Welcome to Retire Better, a regular series we’re launching that will explore everything to do with what could — should — be the best period of your life.
But life is about more than money, right? (Hello?) Yes, of course it is! So we’ll also explore everything from where to live, what to do, how to stay fit, your bucket list and more. Ask me anything. Really. And I’ll search far and wide to get an answer for you. Send your questions here.
And at the bottom of today’s column, look for our Question of the Month, and send me your answer to the same email.
Question: ‘Now that market volatility is back, what can someone nearing retirement—I’m 56—do to ensure that my portfolio won’t get hurt if there’s a major market drop?’
“it’s a tricky question,” says Lisa Kirchenbauer, president of Arlington, Va.-based Omega Wealth Management. “Because you’re at the age where you can see the goal on the horizon.”
One thing you can do, she advises, is to have different baskets of assets that reflect your time frame. For example, “if you plan on retiring in one to two years, you’ll want to have assets that are conservatively invested, that you know you’ll be able to draw on.” At the same time, it’s important to recognize that retirement can often last a long time—decades—“which means you should also have a growth-oriented basket as well, so your 401(k) or IRA can continue to grow.”
Since inflation seems to be making a comeback, this last bit of advice is particularly crucial. Because inflation slowly eats away at your purchasing power, your assets must keep up. For example, if you have $100 today, but inflation is 3%, a year from now that same $100 will really be worth just $97.
But what if there’s a giant drop, like the S&P 500’s SPX, +0.17% 56% plunge during the devastating bear market of a decade ago? Talk about killing your purchasing power. Kirchenbauer, who has managed money over numerous market cycles, including the 2007-2009 wipeout, emphasizes the importance of not letting your emotions get the best of you. When your emotions take over, it can trigger poor investment decisions, like bailing out when prices are bottoming out.
Read: 5 ways to avoid becoming a failed retiree
“You want to have your portfolio set up so your growth assets will act well during a downturn.” By “act well,” Kirchenbauer means make sure your accounts are set up so that you’re automatically investing—even during a downturn. It’s the classic strategy of dollar-cost averaging, meaning that if you invest on a regular basis—say a little bit with each paycheck—you’ll buy more shares when prices are low, but fewer when they are high. It’s one of the most important things you can do over the long term.
Question: ‘I’m thinking of moving abroad when I retire. But how will my income be taxed?’
The number of Americans moving abroad after they leave the workforce is growing rapidly, says David Kuenzi of Madison, Wis.-based Thun Financial Advisors. He advises doing your homework ahead of time in order to avoid some costly financial mistakes down the road.
Perhaps the biggest mistake these expats make? “Many Americans moving abroad for the first time are surprised to learn that the U.S. is the only country in the world that taxes its citizens even after they leave the U.S.,” Kuenzi says. “Credit for taxes paid in an expat’s country of residence can be applied to offset U.S. taxes due. But the outcome of citizenship-based taxation is that income will always be taxed either the U.S. rate or the local rate, whichever is higher.”
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So don’t think you’re going to save a bundle tax-wise. Of course, you could still save big on things like housing, medical care and leisure activities, depending in where you settle.
Something else to consider: “Most American brokerage firms will no longer maintain accounts for residents of foreign jurisdictions, even if they are U.S. citizens,” Kuenzi warns. “Bank accounts are also subject to closure when people move abroad.” One possible way around this is to maintain a U.S. mailing address. Perhaps a trusted friend or relative could help. But be careful: “Many financial institutions can and will close accounts based on any indication they have that the client is residing abroad,” he says.
Those are just two major issues to consider; of course there are others. So before you head off to that beach cottage in Costa Rica or flat in Florence, talk your adviser.
Question of the Month
Lots of people say they’ll “travel more” when they retire. What are the top three places you’d like to visit? Send your answers to RetireBetterMarketWatch@gmail.com.