Retirement Planning for What You Can and Cannot Control

If you've ever felt overwhelmed by retirement planning or unsure where to start, you’re in the right place. Today, we're diving into the aspects of retirement planning for what you can and cannot control with your hosts Kyle Hammerschmidt, founder of MOKAN Wealth, and co-host Kolin Hayes.

The Uncontrollable Factors in Retirement Planning

1. Tax Rates: A Moving Target‍

One of the most significant variables in retirement planning is future tax rates. Unfortunately, you cannot control how tax legislation evolves or what tax rates will be in the future. The best you can do is make educated assumptions based on current laws.Tax planning is essential to manage how your money is taxed and when you pay those taxes. For instance, a strategic approach might involve Roth conversions. This involves moving money from tax-deferred accounts to Roth IRAs, where future withdrawals can be tax-free. This strategy allows you to pay taxes on the converted amount now, potentially saving you from higher taxes in the future. While we can’t control future tax laws, we can control how we prepare for them, thus managing our lifetime tax bill effectively.

‍2. Inflation: The Silent Eroder of Wealth

‍Inflation is another uncontrollable factor that can have a substantial impact on your retirement. The purchasing power of your money decreases as inflation rises, making it crucial to plan for this eventuality. Even though you can't control inflation rates, you can prepare for them by incorporating assumptions about higher inflation into your retirement plan.To mitigate the effects of inflation, it’s wise to plan for worst-case scenarios. For instance, running financial projections with an inflation rate of 4% to 4.5% can help you understand how your essential costs might increase over time. Investing in assets that typically outpace inflation, like stocks or real estate, can also help preserve your purchasing power.

‍3. Market Volatility: Riding the Roller Coaster

‍Market volatility is another element beyond your control. The stock market can experience significant ups and downs, often driven by factors unrelated to your personal financial situation. For example, a sudden market downturn, like the one seen in early August, can be jarring.While you can't control market fluctuations, you can manage your exposure to volatility. This involves setting realistic expectations for your investments and having a diversified portfolio. Keeping two to five years' worth of income in stable, low-risk investments can help weather short-term market storms, allowing your long-term investments time to recover. Understanding historical data and adjusting your portfolio based on your risk tolerance are key strategies for managing this uncontrollable factor.

The Controllable Factors in Retirement Planning

1. Withdrawal Rates: The Power to Decide

‍One area where you have significant control is your withdrawal rate. This is the rate at which you draw funds from your retirement savings. Deciding whether to withdraw more or less depending on market performance or personal needs can greatly impact the sustainability of your retirement funds. Consider your personal situation: would you prefer to spend more in the early years of retirement or save more for later? You might choose to withdraw a higher percentage early on to enjoy retirement while you are more active, or you might opt for a lower withdrawal rate to preserve your assets for later years. Strategic withdrawal planning can help you balance immediate enjoyment with long-term financial security.

‍2. Risk Management: Balancing Your Investment Strategy

‍Managing investment risk is another aspect you can control. While you can't dictate market movements, you can choose how to allocate your assets. Understanding different investment types—such as bonds, stocks, annuities, and fixed-income securities—allows you to create a diversified portfolio tailored to your risk tolerance and financial goals.Effective risk management involves placing your short-term needs in stable investments and letting your long-term investments grow. For instance, if you need income in the next few years, you might keep that money in low-risk investments. Meanwhile, funds intended for long-term growth can be invested in more volatile assets with higher potential returns.

‍3. Lifetime Taxes: Proactive Planning for Tax Efficiency

‍Finally, while you can’t control future tax rates, you can manage your lifetime tax liabilities. This involves proactive tax planning to minimize your total tax burden over your retirement. By considering strategies like Roth conversions or tax-efficient withdrawals, you can potentially reduce your tax liability and preserve more of your wealth.Proactive tax planning means making decisions now that will impact your future tax situation. This could involve adjusting your asset allocation, timing withdrawals, or making charitable contributions. By staying ahead of tax implications, you can optimize your financial situation both now and in the future.In retirement planning, understanding what you can and can't control is crucial for crafting a robust strategy. While factors like tax rates, inflation, and market volatility are beyond your control, you can take charge of your withdrawal rates, risk management, and lifetime taxes. By focusing on these controllable aspects, you can better prepare for a secure and fulfilling retirement.Thanks for tuning in to Retire Ready. Remember, proactive planning is key. As always, we encourage you to avoid procrastination and take charge of your retirement planning today. If you enjoyed this episode, please like, rate, and review the podcast. For more resources, visit us at retirereadyacademy.org or reach out through our website at mokanwealth.com.