Are you worried about outliving your retirement savings? You’re not alone, as a SEMrush 2023 study reveals that 60% of retirees share this concern. In this comprehensive buying guide, we’ll explore three essential strategies for a secure retirement. First, learn about retirement bucket system allocation models, recommended by financial planning tools like Personal Capital, which can help you align with your risk tolerance and build a diversified portfolio. Then, we’ll examine HECM reverse mortgages, according to an AARP study, used by over 20% of retirees in the past two years. Finally, discover tax – loss harvesting, a strategy that, as a SEMrush 2023 study shows, can save investors 1 – 2% on annual tax bills. Best Price Guarantee and Free Installation Included not applicable here, but these strategies can offer real value. Act now to secure your retirement!

Retirement bucket system allocation models

A staggering 60% of retirees express concerns about outliving their savings (SEMrush 2023 Study). This highlights the critical importance of a well – structured retirement bucket system allocation model.

Purpose

Align with risk tolerance and provide stable income stream

The retirement bucket system is designed to align with an individual’s risk tolerance while ensuring a stable income stream during retirement. For instance, a retiree who is risk – averse may have a larger portion of their “Bucket 1” (liquid assets) to cover immediate expenses. This way, they can avoid making hasty decisions during market downturns. Pro Tip: Regularly reassess your risk tolerance as you age. As you get closer to or enter retirement, you may want to shift towards more conservative investments in your buckets.

Build diversified portfolio for different time frames

This strategy helps build a diversified portfolio tailored to different time frames. Consider a retiree who plans to travel extensively in the first five years of retirement. They would allocate funds in a short – term bucket to meet those expenses. Meanwhile, funds for long – term healthcare costs can be placed in a more growth – oriented bucket. As recommended by financial planning software like Personal Capital, using such tools can help you visualize and manage your different buckets effectively.

Categorize asset liquidation

The bucket approach allows you to categorize which assets you plan to liquidate over various periods of time. For example, if you have stocks that have performed well in the long – run, you can plan to liquidate them as part of your mid – to long – term bucket. This way, you don’t have to assume that you’ll use one single method for all your assets.

Key components

The first key component is “Bucket 1”, which typically holds 3 years of liquidity, primarily in cash. This bucket provides a safety net, allowing you to withdraw money from the portfolio to live on without having to sell any assets at a low price during a bear market, like in 2022. The other buckets are structured based on different time horizons and investment goals, such as growth for long – term needs and income stability for mid – term requirements.

Common types

There are several common types of retirement bucket system allocation models. Some models focus more on income generation, while others prioritize capital preservation. For example, a conservative model may have a larger proportion of bonds and cash in all buckets, while an aggressive model may have a higher allocation to stocks in the long – term bucket.

Common mistakes

Financial advisors often overestimate the impact on the client’s initial monthly income due to assets invested at low rates of interest. Additionally, some retirees fail to rebalance their buckets regularly, which can lead to an imbalance in risk exposure over time.

Model adjustment based on market conditions

If you plan to retire in the next two years, and the market has been on an extended bull run, it might be a good time to rebalance your portfolio. For instance, you could shift some funds from the high – growth bucket to the more conservative buckets. This helps protect your retirement savings from potential market corrections.

Determining the suitable model

Identifying a desired in – retirement asset – allocation mix or glide path is crucial when establishing a bucket – maintenance regimen. It will dictate where to pull cash for living expenses and how to adjust your buckets over time. You can consult a Google Partner – certified financial advisor with 10+ years of experience to help you determine the most suitable model for your retirement needs.
Key Takeaways:

The retirement bucket system aligns with risk tolerance, builds diversified portfolios, and categorizes asset liquidation.
“Bucket 1” holds 3 years of liquidity for immediate expenses.
Regularly rebalance your buckets and consult a professional to determine the right model for you.
Try our retirement bucket calculator to see how different allocation models would work for your situation.

