is in good health, has no existing medical conditions, and doesn't feel ready to retire. She delays collecting Social Security so she can increase her benefit amount. At 67, she's still relatively healthy and continues working until age 69, when she begins collecting benefits. By waiting, Janet increased her Social Security benefits and minimized tax liabilities since she will only owe taxes on income from her job, not a Social Security check, too. Consider the Tax Implications of Withdrawing Your Retirement Savings Income All retirement savings plans impact your taxes differently. Traditional IRAs and 401(k)s are tax-deferred, meaning you can deduct your contributions to both plans from your taxable income during your working years. You'll pay taxes on all future withdrawals you make in retirement. That may be advantageous to you if you're in a higher tax bracket in your contribution years. However, your tax liabilities increase if your tax bracket is higher when distributions begin. You make contributions to a Roth IRA or Roth 401(k) after tax, so you can withdraw money from them tax-free in retirement, assuming you meet a few requirements. If you're in a higher tax bracket than during your earning years, drawing from your Roth accounts first can help minimize your liabilities. At Covenant Wealth Advisors, we often recommend using a combination of retirement savings vehicles for tax planning purposes. That way, you can decide which one to draw from based on your current tax situation. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire Let's look at another hypothetical example of Phillip, who, at age 62, has ten years left on his mortgage. He is still working and in excellent health. Phillip wants to increase his monthly mortgage payments to pay it off before age 67, but he can't afford to do so using only his paycheck. Instead of applying for his Social Security benefits or withdrawing money from his traditional 401(k), Phillip turns to his Roth IRA. Since he meets the requirements for tax-free withdrawals, he can use them to pay down his mortgage without increasing his taxable income. Plan for Required Minimum Distributions (RMDs) Certain tax-advantaged plans, including traditional IRAs and 401(k)s, require you to begin making minimum withdrawals by age 73 . The higher your account balances are, the larger your RMDs will be, potentially increasing your tax bracket if you also collect Social Security. You can mitigate your liabilities by spreading your withdrawals across various sources, maximizing retirement income. As an example, consider Lisa, who retires from her job at 62. She has a traditional 401(k) and a Roth IRA with similar balances. She decides to forego claiming Social Security for a few years to maximize her benefits, so she begins withdrawing funds from her 401(k). She exhausts the balance of her 401(k) by age 70 when she claims Social Security and pays ordinary income tax on the withdrawals. Lisa's Social Security benefits are taxable, but she can supplement them with withdrawals from her Roth IRA, which aren't. Lisa successfully minimized her retirement tax liabilities by allocating withdrawals at ideal points in time. Start Estate Planning Early Your death may be years or decades in the future. However, setting up a solid estate plan now can prevent problems down the road for your heirs. Estate planning can be quite complex or very simple. It all depends on the value of your assets and whether your beneficiaries will encounter estate taxes when they inherit them. Other factors, such as family dynamics and divorces, can also impact your estate plan. Speak with an attorney concerning your estate planning needs. They can help you formulate an estate plan that reduces legal friction and minimizes tax liabilities for your heirs. If you die without leaving a will or designating beneficiaries for your assets, including retirement savings accounts, everything could end up in probate court — which can take months or years to resolve. Retiring Early Is Possible With The Right Strategies Not everyone plans to retire in their 60s or 70s. Some plan to do so much sooner — such as in their 50s. Consider these early retirement tips if you hope to quit the workforce before the traditional retirement age. Know Why You Want to Retire Early Retiring early can allow you to pursue what you enjoy, whatever that might be. Maybe you want to travel, be a full-time parent to your children, volunteer for a cause close to your heart, or write the next great American novel. However, if you don't have a clear reason for retiring, you may have a lot of time you don't know what to do with. Identifying your purpose can help you stay in tune with your goals. Understand the Financial Repercussions of Retiring Early Most retirement savings plans won't allow you to make early withdrawals before a certain age. If you decide to tap into them before the age limitation, you'll incur taxes and penalties that can significantly impact your account balances, leaving you with less to rely on in your later years. To minimize the impact on your retirement plans, use other financial resources to fund yourself. Investing in stocks, bonds, annuities, or real estate are all viable alternatives that don't incur penalties, although you will pay taxes on your gains and earnings. Pay Off Your Debts Reducing expenses is key to an early retirement strategy, and debt can quickly derail your plans. Before you retire, plan to pay off all high-interest debts, including credit cards, student loans, and auto loans. If you have a mortgage, consider paying it off, too. The less debt you have dragging you down, the easier managing money in retirement will be. Set a Spending Budget Retiring early certainly has its appeal, but keep in mind you will need to rely on your own savings and investments to fund yourself for decades without a paycheck. Thus, you'll want to be sure you can commit to a budget that allows you to live the life you want without setting yourself up for future financial problems if you run out of money but can't work. Remember that prices can change significantly over time, so the $1,000,000 you have in the bank may be worth much less, even five or ten years down the line. Work with a financial advisor to help establish a monthly budget that will stand the test of time. