Fit for the Future
Life can be full of changes, challenges and opportunities. For every situation, there are ways to cope. Here are a few things to consider when life comes your way.
Congratulations! You’re moving up in the world with a challenging new job. As you celebrate your new position, don't forget to update your retirement plan. If you enrolled in your former employer's retirement plan, review its distribution options. You may want to ask if you can move those assets into your employer's plan.
If your new job includes a raise, consider investing the difference in your retirement plan.
Determine if your retirement savings are on track. Are your investments still in line with your long-term goals? Or is it time to change those goals, strategies and investments?
This major milestone means combining more than furniture and kitchen appliances — not to mention interior decorating tastes! You’ll need an overview of combined assets — and debts — to start planning on future shared goals.
Start by revising your budget to reflect your new status. Set up a spending plan that covers short- and long-term needs and goals:
- Larger home
Update your personal accounts (and retirement plans) to include your new spouse. If your spouse does not participate in an employer-sponsored plan, encourage him or her to enroll. Don’t forget to update the designated beneficiaries on all your accounts (retirement, investing, banking, etc.).
Once you have a plan, determine how much life insurance you would need in case of a tragedy. A death benefit can help provide a surviving spouse the funds to pay for burial expenses and secure their financial future.
Bringing home a new baby is one of life’s most exciting events
With a new person in your life who is depending on you, you’ll want to make sure your family's life and health are well protected.
- Does your current insurance meet your new family needs?
- Include your new family member in all appropriate policies: health, life, disability, etc.
- Consider additional coverage.
With a new baby, planning for long-term care coverage or estate planning may seem a distant future, but this may be a good time to review these areas. In some cases, you may find that locking in a policy now will result in lower premiums.
Saving for an education
A new child often means adjusting financial and retirement goals because you may have to devote more for future educational expenses. But you can still develop a plan to save:
- Calculate how much you need to save to pay for education expenses.
- Research ways to fund education with tax-advantaged educational savings accounts.
- Determine how saving for education will impact your other savings and investment plans (retirement, new car or home purchases).
Living in retirement
Develop a plan to make your money last as long as your retirement. Building up a substantial retirement account balance is a significant accomplishment. The challenge now is to develop a plan to make sure your money lasts as long as your retirement, which could last 20 or 30 years.
Budget: Essential vs. nonessential
Your first step should be to figure out a budget. Make a list of expenses you must cover to survive: Housing, food, utilities, healthcare, transportation, clothing, etc. These are your essential living expenses, and need to be your highest priority items. Therefore, these should be covered by a reliable source of guaranteed income you can count on throughout retirement.
You may also want to figure out a budget for nonessential expenses such as vacations, home improvements, hobbies, charitable donations and so forth.
Next, you’ll want to consider the sources of your retirement income. For most Americans, retirement income consists of a combination of three sources:
- Social Security
- Pensions and employer-sponsored savings plans [403(b), 457(b), 401(k), etc.]
- Personal savings and investments
Determine an appropriate amount to withdraw. Many financial professionals recommend withdrawing no more than 4% of your total balance each year.
One important choice you can make is the order in which you tap your retirement accounts. If you withdraw your assets in the right sequence, you can take the maximum advantage of tax laws. For instance, one common approach is:
- Taxable investments first. Stocks and bonds, CDs, savings accounts … any investment not benefitting from tax deferral.
- Tax-deferred investments. 403(b)s, 401(k)s, IRAs, etc.
- Tax-free investments. Muni bonds, eligible withdrawals from Roth accounts.
This strategy allows tax-deferred investments more time to grow. There are exceptions to this conventional wisdom so you may want to talk to a tax professional first.
If you invest in a 403(b), 401(k) or 457(b) retirement plan or an IRA, those account values may represent a significant part of your estate. Consider integrating these assets into your overall estate plan. This helps assure that assets pass directly to family members, minimizing income and estate taxes.
Protect your estate and your heirs
Think of your estate as a separate legal entity. When you die, an estate will be created to collect your assets, pay creditors and distribute the rest to beneficiaries.
"Think of your estate as a separate legal entity"
"Probate" assets pass through an individual's estate and are eventually distributed to the beneficiaries named in the deceased’s will. If there is no will, beneficiaries are set by state law. Probate assets also are subject to control by the estate’s executor or administrator.
There are plenty of expenses that will fluctuate in the years to come. While you may not have much control, you can still plan for expenses that can be affected by:
- Tax rates
Non-probate assets (e.g., a tax-qualified retirement account with a designated beneficiary) do not pass through an individual's estate and are not controlled by the individual's will or state law. Instead, these assets pass directly to the designated beneficiary.
Because non-probate assets are not controlled by a will, it is important to coordinate retirement account beneficiary designations with your overall estate plan. Without a beneficiary, your retirement account would be payable to your estate, becoming a probate asset by default.
Retirement plan assets
The value of assets in a tax-qualified retirement plan or IRA are fully includible for estate tax purposes. And, because these retirement plans are typically funded with pretax dollars, the assets will be subject to ordinary income tax upon distribution to your beneficiary.
Since income taxes and estate taxes are part of the equation, it can be difficult to incorporate retirement plan assets in an effective estate plan. Further, the identity of the beneficiary and the timing and form of distributions can impact estate and income tax results. Consult a qualified tax advisor to help integrate your retirement plan into your estate plan.
This information is general in nature and may be subject to change. Neither VALIC nor its financial advisors or other representatives give legal or tax advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For legal or tax advice concerning your situation, consult your attorney or professional tax advisor.