Investing With Retirement in Mind

A quick check of the top news stories over the weekend showed four prominent articles about retirement – how to retire, figuring out if you have enough, what to do if you are stuck, and so on. Apparently, retirement is on the minds of many investors, young and old. This news focus reminded me that retirement investing is a lifelong endeavor. It’s a good idea to invest early and as if you are going to retire soon, even if you are not. Here are some steps to take now. These guidelines apply to everyone from age 12 on.

Know the different types of accounts

There are multiple retirement vehicles available; we encourage you to use all of them. One client, age 50, is setting up Roth IRAs for his young teenagers. They can contribute $5500 each year until they make too much money. You should consider doing the same. Also set up IRAs for your kids by age 12 (age of legal employment in MA) or later. There are limits on contributions, but you can contribute every year you earn money. For yourself, if you or your spouse have private company income, set up a SEP IRA. Contribution limits for SEPs are much higher, over $50k. Lastly, take advantage of all 401ks, including those for working kids. These are available at larger companies and have contribution limits above IRAs and below SEP IRAs.


We want to emphasize the benefit of opening and contributing to accounts for your kids when they are young. Long-term compounding is too powerful to ignore. Contribute the maximum to every account for as many years as you can. Do this for yourself and for everyone in your family. All contributions are tax deductible, except for the Roth IRA. A SEP IRA to Roth conversion, after paying the conversion tax, allows you to build up large sums of money that will never be taxed.

To give you an idea of how powerful this four-part combination can be, you can defer and invest over $100k each year per person, and contribution limits are increasing each year. You may need to do the work on this for your kids (and fund the contributions) until they are old enough to do it on their own, but it’s worth it to give them a head start on retirement savings. I have seen annual contributions of a family of well over $100k per year among spouses and children. That’s just in retirement accounts.

Invest in a coordinated manner

Over time you will accumulate different types of accounts: taxable (trust, joint, personal), tax-deferred (IRA and 401k), and tax-free forever (Roth). Moreover, you may have assets that are not recorded in the financial markets such as private stock or real estate. It’s important that investment decisions for these accounts be made holistically, not as silos. Someone must monitor all these accounts as a group, maximize contributions, match investments with tax sheltering and tax deferment, and know the rules for withdrawals. Unless you are a full-time investment professional it’s unlikely that you will find this task interesting or worth your time. That’s where a professional advisor can be very helpful.

Set limits, relax and enjoy

When you retire you can look forward to multiple sources of income. First, there is social security income. Next you can withdraw money from your IRAs or 401k. You might have a pension and maybe even annuities, although both of these have been going out of fashion for some time. At some point you may need to take money out of your taxable account. Your investment mix must change because you are no longer earning and saving money. Regular reviews of your accounts will help you coordinate withdrawals and fine tune investment allocations.

Go easy on withdrawals

Investors naturally worry that a market crash will delay or derail their retirement. In fact, if you have been investing and saving for many years markets should have very little effect on the timing of your retirement. I am referring to stock and bond markets worldwide and real estate because that is what most wealthy investors own. Many of those who were wiped out in 2009 had too much employer stock in their personal accounts. You may have to temporarily limit your withdrawals during a period of extreme market decline, but within two years you can likely rely on a steady and growing income.

It’s also important to be realistic about your withdrawals. Every dollar spent today is gone, plus all the compounding it would have accrued in the future. So take less than you think you can. Overly optimistic assumptions about investment returns coupled with overly confident withdrawals can lead to future disappointment. Consult with your advisor to get the right mix and the right amounts.

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