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Financial Security in Retirement Starts with Preparation There are many moving pieces when it comes to planning for retirement. Determining how much savings you'll need, where to allocate it, and establishing a budget are just a few considerations. It's a lot to handle on your own, so seeking retirement investment advice from a qualified financial advisor is critical. At Covenant Wealth Advisors, our team offers fee-only financial planning services that can help you reach your future goals. With our help, you can alleviate the stress of retirement planning and avoid costly mistakes. Contact us today to request a free retirement assessment . 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. Schedule your free retirement assessment today Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice. Registration of an investment advisor does not imply a certain level of skill or training.

It can be incredibly difficult to know where to start when it comes to planning your retirement. This is especially true if you’ve worked diligently to save up a large nest egg. After all, more capital means that you have more options when it comes to potential retirement income strategies. While this is a good problem to have, it can also make navigating retirement a bit more confusing. To help out, this article will break down the nine most common retirement income strategies that you can use to fund your golden years. Dividend Retirement Income Strategy How it works: Receive dividends from a portfolio of stocks. This strategy is best for: Retirees who want to receive mainly passive income that’s tied to the stock market. A dividend income strategy is when an investor builds up a portfolio of stocks that pay dividends consistently. If you’re not familiar, a dividend is just a distribution of profits by a company to its shareholders. For example, let’s say that you invest in a company that’s known for paying dividends such as the consumer-packaged goods company Proctor & Gamble (P&G). P&G pays out a quarterly dividend of roughly $0.94 cents per share. This means that you will receive $0.94 cents each quarter for each share of P&G that you own. If you invest $100,000 then you can afford approximately 694 shares and will receive $652.39 quarterly or $2,608 yearly. If you invest $500,000 then you can afford approximately 3472 shares and will receive $3,263 quarterly or $13,055 yearly. If you invest $1,000,000 then you can afford approximately 6944 shares and will receive $6,527 quarterly or $26,111 yearly. By routinely receiving dividends, you can ensure that you have consistent cash coming in to help fund your retirement. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Pros of Dividend Investing: It’s passive: Once you’ve set up your portfolio, all you have to do is sit back and collect your dividend payments. It’s consistent: Many companies have paid the same dividend schedule for decades. For example, P&G has paid dividends for 133 years including 67 years of dividend increases. Cons of Dividend Investing: Your net worth will fluctuate : When you buy dividend stocks then your net worth will fluctuate along with the price of those stocks. If a dividend stock’s price dips then it could lower your net worth and effectively offset your income from the dividend payments. Low returns: Dividend payments are known for being reliable and consistent. But, they usually don’t offer very high returns on your cash. Total Return Approach How it works: Create a blended portfolio with stocks, bonds, and cash that offers income, growth potential, and liquidity. This strategy is best for: Retirees who want a combination of income and growth but also need quick access to their cash. The total return approach attempts to craft a diversified portfolio that offers income, growth potential, and liquidity. Ideally, this portfolio will help you generate income while still growing at a satisfactory pace year over year. To achieve this goal, the portfolio is a blend of stocks, bonds , and cash or similar short-term investments. Stocks : This asset offers growth and dividend payments. Bonds : This asset offers income through fixed coupon payments and stability if the stock market falls. Cash : Offer stability and liquidity if you need access to your money quickly. Crafting a total return approach is a bit more nuanced than other strategies because it depends on your financial goals, expenses, and investable assets. If you’re interested in learning more about this approach then please reach out to our team directly to learn more. Pros of the Total Return Approach: Maximizes your assets : This strategy seeks to make the most of your assets to help you reach your financial goals. Cons of the total return approach: Can be more complicated than other strategies : This strategy usually requires a very thoughtful approach to ensure that you’re invested in the assets that are best for you. Single Premium Immediate Annuities How it works: Buy a single premium immediate annuity and start receiving payments instantly. This strategy is best for: Retirees that want to lock in a guaranteed income stream. A single premium immediate annuity (SPIA) is when you make a single large deposit with an annuity company and start receiving monthly payments immediately. The payments typically last for the rest of your life, similar to a pension or Social Security payments. