A recent study highlights a notable trend among affluent individuals approaching retirement: a preference for investment strategies beyond traditional target-date funds (TDFs). Despite TDFs being a common choice, shifting from higher-risk to more stable assets over time, 84% of wealthy investors with at least $200,000 in investable assets are exploring other avenues. This group allocates only a minor portion of their 401(k) and IRA holdings to TDFs, indicating a move towards more customized financial planning as they near their retirement years.
This shift stems from a more nuanced understanding of wealth management, particularly regarding taxation. Nate Miles, a retirement expert, notes that affluent individuals often encounter complexities in managing their tax liabilities upon retirement, an aspect not typically addressed during their working lives. Many retirees lack a clear strategy for withdrawing funds from various accounts to minimize taxes, a crucial element that can significantly influence retirement outcomes. The automated nature of defined contribution plans, while effective for accumulating savings, may not adequately prepare individuals for the intricate decisions required during the distribution phase of retirement.
To emulate the strategies of these successful investors, individuals can adopt several practices. For those close to or in retirement, prioritizing withdrawals from taxable accounts allows tax-deferred and tax-free assets to continue growing. Considering a Roth conversion can also be beneficial, potentially reducing future tax burdens. Establishing a carefully planned withdrawal sequence is paramount to avoid unnecessary taxation. For younger investors, diversifying beyond a single 401(k) by exploring Roth IRAs, Health Savings Accounts (HSAs), and taxable brokerage accounts is advisable. Furthermore, expanding investments beyond conventional stocks and bonds to include tax-efficient options like index funds and exchange-traded funds, alongside alternative assets such as real estate investment trusts and actively managed funds, can help balance growth with a sound tax strategy.
By taking a proactive and personalized approach to retirement planning, individuals can optimize their financial security and achieve their long-term goals. Understanding the intricacies of tax-efficient withdrawals and diversifying investment portfolios are key steps towards a more robust and flexible retirement. Empowering oneself with knowledge and strategic planning can lead to a more secure and prosperous future.