Prepare now to enjoy the retirement you've imagined and earned
A successful retirement hinges on how well you manage your income, costs and taxes—and that takes planning. Your BB&T Wealth advisor partners with your dedicated team to assess your financial situation and create a strategic plan that promotes your future well-being.
Knowing where you are today is the first step toward planning for the future, so we:
- Take time to understand and properly establish your retirement goals and objectives
- Analyze your sources of income, expenses and assets to optimize their role in maximizing family wealth
- Review beneficiary designations and coordinate them with your existing estate plan
Based on a deep understanding of your financial life, we:
- Design a proactive and flexible financial plan to achieve your retirement needs and family legacy goals
- Develop an organized strategy that includes savings and investment vehicles, credit, insurance and taxes
- Determine and account for gaps and variables you can control and other factors you should prepare for in retirement
- Work with your other advisors to ensure successful implementation of your plan
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How should I plan for retirement income?
With proper income planning, you can enter your retirement years with confidence.
Step 1: Determine how much retirement income you’ll need
If you plan to maintain your current lifestyle once you retire, you'll need 60% to 90% of your pre-retirement income. Other things you'll want to consider include:
- Retirement goals – Do your goals include travel or starting a new hobby? If so, consider the costs associated with these new ventures.
- Healthcare – With age comes increased risk of health issues. Plan for both expected and unexpected events, as well as rising medical costs.
- Longevity – Today's retirees are living longer. Consider that your retirement could last 30 years or more.
- Inflation rates – Inflation rates of 3% to 4% could lead to prices doubling within two decades.
- Market volatility –There are no guarantees when it comes to financial performance. Consult your financial advisor to make sure your retirement portfolio can withstand the ups and downs of the market.
- Unforeseen expenses – Build in extra savings for unanticipated financial circumstances.
Step 2: Identify existing sources of income
There are a number of ways to accumulate wealth before retirement. Some of the most common include:
- Traditional and Roth IRAs
- Workplace retirement plans (401(k)s and 403(b)s)
- Pension payments
- Savings and money market accounts
- CDs (Certificates of Deposit)
- Treasury bills
- Social Security payments
- Stocks, bonds and mutual funds
- Real estate investments
Ideally, you'll want numerous and diverse sources of income, an income-producing cash reserve (CDs, treasury bills, savings accounts and money market accounts), and long-term investment sources (stocks, bonds, mutual funds, and real estate) from which you withdraw dividends and interest.
Step 3: Add supplemental income to your retirement portfolio
Though there are a number of ways to supplement your income, there are three methods that can be particularly useful for Wealth clients.
Annuities are kinds of income insurance. An immediate annuity requires a lump-sum premium and, like a pension, provides an appointed monthly payment. Deferred annuities allow you to invest over time and then withdraw your gains in a lump sum or guaranteed percentage payments.
Charitable remainder trusts
Charitable remainder trusts allow you to donate assets such as securities, businesses or real estate (not including the home you live in) to a charity upon your death, while receiving an annual income from a set percentage of the donation, such as 5%, while you're living.
There are numerous other benefits to charitable remainder trusts. You can record the trust as a charitable deduction on your income taxes, use it to defer or potentially eliminate capital gains taxes on the donated assets, and you can allow it to reduce your overall estate tax.
Asset transfers are another creative way to supplement your income. Transfers, such as Grantor Retained Annuity Trusts (GRATs), allow you to receive income from your estate. With a GRAT, the grantor, rather than the beneficiary, receives full benefits from the transfer. To achieve this, you’ll want to set up a limited term that you're most likely to outlive. For example, if you expect to have a 30-year retirement, you could set up a 20-year GRAT. If you don't outlive it, the money will return to your estate. A family trust allows you to transfer assets but is designed to benefit your beneficiary upon your death.
The bottom line
Planning retirement income can be complex. After determining how much you’ll need, identify possible sources of income and find other ways to supplement it. Then, with the appropriate investing strategy, you’ll be on your way to a positive income situation in retirement.
How can I minimize taxes in retirement?
With the right strategies, it’s possible to defer, reduce and even avoid certain taxes and penalties in retirement.
Consider tax-deferred and non-deductible retirement accounts
Perhaps the trickiest aspect of retirement planning is trying to predict what the tax rates are going to be when you retire. The earlier you start planning, the more difficult this guessing game gets.
If you've accumulated a significant amount of wealth during your working years, ordinary income and estate taxes will be an important consideration for you.
Tax-deferred accounts [traditional IRAs, 401(k)s, 403(b)s and certain annuities] offer you tax benefits now that will lead to taxable withdrawals during retirement. Roth retirement accounts [IRA, 401(k), 403(b)] require that you contribute taxable income now that will spare you from paying taxes when you retire.
Take advantage of tax diversification
Ideally, you'll want your money diversified between tax-deferred and non-deductible accounts during your working years. This gives you the flexibility to benefit from either scenario. As you get closer to retirement, you and your BB&T Wealth advisor will need to act based on the most likely circumstances ahead. This may involve moving money from your tax-deferred accounts to a Roth account [IRA, 401(k) or 403(b)]. You would take an initial tax hit for doing so, but it could possibly save tax dollars and diversification over the long term for you and/or your beneficiaries by having multiple tax buckets to draw upon in your retirement years.
When it comes to timing, also consider the required minimum distributions (RMDs) you’ll need to take from your tax-deferred accounts. By the time you reach age 70½, you must start withdrawing the legally required minimum amount. Neglecting to do this will incur severe tax penalties.
Consider tax impact on your retirement income
While there's a penalty for withdrawing less than the required minimum from some of your accounts, there’s also an indirect penalty for withdrawing too much. If you take out a large amount of tax-deferred money during a given year, you may inadvertently push yourself into a higher income bracket for that period.
Strategize ways to reduce capital gains and estate taxes
Here are several tactics for handling the tax challenge:
- Charitable remainder trusts – These allow you to apply additional charitable deductions to your annual income tax, while providing you with supplemental income throughout the remainder of your life. They can also help you defer or potentially eliminate capital gains taxes on the donated assets and allow you to reduce your overall estate tax.
- GRATs – Grantor Retained Annuity Trusts (GRATs) allow you to transfer assets out of your estate for a limited term, thus deferring or eliminating estate taxes on those particular assets.
- Dynasty trusts –This is a trust that doesn't just benefit your children or grandchildren, but multiple generations of descendants. Best of all, this type of wealth transfer will allow you and your beneficiaries to reduce estate taxes. If you're future-minded regarding your legacy, a dynasty trust may be a good option for you.
- Harvesting capital losses – This practice is a good strategy for offsetting capital gains. Identify a stock in your portfolio with losses equivalent to your capital gains, and then sell the losses to counterbalance your overall gains. After 30 days, you have the option of buying back any stocks you sold. You can also offset up to $3,000 annually of ordinary income.
The bottom line
To minimize taxes in retirement, it helps to diversify your tax situation by having both tax-deferred and Roth accounts. As you near retirement, you and your BB&T Wealth advisor can create a withdrawal strategy that’s right for you.
Your BB&T Wealth advisor will help you create a comprehensive, strategic plan to integrate and coordinate your banking, credit, investments, risk management, and trust and estate planning services.
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