The Financial Red Zone

September 1, 2021

The details are critical in the last minutes of the game, and your financial planning is no exception. You can’t turn it over in the Red Zone – you’ve got to put some points on the board, and the first step is to quantify your risk. Financial missteps with your savings can be rough at any point, but if you’re 20 years away from retirement those hits can be more easily recovered from over time than if you experience a major downturn when you’re retiring in the near future.

Let’s look back to the early 2000’s. Imagine there are two employees; both have a 401(k) they’ve been putting money into their entire careers. Bob is 40 and intends to retire in 2023; Gayle is 60 and intends to retire in 2003. If both accounts took a hit from the dot-com crash between 2000-2002, would Gayle still be able to retire comfortably, or would she probably end up needing to work another 5-10 years just to recoup enough to live on? Isolated example? What about when the Stock Market and housing crash caused the nation’s 401(k)s and IRAs to lose approximately $2.4 trillion in the final two quarters of 2008? The average loss that year for workers who had been on the job for 20 years was estimated as high as 25%.

Practically every 401(k)-type account or IRA will be affected by changes in stock and bond values, even with diversification in alternative plans because the value of the assets in these plans is going to be affected by the price of equities to some degree.

It’s not about being scared to invest, it’s about educating yourself and properly assessing your current risk tolerance to try and build some protection against the uncertainties of not only the market but of life itself. The use of the word ‘current’ is intentional; your tolerance can and should change the closer you are to retirement. Being the wrong age at the wrong time in the market cycle isn’t where you want to be.

Knowledge is Power

In addition to understanding your risk tolerance, it’s important to be realistic about your Lifestyle costs and what, if anything, you expect is going to change when you are no longer receiving a paycheck. No matter how far you are from retirement, it is always a good idea to know exactly what you are spending your money on. It’s impossible to build a plan that gives you confidence that you won’t eventually run out of money if you don’t know how much is needed to cover future expenses. The retiree today typically has different considerations than their parents did, and preparing now, regardless of how far away retirement is, can help you manage your expectations.

Being aware of the plan you are invested in is another key factor to success. Are you in a bigger plan that offers a brokerage window where you can have your advisor manage your portfolio from within or are you locked into the 4 or 5 options chosen on your behalf? Do you have a plan of what to do with your 401(k) if you move from one employer to another? What about rolling over into an IRA or perhaps conversion? Knowing your options and taking control when able can directly impact the performance of your account.

Don’t Forget the Taxes

Most of us think about retirement/savings in terms of a 401(k) or an IRA strategy for savings where we haven’t considered the taxes that will be owed on that money when we need it. Knowing what type of plan you are contributing to, determining a schedule to pull future income, and knowing what taxes will be required is critical. Are you aware of Required Minimum Distributions and how those withdrawals will impact your overall plan? Do you understand the rate at which those withdrawals are taxed? The government has a plan – do you?

The bottom line is being proactive now to understand your own personal risk factors, expenses, and tax implications will keep you protected when YOU hit the Financial Red Zone.

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This article is provided for guidance and information purposes only. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This publication of Mercurio Wealth Advisors’ web site on the Internet should not be construed by any consumer and/or prospective client as Mercurio Wealth Advisors’ solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.