Financial Planning for Nearing or In Retirement


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On the surface, retirement planning hasn’t changed all that much over the years. You work, you save and then you retire. But while the mechanics may be the same, today’s savers are facing some challenges that previous generations didn’t have to worry about. First of all, life expectancy is longer, which means you’ll need your money to last longer – potentially into your 90s. Bond yields are also much lower than they used to be, which means you can’t buy a few fixed income instruments and earn a double-digit return. Then there is the health crisis due to the coronavirus pandemic.

This is compounded by the fact that more companies are moving away from defined benefit pensions —which guaranteed you a certain amount of money in your golden years — to defined contribution plans, which are more subject to market ups and downs. So, how can you have the retirement you’ve always wanted? After all, retirees want to experience all the things they couldn’t do when they were too busy working. Exotic travel vacations, marathon running, novel writing, spending more time with friends and family — the possibilities are almost endless.

When it comes to retirement, you can’t afford to be unprepared. Having a clear idea of how you want to spend your later years, and how you’ll pay for it, are key to ensuring that you can retire comfortably and securely. Financial planning and retirement go hand in hand, covering a variety of different tasks and topics. Whether your retirement is a few years away or you have several decades to get ready, there are certain things you’ll want to add to your financial planning to-do list.

  • Start With Your Target Retirement Number: When mapping out your financial planning retirement strategy, it can help to work backward. That means figuring out how much money you’ll need to save for retirement first, then building your financial plan around actions that can get you to that number. We can help you narrow down how much you may realistically need to have saved and invested. When estimating a target savings number, it’s important to ask questions that can help you set up accurate spending goals to ensure that you don’t run out of money in retirement:
    • What will your retirement lifestyle involve? (i.e. travel, new hobbies, starting a business, etc.)
    • How much will you need to meet your annual retirement budget?
    • Where will your retirement income primarily come from, in terms of Social Security, a 401(k), IRAs, etc.?
    • At what age will you begin taking Social Security benefits?
    • How many years do you anticipate spending in retirement?
    • Is working part-time in retirement or starting a business something you’re interested in?
    • How much debt do you anticipate having in retirement?
    • Will you be providing financial support for adult children or grandchildren?
    • Are you interested in creating a financial legacy of any kind?
  • Weigh Your Options for Saving and Investing: There’s more than one way to save and invest as you build wealth for the future. For example, you could save money for retirement using:
    • 401(k) plan or similar workplace retirement account
    • Traditional and Roth individual retirement accounts
    • SEP or SIMPLE IRA plans if you’re self-employed or run a business
    • Taxable brokerage accounts
    • Savings, money market and CD accounts
    • Health Savings Accounts

Health Savings Accounts (HSA) are not retirement accounts, but they can still be a part of your retirement plan. These accounts allow for tax-deductible contributions, tax-deferred growth and tax-free withdrawals when the money is used for qualified health care expenses, which can include long-term care.

Ideally, you’re able to save and invest through multiple avenues, maximizing the annual contribution limits for tax-advantaged retirement accounts. But if you have a limited amount to save and invest, start with your employer’s plan first and contribute at least enough to get the full company match if one is offered. Consider doing the same with your HSA if you have one at work and your employer matches contributions. Then look at how much you can allocate to an IRA, taxable accounts and savings accounts next.

  • Do the Math on Social Security & Medicare: Social Security benefits can add to your retirement income. However, it’s important to think ahead about when and how you plan to use them. Technically, you can begin taking Social Security benefits at age 62. But doing so can reduce the amount of benefits you’re eligible to receive. Working while receiving Social Security benefits prior to reaching full retirement age, typically 66 or 67 depending on when you were born, can also shrink your benefit amount. On the other hand, waiting until age 70 to take benefits could increase the amount you receive, up to 132% of your normal benefit amount. Whether it makes sense to take benefits earlier or later depends on the other sources of retirement income you already have and whether you plan to work at least part-time in retirement. With Medicare, most people don’t pay a monthly premium for Part A, but you will still have to plan to pay a portion of your inpatient care costs if you’re admitted to a hospital for care. Other Medicare parts, like Part B, also come with costs that can add up. You’ll need to pay monthly premiums, copayments, coinsurance, and deductibles. In 2016, the average Medicare enrollee paid $5,460 annually for healthcare expenses, according to the Kaiser Family Foundation. Of that amount, $4,519 went toward premiums and healthcare services.
  • Tax Planning: Diversification isn’t just for your investment portfolio. If you’re actively saving for retirement, it’s also a good idea to diversify how and when your savings will be taxed. Doing so can help you successfully navigate two unknowns in retirement:
    • How much of your income will be taxable? You need to consider not just your retirement savings, but also Social Security, pensions, nonretirement investments, and other potential sources of income.
    • What will your tax rate be after you retire? Today’s rates are relatively low by historical standards, and it’s conceivable they could rise before or during your golden years.

Given these unknowns, it’s still possible to plan for a potentially better tax outcome. One approach, is to use accounts with a variety of tax treatments so you can better control your taxable income in retirement. Anticipating future tax rates is always a bit of a guessing game. But with a number of account types at your disposal, there’s potential to build in flexibility and a surprising level of control over future tax bills.

  • Estate planning and gifting: There are various ways to reduce the burden of taxes on your beneficiaries. Careful selection of beneficiaries of your retirement accounts is one example. If you do not name a beneficiary of your retirement account, the assets in the account could become distributable to your estate. Your estate or its beneficiaries may be required to take RMDs on a faster schedule (such as over five years) than what would otherwise have been required (such as ten years or over the remaining lifetime of an individual beneficiary). In most cases, naming a spouse as a beneficiary is ideal because a surviving spouse has several options that aren’t available to other beneficiaries, such as rolling over your retirement account into the spouse’s own account and taking RMDs based on the surviving spouse’s own age.

Also, consider making gifts (either outright or by transferring assets into an irrevocable trust) if you’re close to the threshold for owing estate taxes. In 2021, the federal estate tax applies to assets in an estate exceeding $11.7 million in value. Assets in a properly structured irrevocable trust are not subject to estate tax at your death. If your total lifetime gifts exceed the exemption amount ($11.7 million in 2021), they will be subject to gift tax. You should select the assets used to make gifts carefully, since appreciated assets that are gifted, unlike assets retained by you until death, will not receive a step-up in cost basis for income tax purposes at your death, potentially increasing the amount your beneficiaries pay in capital gains when the assets are sold. You may also reduce the estate taxes due at your death by taking advantage of the unlimited marital and charitable deductions for assets passed on to spouses and charitable organizations. (If assets are gifted during life or passed on at death to grandchildren, or more remote descendants, you must also plan for the federal generation-skipping transfer tax.)

Finally, you can give up to $15,000 per individual ($30,000 per married couple who elect to split gifts) each year to anyone without incurring gift tax or using any of your lifetime gift tax exemption amount. Also, consider making gifts to children or grandchildren to help save for their higher education expenses in Uniform Transfer to Minor Act or Uniform Gift to Minor Act accounts. The dividends and capital gains in these accounts may be taxed at the children’s lower rates, although you must take into account the kiddie tax rules. You may also make gifts to state-sponsored 529 plans for the benefit of children and grandchildren, distributions from which will not be subject to federal (and possibly state and/or local) income tax as long as the distributions are used only to pay qualified educational expenses. In addition, you may pay a child’s or grandchild’s tuition directly to the school without incurring gift tax or using any of your lifetime gift tax exemption amount.

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