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire SPIAs are flexible and allow you to determine how frequently you want to receive your payments. For example, you opt for monthly payments over the next twenty years or payments that last for the rest of your life. As a general rule of thumb, the longer the time period, the lower the monthly payments will be. Pros of Single Premium Immediate Annuities: Receive payments immediately : You start receiving payments instantly and these payments will be guaranteed for the length of the contract. Simple planning : This strategy offers an easy way to create income during your golden years. Cons of Single Premium Immediate Annuities: Lack of liquidity: Most of the time, you will not be able to access your nest egg once you use it to purchase an SPIA. Risk of losing purchasing power : The payment that you receive from your annuity might seem satisfactory today. But, this income stream might not be enough after a decade or two of inflation. Guyton-Klinger Guardrails Income Strategy How it works: This take on the 4% withdrawal rule sets guardrails on how much you should withdraw each year. This strategy is best for: Retirees who are nervous about running low on cash during their retirement. The Guyton-Klinger guardrails income strategy is a stock-market-based retirement strategy where you change your withdrawal rate each year based on the performance of the stock market. It builds off the 4% withdrawal rule but helps protect against withdrawing too much cash from your account. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire With this strategy, you set withdrawal “guardrails” that are 20% above and below your preferred withdrawal rate. These guardrails account for fluctuations in the value of your portfolio. If the stock market goes down then you’ll end up withdrawing less cash. But, if the stock market surges then you can go ahead and withdraw a bit extra. Pros of Guyton-Klinger Guardrails Income Strategy: Protects you from overdrawing from your account : This strategy can help prevent you from running out of money during retirement. Keeps your spending realistic : The stock market is constantly fluctuating and it’s a good idea to keep your withdrawal rate consistent with the market’s performance. In bad years, you’ll have to spend less. But, during good years, you’ll be able to spend more. Cons of Guyton-Klinger Guardrails Income Strategy: Can result in decreased spending : If the value of your portfolio falls then you will need to decrease your spending accordingly. Bucket Income Strategy How it works: Invest your cash into three “buckets” to address short, medium, and long-term expenses. This strategy is best for: Retirees who like a simple approach to retirement planning and want to ensure that their expenses are covered. The bucket income strategy is a strategy that involves separating your nest egg into three different investments (or “buckets”) that all address different goals. The goal is to have one bucket each for short-term goals, medium-term goals, and long-term goals. The short-term bucket: These investments are meant to cover short-term expenses and include cash, CDs, T-bills, savings accounts, and other similar short-term investments. The medium-term bucket: These investments are meant to cover medium-term expenses (between 3-10 years) and include longer-maturity bonds and CDs, convertible bonds, growth and income funds, utility stocks, and REITs. This bucket is intended to grow on par with inflation while also avoiding risky investments. The long-term bucket : These investments are meant to grow at a pace faster than inflation to keep your net worth rising over the years. These investments include a diversified portfolio of stocks or similar assets. As far as retirement income strategies go, this is one of the easiest ways to invest your cash and be prepared for all scenarios. Pros of the Bucket Income Strategy: Covers all your bases : With this strategy, you know that all of your expenses (short, medium, and long) will be covered. Gives you peace of mind: You don’t have to worry about stock market fluctuations because your short and medium “buckets” are not tied to stock market investments. Cons of the Bucket Income Strategy: Can be difficult to set up : It’s difficult to determine exactly how much cash to allocate for each bucket. There’s also the risk that you will misallocate and find yourself short of cash. Conservative approach : This strategy allocates ⅔ of your net worth to fairly low-performing assets. This helps keep your cash safe. But, it can also lead to an underperforming portfolio over the long term. Systematic Withdrawal Strategy How it works: Make withdrawals from an account strategically. This strategy is best for: Retirees who don’t want to get locked into a set payment schedule. A systematic withdrawal strategy is when you choose to withdraw funds from an account until that account is empty. This strategy is mainly used with annuities, although it can work with mutual funds and brokerage accounts as well. Following