After 25 years of working with people preparing for retirement, do you know what surprises them the most? All the changes.
In retirement, most people experience changes in:
- Their lifestyle
- Their priorities
- Their day-to-day pace of living
- How they manage their money
It’s up to us to consider how all these factors affect our bottom line; that is, our ability to stay financially secure throughout retirement.
No two retirements look alike, but we can generally count on:
- Working less
- Pursuing other interests such as hobbies and time with family
- Looking at a much different balance sheet at the end of every month.
Whether you are planning to retire in the coming years or you are already enjoying retirement, two major things will help you balance the scales in your financial favor.
- Knowing the facts about your money in retirement
- Making informed decisions based on those facts
We all need to be aware of these basic changes that affect our money in retirement:
Fact #1: Distribution Matters
Retiree beware: source and sequencing matters. Take a close look at the sources of income you have. Keep in mind, in what sequence you tap which sources can make a costly difference.
The order in which you draw down from your investments and retirement accounts impacts your tax burden as well as the amount of funds available.
When you turn 70-1/2, you will be required to withdraw money from your IRA and 401(k) accounts, then pay taxes on it. Of course, it may seem natural to let that money grow until the mandatory withdrawal time. However, that may not necessarily be the financially wise choice.
Why? You may find yourself in a different tax bracket.
Upon retiring, we want to keep our taxes to a minimum. In addition to Social Security, say you have a small pension and some money in a brokerage account. You may well have a low taxable income that puts you in the 15% or 25% tax bracket. If you choose to defer your healthy IRA until 70-1/2, you might discover that your required minimum distributions will force you into a higher tax bracket with a substantial tax increase. In such a case, it’s far better to take IRA distributions earlier, while you’re still in the lower tax bracket.1
Fact #2: Social Security Timing Counts
When you elect to take your Social Security benefits is important. A smart strategy can add up to thousands of additional dollars in your pocket.
Your monthly allowance varies according to the age at which you apply. You may begin to draw benefits at 62, but if you can draw on other assets and can hold out on Social Security benefits until you are 70, that can add up to an estimated growth rate of 8% per year.2
Keep in mind, it’s not just as simple as waiting until later to claim Social Security. Your decision has long-term and short-term income tax consequences.
When you claim changes the ratio of tax-preferred benefits (like SS) to taxable income, such as capital gains, qualified dividends, and withdrawals.3
If you’re right on the cusp, pay attention: Retirement age is officially on the rise. In 2018, we’ll see a 2-month increase for newly eligible retirees. Those born in 1956 will have to be 66 years, 4 months old before they can claim 100% of their benefits.4
Fact #3: Tax Laws Change
Become determined to never let changes in tax law catch you off-guard. Tax laws are complicated, and your financial landscape during retirement is probably very different than it has been in the past. We are not tax attorneys, but we often encourage our clients to work with a certified accountant to help guide them with their tax planning.
Among the recent changes to our tax code, you should find:
- Higher phase-outs for traditional and Roth IRAs
- Your standard deductions went up
- ‘Chained consumer price index’ vs ‘consumer price index’ for determining inflation as it relates to brackets and other IRS measurements
- A change in the medical expense deductions for seniors
Every year we face the potential for alterations to the tax code. Keeping on top of how those changes may impact your financial situation can help you plan ahead to make smart decisions about the timing of your distributions.
Managing your money in retirement is an ongoing challenge. By staying informed and aware of the laws and tax hurdles, you can formulate the best strategy for maximizing your income streams in the years to come.
Consider the types of assets you have and be aware of penalties and rules associated with distribution. Pay attention to your tax situation and how it may change as your income streams change.
And remember, you don’t have to go it alone. Talking to a trusted and credentialed financial advisor can be one of your best assets in navigating the cost of retirement.
1Personal Decision Points: 7 Steps to Your Ideal Retirement Transition, Scott Hanson