For many people, this is not only a time of eager anticipation, but also one of serious contemplation about what must be done to achieve their goals.
Here are five factors to consider when planning your retirement strategy:
Your Time Horizon
While younger investors have the luxury of time for recouping investment losses before they retire, investors nearing retirement may not. As you approach the end of your career, you may need to shift your mindset from accumulating assets to utilizing the assets you’ve worked so diligently to earn. You may want to consider repositioning your portfolio to reduce risk and preserve your wealth for retirement.
Your Evolving Priorities
Again, your priorities may change from accumulating assets to converting those assets to income. This change will affect the types of investments you consider for your portfolio. In addition, you may have other priorities competing for your assets—for example, college tuition for your grandchildren. Try to quantify the costs of your priorities and factor them into your planning.
Your Risk Tolerance
Generally, when it comes to investments, the higher the risk potential, the higher the return potential. Risk tolerance is subjective. How much risk you are willing to take on is a function of how much of a loss you’re willing to accept and how losses might affect your ability to generate the income you will need from your investments. It may also be important to consider inflation. To help you achieve your vision of retirement, your investments will need to keep pace with—or exceed—the inflation rate.
Required Minimum Distributions (RMDs)
If you have a traditional individual retirement account (IRA) or an employer-sponsored qualified retirement plan, like a 401(k) plan, you generally must begin taking required minimum distributions, or RMDs, from your IRA or retirement plan accounts at a certain point in your lifetime. The age at which an individual must start taking RMDs (“RMD Age”) depends on an individual’s date of birth.1
If you have more than one traditional IRA, there is an RMD for each of them. However, you have the option to either withdraw the total amount of RMDs from any one of those accounts or take the required RMD from each individual account. If you have multiple employer-sponsored retirement plans, the minimum distribution must be calculated and withdrawn from each account separately.
Asset Consolidation
As you approach retirement, you may find that you have assets scattered among many different accounts and across many financial institutions. To help simplify management of these assets, you may want to consider consolidating accounts where possible. Among other things, this makes it easier for you to monitor performance and make withdrawals in an efficient manner.
With qualified plans, such as employer-sponsored retirement plans, you may be able to transfer assets of one qualified plan account into another qualified plan account, where permitted by the relevant plans and applicable law. When doing so, there are certain procedures that you will need to follow, and you should consult your legal and tax advisors to determine whether this is a viable option for you and to understand any potential penalties and/or taxes associated with such consolidation of plan assets, where permitted. A Financial Advisor may be a valuable educational resource during this process as well.
Once you reach retirement and start withdrawing assets, consider making withdrawals from accounts where there are few or no tax consequences. However, the precise order of withdrawals may vary depending on your needs and circumstances, and you may want to speak with your legal and/or tax counsel about a withdrawal order that works best for you.
Footnotes
1 Specifically, the RMD Age is (a) age 70 ½ for individuals born before July 1, 1949, (b) age 72 for individuals born after June 30, 1949, but before 1951, (c) age 73 for individuals born after 1950, but before 1960, or (d) age 75 for all others—note, there is an apparent drafting error in the statutory language in the SECURE 2.0 Act of 2022, which was signed into law on December 29, 2022, which makes it unclear when age 75 starts to apply in lieu of age 73, but it appears age 75 is intended to apply if born after 1959. These new RMD requirements are effective for distributions made after December 31, 2022, for individuals who attain age 72 after that date.