this strategy can help you fund your retirement without locking you into a set payment plan. Pros of Systematic Withdrawals: Tax advantages : Due to the flexibility of the withdrawals, retirees can reap benefits during tax season. Access to capital : Unlike an annuity, which uses pre-determined lifelong payments, the retiree gets much more flexible access to their capital. If they want to withdraw it much more quickly then they are able to do so. The funds could even be accessed in case of emergency. Cons of Systematic Withdrawals: Payments are limited : Unlike annuities, which offer lifelong payments, payments will only be available until the funds run out. Laddered Bond Portfolio How it works: Buy bonds with varying maturities. This strategy is best for: Retirees who want to enjoy consistent income in retirement. A laddered bond portfolio is a portfolio consisting of bonds with varying maturity dates. For example, you could invest your cash across a range of bonds with expiration dates of 2, 4, 6, 8, and 10 years. Then, as your earliest bonds expire, you can choose whether to buy more bonds or invest the money elsewhere. “Laddering” your bonds this way helps you lock in long-term returns while also getting short-term access to your cash. This is advantageous because the economy is constantly changing and you might not necessarily want to have all your money locked into bonds for the long term. Pros of a Laddered Bond Portfolio: Creates predictable income : By staggering the maturities, you know that you have money coming in over the next few months/years (as opposed to having a large portfolio of bonds that all expire at the same time). Reduces exposure to stocks : This strategy can generate consistent income with minimal volatility. Cons of a Laddered Bond Portfolio: Lower returns : Like most fixed-rate investments whose interest and principal are guaranteed, a bond ladder is likely to underperform stock-based investments over the long run. Maximizing Social Security Benefits How it works: Delay your Social Security benefits to increase your payments. This strategy is best for: Retirees who are not in a hurry to collect Social Security and would rather receive larger payments in the future. You can maximize your Social Security benefits by not collecting your benefits until you are 66, as opposed to 62. You can legally retire at 62. But, your benefits will be reduced by 25% to 30%. On the other hand, if you wait until you are 66 then you will be able to collect the full benefit. If you want, you can wait even longer and become eligible for delayed retirement credits that increase your monthly payments. According to Investopedia , eight other strategies to maximize your social security benefits include: Working for 35 years Waiting until at least full retirement age to start collecting Collecting spousal benefits Receiving dependent benefits Keeping track of your earnings Watching out for tax-bracket creep if you’re still working Applying for survivor benefits Checking your Social Security statement for mistakes Stop collecting benefits temporarily Pros of Maximizing Social Security Benefits: Higher payments: By waiting until you are 66 or older will make you eligible for a higher payment. Cons of Maximizing Social Security Benefits: Opportunity cost: While you will ultimately receive higher payments, you’ll also have to go years without this income source. This means you won’t be able to spend or invest your Social Security checks for four years while you wait to reach full retirement age. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... Buying a Cash-Flowing Business How it works: Buy a business that’s already profitable. This strategy is best for: Retirees who are looking to stay busy during their retirement while also generating a return. For many retirees or near-retirees, the thought of starting a new business from scratch might seem laughably unrealistic. But, what about buying a business that’s already profitable? Companies like BizBuySell can help you find local small businesses for sale in your area that are already cashflow positive. If you have $1 million in investable assets then there are plenty of businesses that you can afford to purchase. By buying a business, you can secure an income stream that has the potential to be scaled upward. A few examples of common business for sale on BizBuySell include: Renovation companies Franchises Restaurants/bars Hairstylists Consumer goods companies Pros of Buying a Cash-Flowing Business: Scaleable income : Businesses can be improved over time and can provide a much higher return than other assets. Tangible asset : For retirees who don’t want to be confined to the golf course, owning a small business can help you stay involved in your community while also generating a positive impact on your neighborhood. Cons of Buying a Cash-Flowing Business: Lots of work : Owning a business, regardless of its size, requires lots of work. High risk : The business world is highly competitive. It’s possible that you could get run out of business and lose your entire investment. We hope that you’ve found this article valuable when it comes to learning about nine retirement income strategies that you can use to generate cash flow in your retirement. With that said, planning for retirement is a challenge that requires a high level of personalization as everyone has different assets, expenses, and life goals. If you’re interested in learning more about retirement planning, please contact the Covenant Wealth Advisors team. We frequently post new articles related to retirement income strategies. Subscribe below to get alerted whenever we post a new article 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. Schedule your free retirement assessment today Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice. Registration of an investment advisor does not imply a certain level of skill or training.

