But that means retirement nest eggs have to last longer, too, as Americans live longer and longer past their retirement age.
Assumptions about longevity and safe draw-down rates that seemed reasonable when we started investing in IRAs in the 70s and in 401(k)s in the 80s are no longer valid for two big reasons:
- We’re living much longer.
- Interest rates are a fraction of what they used to be.
So it’s more important than ever to stretch every retirement dollar you have to ensure you don’t run out of money before you run out of time!
Here are some ideas to consider:
Consider income-generating investments such as REITs and rental real estate. These offer certain tax advantages (avoidance of double taxation in most cases), enable investors to take advantage of leverage, have the built-in advantage of investing in real assets and not pieces of paper, and are IRA-friendly. You can even own rental real estate directly in your IRA or other retirement account through self-direction. Visit our free seminar to learn more.
Start withdrawals from tax-deferred retirement accounts early. Sure, you don’t have to make required minimum distributions until you turn 70. But if you take smaller distributions early and stuff them into a Roth IRA, if you’re eligible, you may be able to reduce your marginal tax rate on your withdrawals. That’s because your income in any given year after age 70 will be lower, since your balance for RMD calculation is lower, and withdrawals from Roths are generally tax-free.
Balance Social Security against taxable investment income. If you’re not careful, taking too much in investment income can cause half of your Social Security benefits to become taxable. Some investment income sources aren’t taxable, though – or are only partially taxable. Roth income is generally tax-free, as are withdrawals of dividends from participating life insurance policies. Proceeds on life insurance loans are tax-free, as long as you don’t surrender the policy, generating capital gains on any amount withdrawn over basis. Annuities, combine income with return of capital, so only a part of your annuity income is taxable. Some investments in limited partnerships, MLPs also generate some of your income in the form of return of capital, which are also non-taxable.
By maintaining tax diversity – that is, holding assets that are taxed in a variety of different ways – including inside and outside of retirement accounts, you increase your flexibility for tax management, while potentially realizing less income in higher marginal tax brackets over time.
Engage a life insurance strategy.
If you have some substantial free cash flow during the year and you want or need life insurance, you may consider overfunding a permanent life insurance policy to the maximum extent allowed by law (without turning the policy into a modified endowment contract).
That way, you get the benefit of a large tax-free payout to a beneficiary of your choice in the event of death, or the possibility of tax-free withdrawals of dividends and tax-free loans proceeds when the loan is secured by the death benefit or cash surrender value of the policy. In the end, accumulated cash values in permanent life insurance policies, including whole life, participating whole life and universal life policies – are generally treated similarly to Roth IRAs. However, you have much less flexibility in what you can invest in than you have with an IRA or Self-Directed IRA (see below).
Use a Self-Directed IRA
Your IRAs and similar accounts are not restricted to stocks, bonds, CDs, annuities, cash and mutual funds. You can potentially vastly increase your long-term returns and possibly reduce expenses by choosing use a Self-Directed IRA in almost any investment you feel comfortable in, or in which you feel you have a market-beating advantage. For an introduction to the Self-Directed IRA concept, please attend one of our free informational on-line seminars that we conduct several times per week. You can sign up here.
A lifetime income annuity from a highly-rated insurance company is specifically designed to hedge against longevity risk – or the risk of living too long. Yes, part of the income coming back to you is taxable as ordinary income. But it is the only option that will provide income to you for as long as you live, in writing, guaranteed.
One strategy: Identify your very basic, minimum needs in retirement, and get a lifetime income annuity that pays this amount. That way, you know you have your basic needs covered. You also have the freedom to invest the rest of your portfolio for an even greater return than you would, otherwise.
Keep an emergency fund – outside of your retirement.
Don’t force yourself to make a taxable distribution or early distribution you don’t want to make. Keep an emergency fund in something reasonably liquid, though not necessarily all in cash. One idea: Keep 1 month worth of expenses in cash in the bank or a money market. Another six months in a longer term CD, and the rest in a short-term bond fund or other vehicle that pays a reasonable interest rate. The idea is to have as little money as possible earning a negative return after inflation.
We’d like to be a part of any long-term retirement strategies you do make. Please visit us at www.AmericanIRA.com, or give us a call at 866-7500-IRA (472).
We look forward to serving you.
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