Financial Planning for Pre/Post-Retirees
“At Lionshare Partners, we believe everyone should be able to live the retirement they’ve always wanted. Our team of professionals can help you create a well-thought-out strategy to help you address your financial needs and concerns”
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.
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.
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.
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.