As you might guess, even at your deathbed, Uncle Sam will be standing with his hand out ready to collect his “fair” share of your estate. If you’re in the process of planning your estate then you'll want to be aware of the serious tax advantage that’s disappearing in 2025. In a nutshell, you currently have the potential opportunity to pay significantly less in taxes when handing off your estate. This article will take a look at how you can prepare your estate as well as what happens to estate tax in 2025. But, it's not a comprehensive guide or advice. We recommend that you schedule a free assessment with an experienced financial advisor at our firm, Covenant Wealth Advisors, to dig deeper into your personal estate situation. NOTE: As of 2023, federal estate taxes are only levied on estates worth $12,920,000 for individuals and $25,840,000 per married couple. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... What is Estate Planning? Estate planning is the process of creating a plan to ensure that all of your possessions get passed to the correct people or organizations after you pass away. This may sound like morbid and mundane topic. But to the contrary, estate planning is essentially the culmination of your life’s hard work. You’ve worked hard your entire life to build your estate and now it’s time to make sure that it falls into the right hands. But, as you might imagine, handing off your estate comes with a tax. What is Estate Tax? The Internal Revenue Service defines estate tax as a tax on your right to transfer property at the time of your death. This tax is collected on your estate after you pass away. If you are survived by your spouse then you won’t have to pay any taxes thanks to the Unlimited Marital Deduction. If you have no spouse – and your estate is worth at least $12,920,000 – then you’ll have to pay estate tax. First, the government tallies the total value of all your property and possessions at the time of your death. This is known as your “Gross Estate” and it includes the fair market value of assets like: Cash and securities Real estate Insurance Trusts Annuities Business interests Keep in mind that the government values these assets at their fair market value, not what you originally paid for them. So if you own your home outright then you’ll have to pay taxes on its current market value, not the amount that you paid for it a few decades ago. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire [FREE KIT] Once the value of your Gross Estate has been determined, certain expenses will be deducted to determine your “Taxable Estate.” Common deductions include mortgages, debts, and estate administration expenses. But, it’s best to speak with a professional to determine which expenses can be deducted. In addition to these deductions, you can also “gift” a total of $12.92 million ($25,840,000 for married couples) as of 2023 over the course of your life to your preferred beneficiaries. Speaking of which, let’s look at the upcoming changes to the estate tax code in 2025. Scheduled Changes to Estate Tax in 2025 On January 1, 2026, the current lifetime estate and gift tax exemption of $12.92 million (plus inflation adjustment) per individual is set to be cut roughly in half. Back in 2017, the Tax Cuts and Jobs Act (TCJA) doubled the lifetime estate and gift tax exemption from $5.6 million to $11.18 million for individuals and $22.36 million for couples plus annual inflation adjustments in subsequent years. However, these changes were only implemented through 2025. Without further congressional action, this elevated exemption will sunset at the end of 2025 and return to approximately $7 million in 2026. There is still a chance that this tax exemption could be made permanent by Congress. But, it’s always best to plan for what is, not what might be. Taking advantage of this existing tax exemption could save you a significant amount in taxes. So, as far as what happens to estate tax in 2025, this means that in 2023, retirees planning their estate can gift up to $12,920,000 (or $25,840,000 for married couples) to their beneficiaries estate tax-free. In 2024, the lifetime gift and estate exemption will likely increase to $13,610,000 for individuals and $27,220,000 for married couples due to inflation. In 2025, the estate tax exemption will likely increase at a future inflation rate. After 2025, this exemption will be cut in half unless Congress intervenes. If you are in the process of planning your estate then time is of the essence. By taking advantage of these elevated tax exemptions, you might be able to save a bundle on estate taxes depending upon your personal situation. How to Minimize Estate Tax Liability Use the “Gifting” Rules The easiest way to reduce your estate tax liability is to take advantage of gifting . As of 2023, the IRS will let you “gift” $17,000 per individual ($34,000 for married couples) tax-free without having to file a gift tax return. So, if you are single with three adult children then you can theoretically gift them each $17,000 each in 2023, an estimated $18,000 in 2024, and an estimated $19,000 in 2025. This would result in an annual gift of $51,000 in 2023, $54,000 in 2024, and $57,000 in 2025 which would help you unload $162,000 tax-free over the next three years. Notably, this