Revealing The Retirement Trifecta

Proactive accumulation, smart investment strategy, and tax-efficient distribution are three fundamental factors for a successful retirement plan. Each one builds on the previous one, resulting in a potent mix of what is required to achieve financial freedom. Let’s take a look at these key components of the retirement trifecta.
getty retirement saving concept

Accumulation in a proactive manner
The first aspect of the trifecta is to have a proactive accumulation approach. To become an investor, you don’t need $10,000 or even $100,000. Many of our clients have started investing with less than $1,000. It takes a long time to accumulate wealth. For most of us, accumulating enough assets to reach financial freedom will take years. Without having to work, financial independence is owning a portfolio that generates the money you require for your particular lifestyle. You decide when you want to retire once you’ve achieved financial independence.
It is critical to be proactive throughout the accumulation stage. It’s crucial to have a number of tax-diversified accounts in addition to having the discipline to invest every month. This is sometimes ignored, but it is critical because our current low tax environment is likely to change in the future. In general, accounts are taxed in one of three ways. They remind us of buckets, so that’s what we call them. Taxable accounts are in the first bucket. Stocks, Exchange Traded Funds (ETFs), and low-turnover mutual funds are examples of this type of investment. After-tax dollars are used to fund this account. Dividends and interest are taxed in this account, but capital gains are not taxed until the asset is sold. It can be a very effective approach to accumulate wealth while avoiding most taxes until you decide to sell. If you plan to use this type of account for long-term purposes, it’s critical to choose tax-efficient assets to minimize your tax liability.
Tax-deferred accounts make up the second category. Retirement accounts such as your 401k, Traditional IRA, 403b, SIMPLE, SEP, and other pretax accounts are among the most popular. The money you put into these accounts is tax-free right now and will grow tax-deferred until you withdraw it in retirement. When you withdraw the funds, the entire amount (both the original contributions and the gains) is taxed at the current income tax rates.
ADDITIONAL INFORMATION FOR YOU
Tax-free accounts fall into the third category. This category includes all Roth accounts. A Roth is a tax-deferred account that is funded using after-tax cash and grows tax-free as long as the distribution requirements are followed. There are income restrictions when it comes to establishing a Roth, so consult with a certified financial counselor or CPA before investing.
Most investors have all of their assets in the tax-deferred bucket during the accumulation period. The issue is that if tax rates rise, people will have little choice but to pay greater taxes in order to access their funds. As a result, funding accounts in all three categories is crucial. When you retire, you’ll have more power and distribution alternatives.
A Strategic Investment Plan
The second part of the trifecta is to have a well-thought-out investment strategy. The plan is to invest predominantly in equities at the start of the accumulation period, allowing your assets to expand over time and develop wealth. As your assets expand and you get closer to retirement, you’ll want to change your plan and diversify your holdings to include fixed-income investments. Maintaining exposure to equities should be part of your investment strategy if you want your assets to last a lifetime and maybe leave a lasting legacy to your descendants.
Distribution that is tax-efficient
The final component of the retirement trifecta is having a tax-efficient distribution strategy. When you’ve decided to retire, it’s time to consider the income options and the tax implications of using the assets you’ve amassed thus far. You must first evaluate your expenses, followed by your sources of income other than your retirement assets. For most people, this comprises their social security benefits, as well as any pensions or other sources of income, such as real estate. If you require additional funds, you will need to tap into your retirement savings. The amount you remove and the amount of tax you owe will assist you decide where to get your money. If you’re in the 12 percent tax band or lower, for example, you might want to explore using accounts in your tax deferred bucket as your primary source of income. If the 12 percent bracket is full and you need extra money, look into using accounts from your other accumulation buckets to satisfy your income demands. Please check our tax guide for more information.
To develop a successful retirement plan, we all need the retirement trifecta. Your retirement trifecta, on the other hand, will be one-of-a-kind. Working with a knowledgeable financial advisor can help you plan your accumulation strategy, ensure you have the correct mix of smart assets, and create a tax-efficient distribution plan that meets your objectives./nRead More