Change and uncertainty are in the air, with inflation, interest rates, markets and the political landscape in flux. What should your retired and near-retirement clients be doing as 2024 draws to a close? Financial advisors in the Dynasty Financial Partners Network offered suggestions in response to a Dynasty survey on retirement, taxes and the end of the year.
What key changes or trends in retirement planning should individuals be aware of as we approach the end of the year?
Robert S. Alimena, MBA, CFP, vice president and private wealth advisor with Procyon Partners, says that investors may need to adjust their portfolio as returns of different asset classes shift.
“Although their portfolios have experienced a nice tailwind from U.S. equity markets over the past few years, their expenses are increasing,” Alimena says. “Inflation has been a big point of emphasis in our discussions, and it impacts different variables within their financial plan.”
“Even though inflation data has been favorable as it relates to potential Fed decisions around the interest rate environment, we have not seen client costs go down,” he adds. “Rather, they are going up slower from what has been a significant increase over the past few years.”
As clients’ withdrawal needs increase, they must ensure their asset allocation — including their allocation to cash — continues to match their personal benchmark objectives to achieve their goals, says Alimena. “Right now, money market rates are attractive, but in a falling rate environment that attractive rate could change quickly,” he says, so “re-allocating cash to asset classes with better long-term growth prospects is prudent in avoiding opportunity costs.”
Ryan Kemp, JD, CFP, CIMA, AWMA, account vice president with Cyndeo Wealth Partners, urges advisors to be mindful of a possible regulatory change that would have a big impact.
“An issue that investors should be aware of now but probably seems far off is the potential expiration of the current federal estate tax exemption at the end of 2025,” Kemp notes. “Unless Congress makes the change permanent, the federal lifetime gift and estate tax exemptions will revert to 2017 levels (adjusted for inflation) in 2026.”
“It can take months for a complicated estate plan to be restructured and executed and assets to be moved, Kemp says. “The closer we get to the end of next year without it looking like Congress will act, the harder it will be to get an estate plan change implemented in time.”
But Matt Liebman, founding partner and CEO of Amplius Wealth Advisors, sees little cause for concern. “We do not expect major retirement planning changes by year end, but as the election concludes, we will have to monitor any legislative or regulatory changes that impact planning,” Liebman says.
How should retirees and those nearing retirement adjust their investment strategies in light of current economic conditions?
Alimena, of Procyon Partners, urges reallocating portfolios, including possibly investing in alternatives.
“Whereas prior to the rate-hiking cycle, the fixed-income component was a drag on overall portfolio returns, this asset class is now at a point where it can do more of the heavy lifting in helping clients achieve their target portfolio returns,” he says. “Given the backdrop of rising rates and falling bond prices and the positive returns in equities, investors’ portfolios might have become out of range with regard to their risk tolerance and expected withdrawal rate.”
“There are always macro uncertainties, and maybe more looming than a normal year given the political backdrop and potential range of outcomes from a future policy standpoint as it relates to government spending and taxes,” Alimena continues.
“With equity markets at all-time highs, it is an advantageous time to re-evaluate both their portfolio allocations and spending needs to ensure they are aligned with their goals,” Alimena advises. “This might include adding non-correlated assets through the use of alternatives to ensure their investment assets are properly diversified and minimize volatility relative to their personal target returns.”
The Case for Cash
Don’t forget cash, says Kemp, of Cyndeo Wealth Partners. “I would always recommend holding several years of retirement spending needs in cash and cash alternatives,” he says. “It appears that we are continuing to move toward an eventual Federal Reserve rate cut, and investors should prepare their safer money and fixed-income holdings for a normalization of the yield curve.”
But Liebman, of Amplius Wealth Advisors, sees little reason in the current market landscape for big changes in portfolios. “We don’t think short-term economic conditions should have a major impact on solid long-term financial plans that balance both short-term and long-term goals,” he says.
What tax considerations or benefits should people take advantage of before the year ends to maximize their retirement savings?
For those heading toward retirement, Alimena recommends creative contributions to their 401(k) to maximize savings.
One strategy he recommends for clients trying to save as much as possible, tax-efficiently, is exploring after-tax contributions to 401(k)s. Although the current limits on pre-tax or Roth contributions to a 401(k) plan for individuals is $23,000 ($30,500 if over 50), the overall contribution limits between employee contributions and employer match is $69,000, he notes.
“So, while most people stop contributing to their 401(k) after they hit those initial thresholds, they could be putting an additional $46,000 in their 401(k) with after-tax dollars (less any match from their employer),” says Alimena. “The employee can then roll these after-tax contributions into a Roth IRA when they retire, achieving the mega backdoor Roth.”
“This strategy has some complexity involved, so working with an advisor to devise the best plan of action is critical, but this could be a great way for savers to establish a large bucket of tax-free assets when they enter retirement,” he says.
Going Solo
For individuals who are self-employed or receive nonemployee compensation through an IRS Form 1099-NEC, Alimena advises looking into a Solo 401(k) to try to maximize retirement savings.
“Similar to an employer plan, there is an employee contribution component and a profit-share component. Even if the individual is maxing their employee contributions through their W2 job, they could still make a profit-sharing contribution into their solo 401(k), deferring taxes on up to an additional $69,000, depending on their self-employed income,” Alimena says. “For people in higher tax brackets, this strategy can allow them to defer more funds for retirement, reducing their taxable income and increasing their nest egg.”
More Tax Considerations
For clients in higher brackets, Kemp, of Cyndeo Wealth Partners, reminds advisors to consider a common tax-reduction strategy: “Tax loss harvesting in taxable accounts and Roth conversions are always important strategies to consider each year,” he says. “Whether or not these make sense to an investor is dependent on asset allocation and income level. Another often-overlooked opportunity is to max out a health savings account, if eligible, and invest those funds for later,” Kemp says.
Liebman, of Amplius Wealth Advisors, notes the importance of ensuring that retired clients take their required minimum distributions. “Most of these tax considerations are best discussed on a one-on-one basis, he says. “Generally, though, people should make sure that their RMDs are complete and work with their advisors on more involved consulting and planning.”