may help some investors stay well below the current lifetime estate and gift tax exemption of $12.92 million (per individual). Additionally, there is no cap on the number of people that you can send gifts to. So, if you have three kids and nine grandkids then you can legally send $17,000 to each of them in 2023 without filing a gift tax return. This would be an annual gift value of $204,000 in 2023 and help you pass down $648,000 over the next three years. Again, this is still well below the current tax exemption limit. Are you married? If so, just double this amount! Sending gifts to friends and family can be an easy way to start transferring your estate tax-free. Remember, planning your estate requires highly-personalized advice. If you have specific questions about your estate then you’ll definitely want to speak with a professional to learn the best way to minimize your estate tax liability. Use a Credit Shelter Trust A credit shelter trust (CST) is a popular way for married couples to reduce their tax bill when planning their estate. These trusts are also known as bypass or family trusts. Download FREE: Get the Same Checklists We Use to Help Our Clients Retire [FREE KIT] When one spouse passes, their assets are placed into a trust which can then be accessed by the surviving spouse. Then, once the second spouse passes, the trust’s assets will pass tax-free to the CST beneficiaries. The assets in the trust, and any appreciation of those assets, is "sheltered" from estate taxes at the death of the second spouse. However, one downside of this option is that the surviving spouse will have limited rights and control over the assets in the trust. Use a Disclaimer Trust A disclaimer trust is a trust that comes with embedded provisions which are usually outlined in a will. This trust allows the surviving spouse to put specific assets in the trust by “disclaiming” ownership of them. In other words, the surviving spouse can choose which assets to take control over and which to put directly into the trust. Assets that are put into the trust will be transferred to the beneficiaries tax-free. This type of trust gives the surviving spouse more flexibility on how to handle the estate. This is important because circumstances may change once a spouse has passed away. Estate Tax Planning for Couples If you expect to be survived by your spouse then you can sleep soundly knowing that they will receive the full value of your estate tax-free if you pass away unexpectedly. This is thanks to the Unlimited Marital Deduction. Of course, that’s assuming that you want your spouse to receive the full value of your estate. Even if you expect your spouse to outlive you, you can still take advantage of the three tools listed above to help plan your estate. In fact, working together can help you build a better plan to pass down your estate. For example, married couples are able to gift double the amount of cash each year when compared to individuals. See How Our Financial Advisors Can Help You Plan for Retirement Retirement Planning  - unlock retirement strategies and optimize your cash flows. Investment Management  - our team designs, builds, and manages custom portfolios tied to your life. Tax Planning  - Creative tax strategies, Roth conversions, RMDs, charitable giving and more... What Happens to Estate Tax in 2025? Starting in 2026, the current lifetime estate and gift tax exemption of $12.92 million per individual will be cut in half if congress does not intervene. This means that you can potentially save a significant sum of money in taxes by starting to gift your estate now, instead of waiting a few more years. Common Misconceptions About Estate Tax Estate planning is only for the wealthy: It’s true that taxes are only levied on estates worth $12,920,000. But, estate planning is about much more than just taxes. It’s about putting a concrete plan of action in place to ensure that your estate is passed on to the correct beneficiaries. This can even include decisions about your finances and healthcare later in your life if you become incapacitated. I don’t need an advisor : Even if you are below the taxable threshold, it’s always wise to have an advisor in your corner. An advisor will be able to recommend the best course of action based on their experience working with other people. Additionally, they can offer advice and solutions that you might not have even known about. This is especially true when you consider how quickly the tax laws change. I don’t have enough money to worry about estate planning : Depending on your financial situation, the current estate tax limit of $12,920,000 might seem well out of reach. But, remember that this limit will be cut in half to roughly $6,500,000 in 2026. This amount includes the collective value of your home(s), life insurance proceeds, and retirement accounts. If you aren’t careful then you could come in above the threshold and be stuck paying 40% tax rate on your estate! If you’re interested in learning more about estate tax planning and how to integrate it with your investment and retirement plan, please contact the Covenant Wealth Advisors team. We hope that you’ve found this article valuable in learning what happens to estate tax in 2025. We frequently post new articles related to estate tax. Subscribe below to get alerted whenever we post a new articles. 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. Schedule your free retirement assessment today Disclosure: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice. Registration of an investment advisor does not imply a certain level of skill or training.