Today many Americans plan for a retirement of up to 20 years, yet in reality, your retirement may last much longer. Believe it or not, living nearly a century may someday be commonplace. As a result, rather than thinking of retirement as the final stage of life, a more realistic approach may be to view it as a progression of phases. This involves taking a fresh look at retiree expenses and income, as well as withdrawal and estate planning strategies.
The Need for Flexible Planning
Traditionally, retirees were advised to project income needs over the length of their retirement, add on an annual adjustment for inflation, and then identify any potential income shortfall. But the planning required may not be that linear. For example, research suggests that some retirees’ expenses, other than healthcare, may slowly decrease over time.
That means some retirees, depending on personal expenses, may need more income early in their retirement than later. That’s why it’s critical not just to determine a sustainable withdrawal rate at the outset of retirement but also to periodically evaluate that withdrawal rate.
Or consider another trend: the desire to remain active means many people are continuing to work part time or starting new businesses in retirement. In fact, some psychologists and gerontologists believe that many people don’t really want to retire, but instead want to reinvent themselves through a mixture of enjoyable work and leisure.
“In 2015, retirees who collect Social Security before the year of their full retirement age will see their benefits cut $1 for every $2 earned above $15,720.”
Early Years: Income and Tax Decisions
Keep in mind that adding employment earnings to your retirement “pay check” requires careful planning because it may impact other sources of retirement income or bump you into a higher tax bracket. In 2015, retirees who collect Social Security before the year of their full retirement age will see their benefits cut $1 for every $2 earned above $15,720. Also, depending on adjusted gross income, you might have to pay taxes on up to 85 percent of benefits, according to the Social Security Administration.
The need to potentially stretch out income over a longer period than previous generations also means that some people may not want to tap Social Security when they’re first eligible. Consider that for each year you delay taking Social Security beyond your full retirement age until 70-years-old, you’ll receive a benefit increase of 6 to 8 percent. One caveat: If you do decide to delay collecting Social Security, you may want to sign up for Medicare at age 65 to avoid possibly paying more for medical insurance later. For additional information visit the Social Security website.
If you have accumulated assets in qualified employer-sponsored retirement plans, now may be the time to determine if rolling that money into a tax-deferred IRA would make managing your investments easier.Also plan ahead for healthcare costs not covered by Medicare. Remember that Medicare does not pay for ongoing long-term care or assisted-living expenses, and qualifying for Medicaid requires spending down your assets.
Finally, don’t overlook any pension assets in which you may be vested, especially if you changed employers over the course of your career. Pensions can supply you with regular income for life.
“Consider that for each year you delay taking Social Security beyond your full retirement age until 70-years-old, you’ll receive a benefit increase of 6 to 8 percent.”
Middle Years: Distributions and Lifestyle Realities
By April 1st of the year after you reach age 70½, you’ll generally be required to begin taking annual withdrawals from traditional IRAs and employer-sponsored retirement plans, except for assets in a current employer’s retirement plan if you’re still working and do not own more than 5 percent of that business. The penalty for not taking your required minimum distribution (RMD) can be steep: 50 percent of what you should have withdrawn.
Withdrawals from Roth IRAs, however, are not required during the owner’s lifetime. If money is not needed for income and efficient wealth transfer is a goal, a Roth IRA may be an attractive option. Be sure to consult with a qualified advisor to discuss the tax implications of converting a traditional IRA or employee-sponsored retirement plan to a Roth IRA.
Also, consider reviewing the asset allocation of your investment portfolio. Does it have enough growth potential to keep up with inflation? Is it adequately diversified among different types of stocks and income-generating securities?
Later Years: Your Legacy
Review your financial documents to make sure they are true to your wishes and that beneficiaries are consistent. Usually, these documents include a will and beneficiary designations governing brokerage accounts, IRAs, annuities/insurance, pensions, and in some cases, trusts. In my opinion, you should also have a durable power of attorney, someone who will manage your finances if you’re not able, and a living will, which names a person to make medical decisions on your behalf if you’re incapacitated.
Keep in mind that a good financial advisor is invaluable during this time of your life. A systematic approach to manage your budget and investment assets is important. Preparing for a retirement that could encompass a third of your life span can be challenging. Regularly review your situation with financial and tax professionals, and be prepared to make adjustments as needed for success.
For more information call AC Financial 210.231.0456 or visit www.myacinvestments.com. AC Financial is located at 242 W. Sunset, Suite 101 in San Antonio, TX 78209.