With 2013 tax filing just around the bend, we are writing to remind clients to keep retirement planning at the forefront of their tax planning agenda. First, be sure to max out any and all retirement accounts you can for 2013. Clients should be aware that many companies match 401k contributions; that they may also be eligible for Roth IRA contributions; and that there are various penalties for withdrawing funds from these accounts. Furthermore, if you are over 50, you may be entitled to increased savings thresholds.
What Should I Do With the Monies Once Retired?
Clients, including our bankruptcy clients, often ask, how should these assets be invested? We are not retirement asset managers, although we do manage trust accounts for clients. We do educate our clients to the fact that most retirement account assets are protected in bankruptcy. But with the general population living longer and longer, and with financial planning for retirement falling largely on individuals and not on their employers, we have some rules of thumb to consider.
The Buckets and Retirement
Many folks have heard of the bucket strategy. It’s a conceptual process in which you construct a series of several buckets. The first bucket is for currently needed funds. You would place, for example, one to three years of needed monies in this bucket. Thus, for someone who needed $50,000 per year, in addition to their Social Security and other pension income, they would place about $150,000 in a federally insured money market account, or short term certificates of deposit. While those monies earned nominal interest (these days short term interest rates are around zero), they would be protected from the pitfalls of the market.
Many studies approve of the 4% withdrawal rate. That is, withdraw 4% of your total assets per year. In this case, it would be from the first bucket. You should adjust the number annually based on inflation. You should also be cognizant of the market: if there was a severe decline that year, you may want to reallocate funds.
Your second bucket, you use to refill your first bucket. This has slightly more volatile investments such as intermediate bonds and perhaps some stocks with dividend payments. Folks who don’t want to sell their inherited utility stocks often put them in this bucket.
The third bucket is used to fight inflation. That is, for higher risk but higher return investments such as stock mutual funds including international funds to protect you during domestic sell offs. This bucket is risky, but it’s not needed for several years, so it can be.
Should We Own Stock During Retirement?
Unfortunately, if you have limited retirement resources and a long life expectance, there is not much of a choice. It’s the only place for growth. Historically, the stock market grows at about 9% per year. Nothing else does that. And, with stock, or equity, mutual funds, you have professional management at a nominal cost. The old rule of thumb, popularized by Vanguard founder and consumer guru, John C. Bogle, was to have the bond percentage of your retirement portfolio the same as your age: if you are 70, you have 70% in bonds. One thing missing from a simple analysis here is that Social Security and pensions are, as a practical matter, part of the first bucket and must be accounted for. Thus, the new thinking is that you need a higher percentage in stocks, but factoring in the annuity of Social Security and any fixed pension. It’s a higher risk, but you are likely to live longer too. One new study, by Pinnacle Advisory Group, says to have 20% to 50% of your assets in stock at the outset, but to increase your equity percentage as time goes on! This is the opposite of old school thinking, but the experts have a point: if you think of putting several years of retirement savings into that first, non equity bucket, then you can see that when the third bucket grows, it will increase the equity percentage.
Experienced Bankruptcy Attorney
Attorney Neil Burns represents consumers in bankruptcy. Their retirement assets are protected and exempt from bankruptcy. The strategies above, while mere outlines, can be employed even when you need to file for bankruptcy protection. Call Attorney Neil Burns if you have questions.
