Retirement: Planning Guide for Retirement

Most Important Questions for Retirees

One of the biggest financial moments in life is retirement, and yet very few people have a comprehensive plan for that moment or even any plan. As someone who is approaching retirement, what do you need to do to be prepared?

1. Simplify Your Accounts

Reduce your accounts to the simplest number possible to avoid complexity and potential mistakes.

2. Understand Your Cash Flows – Income + Expenses

Most people don’t have a budget. That’s fine. What is not fine, is not tracking your expenses. How can you expect to retire without knowing how much money you need to live your life?

Five years before you retire, start tracking your yearly expenses. You will then understand where your spending occurs, what expenses may cease once you retire, and where you might spend more entering retirement. You can then say with some confidence, I need $X a year to live adjusted for inflation. The next question is where will you get the income to cover these expenses?

For our clients, we map out their employment/self-employment income leading up to retirement and then help them understand the transition and timing of new retirement income streams including pensions, Social Security, Required Minimum Distributions, and proceeds from a business sale. The final piece is fitting investment withdrawals into this picture. For example, these new retirement income streams may have partial years to start (e.g., pensions and Social Security). We want the client to know where their income will originate from in each year of retirement, starting on the date they retire, until the death of the last spouse.

3. Major Age Milestones

59.5 – This is the age when you are eligible to withdraw from your retirement accounts penalty-free. It is not age 59, it is not age 60, it is after you turn 59.5 years old to the date. This means you can withdraw from your pre-tax IRAs, 401(k), 403(b), etc. without incurring a penalty, and the earnings from your Roth IRA, Roth 401(k), etc. Note, penalty-free does mean tax-free, depending on the type of withdrawal/account.

62-70 – Social Security – You may begin claiming benefits between ages 62 and 70, if eligible. When to claim depends on your specific circumstances (e.g., your age, your spouse’s age, your individual earnings record, your life expectancy, need for income, investment risk tolerance, etc.).

65 – Medicare – If you are retiring before the age of 65, you’ll want to plan to obtain health insurance and account for that potentially significant cost. If you are working past the age of 65, you’ll want to understand how your employer health insurance plan integrates with Medicare, as you can potentially delay claiming Medicare until you retire.

73 or 75 – Required Minimum Distribution (RMD) – This rule applies to pre-tax retirement investment accounts (e.g., IRAs, 401(k), 403(b)). You are required to withdraw a certain percentage of your account each year after you turn 73 (born before 1960) or turn 75 (born in 1960 or later).¹ These RMDs continue until your death (and even after for your beneficiaries).

4. Taxation

Your tax picture may look very different in retirement. After your earned income ends, you will no longer pay Social Security and Medicare wage taxes. However, your pension, Social Security, and investment income/withdrawals may be taxed.

For example, 0%, 50% or 85% of your Social Security benefits may be federally taxable depending on your other income, while the state you live in also may tax Social Security. Vermont taxes Social Security and pension benefits, while Pennsylvania does not.

It’s important to understand your income sources in order to select the correct federal and state tax withholdings each year for Social Security and for any withdrawals from your investment accounts. While your employer may have handled most of your tax withholding, it is now up to you to make sure you are completing the proper tax withholdings on your accounts. While we can’t provide tax advice to our clients, we do help with tax planning, including helping you to understand your tax picture before, at, and after retirement and working with your tax accountant.

Opportunities

As a Financial Advisor, the first step is to help my clients understand each aspect of their retirement whether that is timing, income, expenses, healthcare, charitable giving, leaving an inheritance, etc. After we create a “current” retirement plan, we will look at how various strategies may improve your retirement plan for the outcomes you seek.

• Do your assets support the lifestyle you want now and in the future?
• Should you adjust your investment risk tolerance higher, lower, or not at all?
• How do you minimize the taxes you pay on your retirement account withdrawals?
• Does the order of investment withdrawals matter (e.g., taxable, pre-tax, after-tax)? Should the focus be on different withdrawals in different years of retirement?
• Does the cost of health insurance before Medicare negate the benefit of retiring early?
• How does the cost of long-term care factor into your retirement?
• Is there the opportunity to pay tax early in retirement to avoid larger tax bills later in retirement? Strategies like Roth conversions can lower Required Minimum Distributions and potentially lower your income tax rate in the future, which can minimize taxation on Social Security benefits and Medicare premiums.
• Are Qualified Charitable Contributions (QCDs) appropriate if you have large Required Minimum Distributions that aren’t needed for income, and you have charitable desires?
• Does gifting money today actually lower the estate/inheritance taxes you pay today?

Summary

Retirement is a highly personal decision that is specific to you and your family’s needs, wants and desires. The worst thing you can do is ignore the inevitable, and the best thing you can do is prepare a retirement strategy early to allow you to proactively plan the retirement you want.

1. The required beginning date (RBD) is April 1st in the year after you turn age 73 or 75. Therefore, you could either take your first RMD in the year your turn age 73/75 or you could take it by April of the following year, which would be in addition to your age 74/76 RMD.