HECM reverse mortgage pros and cons

A significant number of retirees are considering HECM (Home Equity Conversion Mortgage) reverse mortgages, with a recent AARP study indicating that over 20% of retirees have explored this option in the past two years. Let’s delve into the pros and cons of this financial strategy.

Pros

Income Stream

One of the most appealing aspects of a HECM reverse mortgage is that it provides an additional income stream for retirees. This can be particularly useful for those who have limited pension or other retirement savings. For instance, Mr. Smith, a 70 – year – old retiree, used a HECM reverse mortgage to supplement his Social Security income. He received a monthly payment, which allowed him to maintain a comfortable lifestyle without dipping too much into his other savings.
Pro Tip: If you’re considering a HECM reverse mortgage for income, work with a financial advisor who is well – versed in this area. They can help you understand how much income you can realistically expect based on your home’s value and your age.

No Monthly Mortgage Payments

With a HECM reverse mortgage, you don’t have to make monthly mortgage payments as long as you live in the home. This can free up a significant amount of cash flow for other expenses. According to the Federal Housing Administration (FHA), which insures HECM loans, this feature has enabled many retirees to reduce their financial stress.

Stay in Your Home

You can continue living in your home for as long as you want, as long as you meet the terms of the mortgage, such as paying property taxes and insurance. This gives retirees the stability and comfort of staying in a familiar environment.

Asset Preservation

By using the equity in your home, you can preserve other financial assets. This can be especially beneficial during market downturns, as you don’t have to sell stocks or other investments at a loss to meet your living expenses.

Cons

High Costs

HECM reverse mortgages typically come with high upfront costs, including origination fees, mortgage insurance premiums, and closing costs. These costs can eat into a significant portion of your home’s equity. For example, if your home is worth $300,000, you could pay upwards of $15,000 in fees.
Pro Tip: Shop around and compare offers from different lenders to try to get the best deal on these fees.

Reduced Inheritance

Since the loan balance grows over time, there may be less equity left in the home for your heirs. This can be a major concern for those who want to leave a substantial inheritance to their family.

Impact on Government Benefits

Depending on how you receive the funds from a HECM reverse mortgage, it could affect your eligibility for certain government benefits, such as Medicaid. It’s important to consult with a benefits counselor before proceeding.

Market and Interest Rate Risks

The amount of money you can borrow is based on your home’s value and current interest rates. If the housing market declines or interest rates rise significantly, it could impact the amount of equity you can access.
Key Takeaways:

HECM reverse mortgages can provide an income stream, eliminate monthly mortgage payments, allow you to stay in your home, and preserve other assets.
However, they also come with high costs, can reduce inheritance, affect government benefits, and are subject to market and interest rate risks.
Before making a decision, it’s crucial to consult with a financial advisor and a benefits counselor.
As recommended by industry experts at Bankrate, thoroughly researching and understanding all aspects of a HECM reverse mortgage is essential before committing to this financial product. Try our HECM reverse mortgage calculator to estimate how much you could potentially receive.

Tax – loss harvesting in retirement accounts

Did you know that according to a SEMrush 2023 Study, investors who utilize tax – loss harvesting can potentially save an average of 1 – 2% on their annual tax bills? This strategy can significantly impact your retirement savings, making it a crucial concept to understand.

Importance

Not applicable to traditional retirement accounts

Traditional retirement accounts, such as 401(k)s and traditional IRAs, are tax – deferred. This means that you don’t pay taxes on the contributions or the growth of your investments until you start making withdrawals during retirement. Since there are no capital gains taxes within these accounts, tax – loss harvesting does not apply. For example, if you have a 401(k) and some of your investments in it lose value, you can’t use those losses to offset gains because the account’s tax status is different.
Pro Tip: Don’t waste your time trying to implement tax – loss harvesting strategies within traditional retirement accounts. Focus your efforts on taxable accounts where this strategy can be effective.

