Identify Your Risks
Retirement planning in today’s environment poses different risks than in the past, so it is critical to consider this new landscape when preparing for retirement. There are three main risks to consider when planning for your retirement – structural, market, and taxes.
Structural risk is something you may face based on the way you’re preparing for your retirement. It’s the structure of your approach and addresses the tools, resources, and funding of your retirement. Structural risk today is very different than it was in the past. In the past, the retirement planning approach using the following three pillars was strong. However, this three-pillar approach may not work in today's retirement planning landscape. You may need something different.
- Social Security – The availability of Social Security down the road is uncertain. We simply don’t know what Social Security is going to look like in years to come.
- Personal Savings – Do you have personal savings to use for retirement income other than Social Security?
- Traditional Retirement Plan – Have you set up an IRA or 401(k) for your retirement, and if so, are you taking full advantage of it?
Market risk is something you are faced with as your retirement funds are exposed to market volatility and the impact the stock and bond markets have on the growth of your investments.
S&P 500® from 2000 through 2018
The chart below shows a hypothetical investment of $100,000 in the stocks reflected by the movement of the S&P 500®, excluding dividends, made at the beginning of 2000 and tracked through the end of 2018. The funds are tracked through two bear markets and two bull markets. At the end of this 19-year period, the S&P 500® index, including dividends, had earned an average of 4.86% a year.
S&P 500® - Where do we go from here?
Sources: Yahoo Finance GSPC Historical Prices, accessed 01/05/18
Please note, it is not possible to invest directly into the S&P 500® Index; this measure is provided solely as a gauge of overall market performance. Standard & Poor’s: “Standard & Poor’s®,” “S&P®,” and “S&P 500®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”).
The historical performance of the S&P 500® is not intended as an indication of its future performance and is not guaranteed. This chart is not intended to provide investment, tax or legal advice. Be sure to consult a qualified professional about your individual situation. This chart does not take into account investment fees, so actual results may be different than depicted above.
Tax risk may be one of the most impactful risks to your retirement planning. Tax risk addresses the potential for paying unnecessary taxes as you accumulate funds and as you spend those funds later in life. You must consider taxes when saving for retirement. There are two tax structures that you can save under: tax-deferred growth and tax-free growth.
IRAs and 401(k)s are tax-deferred savings plans, which means you don’t pay taxes on those funds until withdrawal. In other words, you won’t pay taxes until retirement versus during your working years.
Tax-free retirement accounts, such as Roth IRAs and Roth 401(k)s, function in the opposite way. You pay taxes as the money goes into the accounts, and you don’t pay taxes on the growth in the accounts.
This is a critical difference that can drastically impact your retirement. In a tax-deferred situation, you’re pushing your tax risk into the future when you won’t know what the tax rate will be, and you don’t know how much growth you’ll have in your account. In a tax-free situation, you’ve already paid your taxes and will have tax-free income during your retirement.
History of Tax Rates: 1913 - 2019
Top Federal Tax Rates
Are taxes going to increase?