“Please grant me the serenity to accept the things I cannot change; the courage to change the things I can; and the wisdom to know the difference.. “Reinhold Niebuhr
Reduce your pain and confusion
When you look at all the moving parts involved in planning your retirement income, it’s easy to get overwhelmed by the complexity of it all. Complexity and confusion cause emotional pain and we are pain-avoiding creatures. Therefore, it is tempting to mentally put the whole “how much do I need to retire?” Topic aside. and return to those activities that bring you pleasure. Unfortunately, whether we like it or not, income planning for retirement is a “must do” task. Providing several decades of retirement income is not something that “just happens.” You should do it yourself or hire a financial advisor to help you.
The serenity to accept the things you cannot change
A good place to start your retirement income planning is by recognizing those things that you have some control over and that you can change, and recognizing those things that you cannot control or change. You cannot control or change the world stock market, inflation, bank interest rates, increases in health care costs, or the cost of gasoline. So, acknowledge its existence and how it affects your plans, get over it, and address what you can control.
The courage to change the things you can
Two very important things you can control are the tax efficiency of your investment shares and your investment costs.
You can control tax efficiency
Bonds, bond funds, real estate investment trusts (REITS), high-dividend stocks, and high-dividend stock mutual funds generate taxable ordinary income. Unless you need the income, there is no point in paying income taxes on the income you don’t need. Whenever possible, place your ordinary income-generating investments in tax-deferred or tax-deferred accounts, such as tax-free Roth IRAs or tax-deferred IRAs, 401k, 403b, or fixed or variable annuities. This way, you don’t pay ordinary income taxes that you don’t need. Not only will that reduce your current tax burden, but you’ll also be making money on the money you now send to federal and state tax authorities. Tax deferral is a very powerful long-term savings drive, and it also takes the tax burden off your Social Security income.
You can control your investment costs
Actively managed stock mutual funds charge you fees that can consume up to about 6% of your total fund balance each year. Not so, you say, the annual expense charge is much lower. Well, all purchases and sales made by these funds (the business volume) incur trading costs that are deducted from your account. There are both explicit and implicit business costs. The explicit trading costs are simply what you pay to the people who execute the trades (the spread), the implicit costs are what the trades do at the share price of what is bought and sold in large blocks (bid and ask ). These trading costs can double or even triple your annual expense ratio, especially in small-cap and international funds, and the amount of money you are charged is not disclosed anywhere on your monthly or annual statements.
Find out how much you are actually paying for your stock mutual funds. Do the research yourself or ask your broker for a full audit of all the investment costs you are paying. Saving about 4% of your total stock mutual fund account expenses is a HUGE boost to your retirement income plans … and something you can control.