Years of planning come into focus as you get closer to retirement. A goal that was far off is now within view, and retirement preparedness takes on a whole new meaning.
Many crucial decisions are made in the five years leading up to retirement and the first five years in retirement. This is just the beginning of the next stage of life, which could be another 30+ years. The tough decisions you make regarding pensions, Social Security, and Medicare will impact your income for the rest of your life. Factors you may not have focused on in the past are now prominent, such as taxes, longevity, health care, inflation, and market risk.
Every decision you make becomes an integral part of your ongoing plan – which is unique to you. That means there are no cookie-cutter answers, and each option must dovetail with other options to create a lifetime of income for you, and if married, your spouse.
Take, for instance, the options available when beginning your pension benefit. Should you take a monthly payment or a lump-sum payout? Should you start as soon as you are eligible or allow your benefit to grow? Will you take a fixed option without a cost-of-living adjustment (COLA) or a lesser payout that includes an annual COLA and increases as you age? Don’t forget the spousal benefit. Many pension plans allow for a reduced benefit to you with a survivor benefit to your spouse. Opting for the survivor benefit ensures your spouse will not experience the financial loss of a pension benefit.
Social Security provides benefits to you and your spouse and is very complex. There are many options surrounding the timing of benefits. If you begin benefits early, at 62, your monthly amount will be significantly reduced. On the flip side, if you wait to start at 70, you will receive the highest possible monthly benefit. Spousal benefits are also impacted by your beginning date. Maximizing your monthly benefit can be complicated and requires advanced planning.
When it comes to taxes, no one wants to pay more than their fair share. Retirement income planning is essential in helping to reduce and manage the tax burden when you retire. Money that you have saved in tax-deferred accounts such as employer-sponsored 401(k)s, 403(b)s, or Individual Retirement Accounts (IRAs) will be taxed when you take a withdrawal – which is required to begin at age 72 under current Required Minimum Distribution (RMD) rules. There are no required distributions from Roth IRAs, and when you take money out, there are no taxes. Investments in individual, joint, or trust accounts are generally taxed at lower capital gains rates. Tax harvesting strategies can help reduce taxes and, in some instances, alleviate capital gains taxes altogether. Knowing which accounts to access and when can help protect your nest egg and save you a great deal in taxes.
This just brushes the surface when it comes to retirement income planning. We are passionate about guiding you through the maze and helping you understand your options so you can make decisions that will financially prepare you for retirement. If retirement or a change of careers is within sight for you, let our wealth management team help you create a solid plan. Call us today!
