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  • Jimmy J. Williams, CPA/PFS, CFP®

To Retire, Overcome These Three Challenges



Retirement planning of itself has many challenges for individuals. It is an area of life that has many concerns and questions because of the unknowns in the future. It is as the Boy Scouts would say, you must be prepared for anything. To help you accomplish your goal of retiring with a worry-free lifestyle, we believe you should overcome three challenges in the planning process, as well as the remainder of your life. The first of these challenges is longevity.


Longevity


Longevity is that period of time for which you may outlive your sustained investments. Too often, we are asked by our clients, “How long do you think I will live, and how much money do I need to live comfortably?” This is a question, of course, that we cannot answer with any certainty. No one knows what tomorrow may bring. However, it is critical that you provide a savings plan for your future with the hope of reaching the longevity goal you establish for yourself. It is not an answer any of us know with a degree of certainty. For example, I have a friend who is dying from cancer at the age of 45. However, my grandmother lived to the age of 100 years and 10 months. Why this happens, we don’t know. However, we must be prepared for either event.


Inflation


The other challenge to overcome in retirement planning is inflation. It is critical to understand that inflation cycles throughout the economies through the decades of life. No one knows what the next cycle of inflation may entail. However, let’s review what has happened in the past. Over the past two and a half years, our inflation in the United States has increased to a height of 9.1%. It is critical to understand that the cost of buying goods for your everyday living has increased by 9.1%, and certain sectors of the market increased much more. Food and fuel have increased far more than 9.1% over the past two and a half years. It is critical that you understand this large increase takes a tremendous toll on the investments you may have saved with a planned distribution rate of a much lower amount than the inflation factor.


One of the challenges you experience with inflation is that you do not know the length of time or term the inflationary period will be. The height of inflation and the term of which it lasts, both play a role in the use of your retirement funds.


Taxation


The third challenge, as mentioned in the previous paragraph, is taxation. It is true that as Americans, we are taxed on many things, from income, the purchases we buy, and the real estate we own. Taxation impacts literally every aspect of our lives in the United States. However, there are areas that you can control in your cash flow to assist your savings for retirement in lasting longer.


The timing of certain events with your retirement savings can help mitigate the tax burden you are impacted with on an annual basis. It is also a measure of how you invest that you will be taxed. For example, shouldn’t most of your retirement savings be in a qualified plan, such as your 401(k), or an IRA? These types of savings require taxation on the first dollar to be distributed from the respective plan.


However, for most of the wealthy, additional investments are made in those types of companies, or assets, that grow in value. This growth in value is not taxed until such a time as you wish for it to be taxed. For example, you must sell or liquidate the investment for a taxable event to occur. Once you decided and have liquidated the investment, capital gains at a much lower rate that ordinary income tax rates will be attached to the event. If you were invested primarily in growth-type companies and/or assets, your maximum rate on those capital gains in today’s law is 20%. This is a much lower rate than the 37% maximum ordinary income tax rates.


The wealthy in the United States pay an effective lower rate of tax than most Americans that are wage earners. This seems to be an abnormality. However, it is due to the impact and control these wealthy individuals exert over their investments and the realization of gains on a basis for which they control. For example, if you had property that you invested a very small amount in, and sold for a much larger amount, two to three times what you paid for it, the capital gains would then be applied to that portion you sold.


Twenty percent tax rates on capital gains has been the effective rate on capital gains for many years now. It allows the planning for such events to have a little more certainty.

For you to be successful in retirement, it is vital that you overcome the challenge of longevity, inflation, and taxation. If you desire some guidance and seek some form of assistance, contact your local CERTIFIED FINANCIAL PLANNER™ professional for a complimentary consultation. You will be glad you did. See on the jogging trail!


https://livealifeby.design/to-retire-overcome-these-three-challenges/


Registered Principal, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Jimmy J. Williams is an Investment Advisor Representative of Compass Capital Management, LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 S. 3rd, Ste. 4, McAlester, OK 74501.

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