Planning for your retirement as a high-earner includes building a much larger nest egg than average that supports your lifestyle long after you decide to stop working.
If you’ve been blessed with a high income, you may think you’re maximizing your savings if you contribute the maximum amount to your retirement accounts. But there are many strategies you can use to boost your retirement plan from good to great. Speak with your financial advisor to learn more.
1. Wait to Withdraw Social Security
Are you in a rush to file for Social Security benefits? It’s tempting, but if you slow down and calculate your payments – you might regret it. It can come with huge benefits if you can wait until you turn 70.
You can apply for benefits at age 62, but the benefit you receive will be up to 30% less than it would be if you waited until what the Social Security Administration deems “full retirement age” (FRA). Electing to receive benefits before your FRA can reduce your benefits if you decide to keep working. Unless you really need the money, consider waiting to apply. If you can afford it, put off applying until age 70 when your benefit will be about 32% higher than it would be at FRA.
2. Smooth Out Your Income
One strategy, known as income smoothing, seeks to minimize the impact of taxes once investors start tapping into their retirement savings. The idea behind income smoothing is that, when reported income spikes during retirement, so does your average tax bracket, and therefore the taxes you will owe.
Therefore, it is more tax efficient to smooth out the distributions you take from your retirement account. This can prevent higher income levels from being realized in any given year, which would push you into higher tax brackets.
For example, if a couple were to start taking distributions from their tax-deferred accounts at an earlier age, smoothing out their income, that may result in lower estimated average tax costs during retirement. That means more resources to support buying, spending, and other financial goals.
3. Tap Into Home Equity
An important part of retirement planning is determining how much you can withdraw annually from your portfolio, based on a set of assumptions about portfolio strategy and future market performance. When a plan is based on inaccurate assumptions, it may lead you to sacrifice spending or take more risks to boost investment returns.
Don’t overlook one of your most important assets: your home’s equity.
Your home may be one of the most valuable things you own. If you are willing to consider selling or borrowing against it to support your retirement income but exclude its value from the total assets you have to retire, you may be underestimating how retirement ready you are.
Home equity can change that equation and prevent retirement investors from either making unnecessary purchases or worse, taking more investment risk than they are comfortable with.
4. Consider a Roth IRA Conversion
Some individuals can’t contribute directly to Roth IRAs if their income exceeds certain limits set by the tax code, but they may be able to convert a Traditional IRA to a Roth IRA.
The taxable amount converted (including the tax-deductible contributions as well as tax-deferred earnings) is subject to ordinary income tax for the year the conversion is made but provides future tax-free growth potential.
This strategy may work for taxpayers who don’t need to take distributions from their Roth IRA during retirement and plan to leave their account to their children. Talk to your financial advisor about how this strategy can be integrated into your legacy plan.
5. Don’t Ignore Annuities
If you’ve contributed the maximum allowable to your 401(k)s, IRAs, and other tax-qualified retirement accounts, consider putting additional savings into annuities. Annuities are often misunderstood, but they are a sure way to protect your assets and guarantee income.
Assets in an annuity maintain tax-deferred growth potential and can be protected from both inflation and market volatility. Depending on your contract, you will receive regular income payments for a specified period or spread over your lifetime at a certain date. Even better, annuities are flexible. Many of them offer a variety of living and death benefit options so that those close to you can be taken care of after you’re gone.
If you’re a high-earner planning for retirement, chances are you have complex needs and goals.
Plus, your household typically has far more resources than just your investment portfolio, something that should factor into any goals-based planning. How to best use home equity, convert IRAs, or guarantee income streams are only a few of the many retirement strategies a Prosperity Financial Advisor can assist you with.
We have the expertise to discuss different scenarios, lifetime milestones, and your unique financial goals – plus the strategies that go with them – to help you create a plan to support your lifestyle comfortably into the future. How to best use home equity, convert IRAs, or guarantee income streams are only a few of the many retirement strategies a Prosperity Financial Advisor can assist you with.
Start the conversation today.