By Frank Legan
Maybe you’ve been working for decades to accumulate a large retirement savings. Or maybe you’ve accumulated a sizable savings in other ways. Regardless of your method, it’s critical to handle the next financial phase of your life strategically to get the most out of your savings.
It’s time to put your hard-earned savings to work and create an income stream that lasts throughout your golden years. But it gets tricky to navigate all the new tax rules and financial decisions you’ll be making. To help, I’ll explain some of the common traps and pitfalls.
Tax Rules
Believe it or not, there are more tax rules to consider in retirement than there are when you’re working. And each decision you make affects more decisions—it’s like a domino effect.
An example: It’s important to have the right balance between tax-deferred accounts (like a 401(k) or IRA) and tax-free accounts (like a Roth IRA). If you don’t have a good balance and want to move things around, you could consider a Roth conversion, where you convert a portion from a tax-deferred account into a Roth IRA.
However (and here’s where that domino effect kicks in), if you do that, not only can it affect your income taxes for the current year, it could also impact how much you pay in Medicare payments, and how much tax you pay on your Social Security benefit.
There are a lot more moving parts to consider just like this one. One mistake or overlooked decision could result in an unexpected tax bill. But there’s hope. It is possible to actually lower or even wipe out taxes during retirement.
Portfolio Diversification
I’ve seen many retirees limit their portfolios to stable investments like bonds and CDs. My professional opinion is that it’s more important to maintain a balanced asset allocation during retirement.
Given the historically low returns of CD and bond investments, the unpredictability of inflation, combined with whatever distributions you’re already planning to take, you’re putting yourself at major risk of running out of money during retirement if you don’t diversify.
Withdrawal Order
There’s a specific order for withdrawing income from your retirement accounts without jeopardizing your future.
A smart way to do that is to carefully analyze your distribution plan if you have money in taxable, tax-deferred, and tax-free accounts. This helps you make wise tax decisions this year, and then apply that knowledge to your income strategy 10 years from now.
In other words, while taking money from one account right now might seem like a good idea, you should consider how that decision might play out in 10 years.
Longevity Risk
It’s time to think about what would happen if you outlived your retirement savings. The human lifespan is getting longer, and making your savings last throughout your lifetime is essential.
A professional retirement planner can help you, working with you to find a sustainable withdrawal rate, a smart investment strategy, and suggestions for when to withdraw Social Security. All these decisions can affect your odds of having enough money throughout your lifetime.
Social Security Decisions
While it might be tempting to withdraw your Social Security benefits as early as possible at age 62, the sooner you start, the lower your benefit amount. It’s important to consider the long-term effects of that lower amount, and how it could potentially impact your lifestyle during your 70s, 80s, and 90s.
Additionally, if you’re still working and receiving a paycheck and you withdraw Social Security benefits, there are significant tax ramifications to consider—and even more when you add a Roth conversion into the equation.
Choosing the Right Medicare Plan
Thinking about retiring before age 65? Remember that Medicare doesn’t kick in until 65, which means you’ll need health insurance to fill the gap until Medicare is available.
Also, you’ll have a new set of decisions to make once you’re eligible to sign up: you can sign up for the Original Medicare (parts A and B) or a Medicare Advantage plan.
If you choose Original Medicare, additional decisions include which Medicare Supplement plan you’ll need. Each option has a variety of variables, including price, coverage areas, co-pays, and deductibles.
Keep in mind that if you don’t enroll in the right time frame, Medicare actually penalizes you with higher premiums for the rest of your life. It gets even more challenging if you work past age 65 and get health insurance coverage from your employer.
Work With a Professional
Don’t forget that all these rules and regulations have the potential of changing every time there’s a new session of Congress. That’s a lot to keep track of.
You owe it to yourself and your family to properly strategize your finances for your retirement years. Allow Cedar Brook Group to deal with these complexities while you enjoy your retirement. We’d love to help you make your retirement dreams a reality.
Reach out to us at 440-683-9213 or flegan@cedarbrookfinancial.com or schedule a complimentary introductory call online!
About Frank
Frank Legan is Partner, Financial Advisor, and member of the Forward Look Committee at Cedar Brook Group, one of the largest independent wealth management firms in Northeast Ohio. Frank spends his days designing and implementing personalized financial planning strategies for corporate executives, closely held business owners, artists, families, and retirees. He focuses on lifetime income strategies, investment advice, and estate planning services. He also works with businesses to develop strategic and succession planning strategies.
Frank has a Bachelor of Arts in Political Science from the University of Dayton, as well as a Master of Public Administration focused on municipal management from Cleveland State University. Prior to joining Cedar Brook Group, Frank was a financial advisor in the private client group at Merrill Lynch and with NatCity/PNC Investments. Frank is active in his community, serving on various councils, boards, and committees. Frank serves as Chairman Emeritus of the Board of Directors for Catholic Charities Diocese of Cleveland. When he’s not working, you can find Frank spending time with his wife, Laura, their daughter, Reese, and their beloved collie, Charlie. Frank and his family are volunteers at St. Francis of Assisi church in Gates Mills. To learn more about Frank, connect with him on LinkedIn.
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