Retirement Made Safe
You might have heard of a backdoor Roth conversion before, but what exactly is it? In short, a backdoor Roth IRA is a way for those with high incomes to take advantage of a Roth account despite IRS contribution limits.
To start with, you have to have an IRA to convert to a Roth. So, if you don’t meet the qualifications for opening a Roth IRA below, you can only open a traditional IRA.
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The Rule of 120 is a long-standing rule of thumb for financial asset diversification. Retirement planning is complicated, and some people find this rule useful as a starting point to evaluate the amount of risk that they have in their financial plan.
According to the Rule of 120, you subtract your current age from 120, then put the difference in stocks and other equities. The rest goes into ‘safe’ financial products, known as fixed-income assets such as fixed-type annuities, bonds, Treasury securities, and CDs.
In other words, if you are 20 years old, 100 percent of your money should be in stocks. On the other hand, if 70 is your age, then you would be at 50 percent in ‘risky’ assets, such as equities.
To be clear, the Rule of 120 is helpful when you are just beginning things. But it’s not the best rule of thumb for everyone and in every situation. Let’s go more over how this rule can be used – and what some limits may be.
With growing government debt and the prospect of increasing taxes, you may wonder if a Roth conversion is right for you. But there are many nuances to deciding on a Roth conversion and then following through on the conversion process.
You will pay taxes on the converted amount. In some cases, a Roth conversion can move you into a higher tax bracket, depending on your other taxable income. If you will need the money in five years or less, this tax planning strategy might not be a good fit for your situation.
Understanding your options can help in making a confident decision. That being said, here are a few quick factors to keep in mind as you explore whether a Roth conversion might make sense for your financial situation. You will also want to speak with your tax advisor and any other experienced professionals as needed for further guidance on your personal situation.
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As a Nobel Prize winner and professor of finance, emeritus at Stanford’s Graduate School of Business, William Sharpe is a big deal in the world of finance.
He has spent the majority of his life thinking about financial risks. He was instrumental in developing the capital asset pricing model and the Sharpe ratio, which measures risk-adjusted investment returns. In other words, when he has some things to say about retirement, that means it’s worth paying attention to.
You may have heard of capital preservation strategies at some point or another when planning for retirement. But what is capital preservation exactly? What could it mean for your overall financial plan?
Here’s a quick look at what capital preservation involves – and why it becomes more important as people move into retirement and beyond.
In a nutshell, capital preservation is a kind of financial strategy that aims to minimize the risk of loss in your investments. It emphasizes the protection of your money, or “principal protection,” as it’s known in more formal terms.
A well-known rule of thumb in finance is how there is an inverse relationship between risk and reward – or how much risk you take on in order for your money to have more growth potential.
Since capital preservation is focused on protecting your money, this brings up certain questions. By adopting a capital preservation strategy, does this mean that your portfolio won’t grow any more over time?
Thankfully, the answer to that is no. That said, the rate of growth will vary depending on what makes sense for your risk tolerance, personal situation, and timeline until retirement.
Any small business owner can tell you about how much they have given to building their companies. But what about business succession planning, when it comes to making their exit on the backend?
Whenever, and however, they decide to step away, are these entrepreneurs as ready as they could be to enjoy the hard-earned fruits of their life’s work? A survey by Wilmington Trust offers some answers.
It’s no exaggeration to say that small businesses play a big role in America. Both Project Equity, a non-profit group focused on economic security, and the U.S. Census Bureau estimate that there are approximately 2.34 million small businesses in the U.S. These companies employ about 25 million people and, pre-pandemic, generated roughly $5 billion annually in aggregate revenue.
Yet while small business owners are actively involved with their enterprises, a study by Wilmington Trust found that many of them don’t have transition plans. What’s more, a large percentage of these entrepreneurs haven’t even thought of any business succession planning.
According to Ernst & Young’s Family Business Center of Excellence, the average age at which small business owners start transitioning from their businesses is 62.
For a lot of entrepreneurs, succession planning will likely cover some sort of transition to retirement. Or it might be a lifestyle in which they remain plugged into their communities, but they might not be as active in their companies as they were in earlier years.
However, in the study, nearly 60% of small business owners didn’t have a formal business succession plan of any kind currently in place. Moreover, 11% of this group hadn’t even thought about having a transition plan at all.
What will be your major retirement income sources? What income streams will you count on to keep up your ideal lifestyle in your ‘non-working’ years? Do you plan to be financially independent, or will you have to depend on your children or other loved ones for support?
These are important questions as you move closer to retirement. Once you step back from a full-time career, your current income from work earnings, entrepreneurship, or other sources will probably change.
The focal point then turns to your lifestyle in retirement and what sources of income you will use to maintain it. Nor is this just a personal question. Rather, it’s a major concern for millions of retirees affecting their financial future.
One survey that can help with these questions is from the Transamerica Center for Retirement Studies. Each year, this survey captures findings from thousands of retirees, workers, and even employers, including on what they are using for major retirement income sources (or what they expect those sources to be).
The Transamerica study is considered to be one of the most accurate samples of the U.S. retirement landscape as a whole. Its numbers are typical of the ‘average’ retiree in America.
As you get closer to retirement, you want to be sure that you are ready for a smooth transition into your post-career lifestyle. There are several things that you can do ahead of time to help yourself with this goal.
To make it digestible, here is a breakdown of different things to do and think about at every stage of pre-retirement.
Every generation faces different obstacles for retirement. But if you were to tune into any financial talk show today, you might hear the host say that retirement isn’t even close to how it was for your parents and grandparents. Why?
Nowadays, people have a variety of issues that are different in scope or that weren’t even around for prior generations. Never-before-seen economic conditions (such as those tied to the COVID-19 pandemic), lengthened lifespans, and evolving financial risks are all contributors to this.
What’s more, the definition of retirement has changed. Nowadays, retirees are taking their golden years by the horns. They are enjoying full lives of second career acts, budding entrepreneurship, volunteerism, and pursuit of lifestyles that might have not been possible for their parents or grandparents.
Here’s a look at why retirement is different for people today than it was in the past — and how you personally can be ready for the changes.
Are you a public employee and close to retirement age? If you prefer to not ‘separate from service’ quite yet, opting for a DROP retirement program can be worthwhile.
Depending on your employer, DROP is short for “deferred retirement option program” or “deferred retirement option plan.” DROP plans first came about in the 1980s for public-sector employees. Currently, members of law enforcement, firefighters, educators, and other civil employees often have this sort of program as an option for delayed retirement.
You have probably heard of some of the many states that offer a DROP program, including Florida, Ohio, Texas, and California. Of course, state governments aren’t the only ones with DROP programs. Municipal governments also offer DROP retirement options to their employees.
DROP benefits can be a great boon to employees who would otherwise prefer to keep working and not quite settle into retirement. If you do have this option as part of your retirement benefits, it’s a good idea to look more into it and see if it might make sense for your working goals.
Are you unsure about whether your retirement system has a DROP option? You can check with your HR department for more information.
All of that said, here is a quick rundown of what deferred retirement option plans involve and what sort of benefits you might obtain from it as a long-term civil employee.
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