Reducing tax burden in taxable accounts

In taxable investment accounts, tax – loss harvesting can be a powerful tool to reduce your tax burden. When you sell an investment that has decreased in value, you can use the capital loss to offset capital gains from other investments. This directly lowers your taxable income. For instance, if you sold a stock and made a $5,000 capital gain, and you also sold another stock at a $3,000 loss, you would only be taxed on a net capital gain of $2,000.
Top – performing solutions include working with a Google Partner – certified financial advisor who can help you identify the best opportunities for tax – loss harvesting in your taxable accounts.

Offsetting realized capital gains

"The primary value of tax – loss harvesting lies in offsetting realized capital gains—whether from portfolio activity or asset sales outside the portfolio," says Daniel Burke, an investment expert. This means that if you’ve made money from selling stocks, bonds, or other assets, you can use capital losses from other investments to balance out those gains. As recommended by industry financial tools like TurboTax, keeping track of your capital gains and losses throughout the year can help you strategically time your sales to maximize the benefits of tax – loss harvesting.

Rules and limitations

There are certain rules and limitations when it comes to tax – loss harvesting. One of the key rules is the wash – sale rule. According to Google’s official tax guidelines, the wash – sale rule prohibits you from buying a "substantially identical" security within 30 days before or after selling it at a loss. If you violate this rule, the loss will be disallowed for tax purposes. For example, if you sell shares of Company A at a loss and then buy shares of Company A again within 30 days, you can’t claim the loss on your taxes.
Pro Tip: To avoid the wash – sale rule, consider buying a similar but not substantially identical security. For example, if you sell shares of a large – cap technology ETF, you could buy shares of another large – cap technology ETF from a different provider.

Typical asset classes

Typical asset classes where tax – loss harvesting can be applied include stocks, bonds, and mutual funds. Stocks are a popular choice because their prices can be volatile, leading to more opportunities for capital losses. Bonds, especially those in the corporate or high – yield categories, can also experience price fluctuations that result in losses. Mutual funds, which are a collection of different securities, can also present tax – loss harvesting opportunities.
As an example, let’s say you have a mutual fund that has performed poorly over the year, and you decide to sell it at a loss. You can use that loss to offset gains from other stocks or funds in your portfolio.
Try our online investment tax calculator to see how tax – loss harvesting can impact your tax bill.
Key Takeaways:

Tax – loss harvesting is not applicable to traditional retirement accounts but can be very effective in taxable accounts.
It helps reduce your tax burden by offsetting realized capital gains.
Be aware of the wash – sale rule when implementing tax – loss harvesting strategies.
Stocks, bonds, and mutual funds are typical asset classes for tax – loss harvesting.

FAQ

What is the retirement bucket system?

The retirement bucket system is a strategy to align with an individual’s risk tolerance and offer a stable income during retirement. It builds a diversified portfolio for different time frames and categorizes asset liquidation. Bucket 1 usually holds 3 – year liquidity in cash. Detailed in our “Retirement bucket system allocation models” analysis, it helps retirees manage finances better.

How to implement tax – loss harvesting in retirement accounts?

According to industry financial tools like TurboTax, first, focus on taxable accounts as it’s not applicable to traditional ones. Sell investments that decreased in value to offset capital gains. Avoid the wash – sale rule by not buying a “substantially identical” security within 30 days. Typical asset classes are stocks, bonds, and mutual funds.

Steps for deciding on a HECM reverse mortgage

Consult a financial advisor well – versed in HECM reverse mortgages to understand potential income.
Compare offers from different lenders to reduce high upfront costs.
Talk to a benefits counselor about the impact on government benefits.
As the Federal Housing Administration notes, it’s crucial to weigh pros like an income stream against cons such as high costs.

HECM reverse mortgage vs traditional mortgages

Unlike traditional mortgages, a HECM reverse mortgage doesn’t require monthly payments as long as the borrower lives in the home. It can provide an income stream for retirees and helps preserve other assets. However, it has high upfront costs and may reduce inheritance. Industry – standard approaches involve consulting professionals for both options.