20 Aug Independent Retirement: Winning the Game
“It just goes to show ya, it’s always something!”
Gilda Radner as Roseanne Roseannadanna
There is a game being played, with a clock, and a score for each player. That clock limits length of each player’s participation, and that score grants powers of health and wealth to be used later in the game. As in soccer, where early goals are hard to beat, so in personal finance do early investments become more powerful over time. A soccer player may have a sense of where other players might be moving, but must retain balance and be ready for change.
A player’s movement can be predicted in a general way for a play or two, but not for an entire game. An hour from now or tomorrow can be predicted with greater accuracy than can a week or a month or a year. Forward vision becomes increasingly hazy with shadows of uncertainty. So does our ability to predict events decline as further forward in time we shine our beams of attention. When it comes to planning for the distant financial future, wider ranges of possible changes and consequences must be considered.
Nothing is more certain than change, and for human beings that means a decline in physical and mental abilities as a result of the inevitable aging process. Tasks once accomplished almost without thinking, may someday become a significant challenge. Most people will need help with one of the Activities of Daily Living (ADLs) before they leave this planet.
Saving for Retirement
Before trying to figure how much money one needs to retire, it is important to determine how much one needs to live now. Only with solid numbers for monthly cashflow can useful estimates be made for future financial needs. Then inflation must be considered because money loses buying power over time. Population growth naturally drives prices higher for survival necessities like food, shelter, clothing, energy and transportation. Money also declines in purchasing power as demand rises with economic development. The standard estimate for inflation in financial calculations is 3%. To buy $100,000 worth of today’s goods and services, $240,000 will be needed in 30 years.
No matter what figure retirement calculations produce as the number to reach for retirement assets, the goal is easier to reach, the earlier the plan is put in place. Early goals are a dominant advantage for the rest of the game. The magic of compounding investment earnings and interest further gets stronger over longer periods of time. Using average stock market returns, a 35-year-old with a $100,000 annual income can amass a million by age 60 with a 6% deductible contribution matched with another 3% by the employer/sponsor or a 401(k) Plan. A 45-year-old with a $200,000 income would need to set aside 12% for retirement savings with the same employer 3% match to reach a million by 60. What matters most is getting started, the sooner the better.
Outside of retirement accounts, there are few better ways to save than by paying off debt. High-interest rate debt, like credit cards, is an investment opportunity like no other. Nowhere else can cash guarantee a mid-teens percentage of return on investment.
Access to Retirement Accounts
Early withdrawal from an IRA will cost the taxpayer a 10% tax penalty on top of the current tax bracket. Transfers between custodians of retirement accounts are not taxed and are not limited in number. A cash distribution delivered to the retirement account holder, or to a non-qualified account, must be re-deposited within 60 days, as a tax-exempt rollover, or it will be subject to the same tax and penalty.
As the earliest age for normal distributions (59½) approaches, or as the arrival of age 70½ requires minimum distributions (RMDs), portfolio adjustments must be made. Maintaining a liquid balance or money market, where distributions will come from, will avoid forced liquidation of more profitable investments.
Time waits for no one, but time can be a friend for those who choose to use it to their advantage. The game begins now, no matter whether choosing to watch, play or ignore; the hands on the clock keep turning and all the scores keep changing. Those with the most time have the greatest savings advantage, but the time to start is always now.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management, LLC, Spire Securities LLC or its affiliates. Investing involves risk, including the loss of principal. Past performance may not be indicative of future results.
Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC