Planning for your retirement is a lifelong project. As such, it can be disheartening when unexpected issues and risks that are outside of your control threaten to derail your hard work and careful foresight. Just as market changes and inflation ups and downs are challenging to predict, government public policy revisions can be just as unanticipated and damaging to your financial future.
Public policy changes can come in the form of reduced Social Security benefits, shifts in minimum required distribution laws, or caps on savings amounts. Increased taxes, new taxes, and adjustments to health care reforms and other retirement programs can wreak havoc on your future financial security.
But just because something is unexpected doesn’t mean you can’t do your part to protect yourself from the changes. There are ways to account for these changes so that if they do occur, you won’t become a victim.
Don’t Put All Your Eggs in One Basket
In other words, don’t assume that Social Security or government aid are your retirement answers, especially if you are young. Recent research shows that approximately half of the American workforce doesn’t have access to a retirement savings plan at work, and of that group, less than 10 percent have taken the initiative to contribute to a plan of their own.
That doesn’t bode well, considering how overdrawn the Social Security system is these days. Even saving a small amount regularly, starting at the beginning of your career, will provide you with a cushion to help you through your retirement years.
Stay Current on Changes and Dates
If you are nearing retirement age, it’s important to consider whether upcoming changes will have any grandfathering provisions. In the past when changes were made to Social Security they did not affect those in or near retirement. However, other provisions, like tax rate changes under the federal income tax system typically do not have grandfathering provisions. There may be prospective effective dates providing some planning opportunities for those closer to retiring.
By working with a financial advisor, you have the advantage of having someone help you stay on top of policy changes and planning opportunities. This could potentially impact your retirement in a significant way.
Protect Yourself From Tax Increases
It’s difficult to plan for future law changes, but there are several options to strategize in the tax area. One is to use tax-free investments, such as municipal bonds, so that if marginal tax rates increase, that income will not be affected. An even wiser choice is to use Roth IRAs and Roth Accounts to achieve tax-free growth, which allows the taxpayer to prepay taxes and lock in current rates. This will shield you from future tax rate increases. One caveat: if the tax system changes and new taxes are added, such as a consumption tax, then the Roth tax vehicle does not protect against them.
Another perk of investing in Roth IRAs is that you create tax diversification, providing for a hedge if tax laws change. Uncertainty is abundant, so having a combination of taxable, tax-deferred, and tax-exempt accounts allows for better planning in times of change.
Diversifying in other ways in a retirement income plan may provide similar protection. For example, having annuities, life insurance, cash, and a diversified portfolio from which systematic withdrawals are taken can provide against policy changes that affect any of these resources individually.
At the same time, it is important to retain enough flexibility and liquidity in the plan to react to changes as well. Having a cash reserve and multiple contingency funds to overcome various risks provides a cushion to give you some peace of mind.
While we can’t predict the future, we can do our part and plan for it, taking into account multiple variables and setting ourselves up for success. Don’t let any threat to your retirement knock you down. Instead, reach out to us so we can guide you in the right direction. To learn more, download our free report, 12 Keys to a Successful Retirement Strategy today. Call my office at 770.249.7424 or email me today at firstname.lastname@example.org.
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