A Year-End Checkup for Long-Term Financial Success in 2020 and Beyond

By Ken Nuss

As 2019 wraps up and 2020 approaches, itΓÇÖs a great time to make sure your savings and investments are aligned with your goals and not creating unnecessary taxes. Here are some key steps.

Figure out how much income youΓÇÖll need in retirement. You can do it at any age, but itΓÇÖs especially important in your 50s and 60s. Many people can calculate it themselves using a retirement calculator on the web. Searching for ΓÇ£retirement income calculatorΓÇ¥ will give you a number of choices.

If you donΓÇÖt feel comfortable doing this, consider hiring a well-qualified financial planner who can give you an unbiased figure.

Once youΓÇÖve got an estimate, you can start structuring your savings to produce the necessary income. While savings accounts and stocks can produce income, the income stream they produce varies.

Only three things offer a guaranteed lifetime income:  a traditional employer-provided pension (which is rarer now), Social Security and a lifetime income annuity. The latter allows you to create your own pension by converting a portion of your savings to a stream of income. It serves as longevity insurance.

Estimate your 2019 federal and state income taxes and look for opportunities to reduce them. If youΓÇÖre holding all your savings in taxable accounts, you probably have an opportunity to reduce your taxable income by moving some money to tax-free and/or tax-deferred accounts.

Contributing to tax-deferred retirement accounts such as a 401(k) or a standard IRA, or to a tax-free Roth IRA is the first line of defense. If you can afford to set aside additional money for the long term, consider also purchasing a deferred annuity. Annuity interest is not taxed as long as itΓÇÖs reinvested in the annuity and not withdrawn.

Deferred annuities come in several flavors. Fixed-rate annuities act much like tax-deferred certificates of deposit. Fixed indexed annuities provide market-based growth potential plus guaranteed principal, and variable annuities let you participate in the stock and bond markets but put your principal at risk.

Check your asset allocation and rebalance if necessary. An asset allocation plan means that you set the percentages you put in equities (stocks or stock funds) and in fixed income, which includes savings accounts, money markets, CDs, bonds and fixed annuities.

If youΓÇÖre overinvested in one area, such as equities, because of the rise in the stock market, you should rebalance to achieve your desired asset allocation. Your asset allocation should not change much in the short term. LetΓÇÖs say you put 55% in equities and 45% in fixed income two years ago. Thanks to a booming stock market, your allocation now stands at 65/35. ItΓÇÖs time to consider rebalancing to bring it back to 55/45 again.

As you age and approach retirement, your asset allocation will usually change, with less money in stocks and more in guaranteed safe investments. Once youΓÇÖre retired and begin withdrawing your savings, youΓÇÖll likely want to become even more conservative.

Sticking to your asset allocation decreases excessive risk and prevents you from buying high and selling low. When the stock market falls, youΓÇÖll be less tempted to sell everything because youΓÇÖll also have a solid cushion of fixed assets. Many people without a plan panic and sell their stock funds at exactly the wrong time, when the market is at a low point.

YouΓÇÖll also be able to resist overinvesting in the stock market when itΓÇÖs reaching new all-time highs. When thereΓÇÖs a strong bull market, itΓÇÖs easy to forget that what goes up will come down eventually.

The right asset allocation is individual. Besides your age and expected income in retirement, your psychology is important. Some people are very risk-averse. Others donΓÇÖt mind the ups and downs of the stock market too much.

Consider fixed annuities as part of your safe-money allocation. Fixed annuities offer many advantages as part of your fixed-income allocation.

Bond funds can be a good choice, but you can lose money in them. If rates spike up after you buy a fund, the value will decline. Long-term bond funds can be especially volatile.

With a fixed annuity, both principal and interest are fully guaranteed by the issuing insurance company. State regulators monitor the financial strength of insurers. State guaranty associations provide an additional level of protection.

Fixed annuities let you reinvest interest earnings without risk. With fixed-rate annuities, reinvested interest earns the same rate as the base annuity, so the yield is guaranteed.

Annuities are tax-deferred. All interest earnings left inside them compound tax-deferred until withdrawn. You can wait until retirement, when your tax bracket is likely to be lower, to start receiving payments.

Fixed annuities do have less unpenalized liquidity than bond funds. You can always cash them in, but you may pay a fee for an early surrender. Also, interest earnings withdrawn prior to age 59┬╜ are subject to a 10 percent IRS penalty.

Because annuities are less liquid than bond funds, you probably wouldnΓÇÖt want to put all of your fixed-income investments in them.

But there is some liquidity. Many fixed annuities let you withdraw up to 10 percent a year penalty-free. TheyΓÇÖre thus more liquid than CDs, which usually have penalties for early withdrawals of any amount.

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information, including updated interest rates from dozens of insurers, is available at https://www.annuityadvantage.com or (800) 239-0356.