Three Threats to Your Retirement Savings

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Having a pension in your senior years can be a lasting comfort. Though it's easy to complain about “living on a fixed income,” knowing you never again have to think about how much income you will have and where it will come from has a certain benefit.

Knowing I would not retire with a pension I took the opportunity to create my own retirement income. I diverted pretax income to retirement accounts, saved and invested taxed income and reinvested gains to defer taxes. I don't worry about an organization going broke and leaving me destitute at the very time I am no longer able to work. After all, a pension is simply a promise.

Few of us are schooled in creating or managing wealth and fewer still in how to make sure that wealth lasts the balance of a lifetime. Putting together wealth sufficient to create income that lasts a lifetime is no easy feat. Yet, in the end the more difficult part is keeping it. 

Once I wondered why those who create wealth so often end up penniless when they had so much. I have come to understand the more difficult part of wealth is not amassing it, the most difficult part is managing it.

During earning years, putting away savings, investing aggressively and hoping for the best, taking gains and investing those for even greater growth is not just lucrative, it's fun. Then being responsible for your own financial future as opposed to those who find a check in their account each month, can keep you up at night.

There are those who know much more about wealth management than I do. Those who can unemotionally manage wealth for me based on a plan to which we have both agreed. Having a wealth manager is certainly a good emotional investment. Now I sleep.

Contrary to the beliefs of many, the biggest threat to retirement wealth is not market fluctuation. The biggest threats to your nest egg are investment fees, churning and taxes.

Wealth management is an expense and you don't necessarily get what you pay for. Hiring a big firm, like Vanguard or Fidelity should deliver you professional management at a reasonable cost with little risk of churning. Hiring a personal wealth manager, one whose family you know, whose yacht you sail on, and is a close acquaintance can be personally comforting. It will also likely be a great deal more expensive as they make much of their income churning your investments. Allowing a low cost institution to manage your wealth generally means your investments will be broadly diversified with periodic rebalancing to account for income and valuation changes. You may personally speak a few times a year, your asset is fully invested, the plan is worked, and you take income. Planned investments cost less.

Strategic tax planning is another consideration after wealth management and its attendant costs. A good wealth manager is schooled in tax planning and can be a key decision making partner. Many who create their own wealth through working own taxable and non-taxable retirement assets.

A simple strategy is to do an estimated tax return in December of each year to determine how much income is expected. As written, the new tax law raises the Standard Deduction to $12,000 in 2018, with an additional $1,300 for those over 65. If your taxable income does not reach that threshold, do a voluntary distribution from your taxable retirement account. Even double that benefit if you don't actually need the cash by simply transferring the amount to your non-taxable retirement account where it will never be taxed. Rather than reporting income under the minimum taxable amount, create some taxable income though a taxable retirement distribution and effectively take tax deferred retirement money tax free.

If you retire responsible for managing your retirement income, hire a low cost manager who won't churn your account. Forget about market fluctuation.  Focus on fees and taxes, those are your greatest financial threat.


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