Questions run rampant when you are in or near retirement.
Will I run out of money? How can I avoid overpaying taxes? Will my family be taken care of if I am no longer here?
Such questions highlight an important point. Everyone wants a smooth retirement but achieving one is not easy. Still, you can go a long way in making those golden years more relaxing and less anxiety-ridden by focusing on five critical areas: tax, income, medical, legacy and investment. (At my firm, we call this the TIMLI™ Retirement Plan, with TIMLI™ pronounced “timely.”)
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Let’s take a look at each area:
Taxes
Think your taxes will go down in retirement?
Maybe — but maybe not.
Taxes can add up even in retirement for a few reasons. Many people save money in tax-deferred retirement accounts, such as a traditional IRA or 401(k). When they begin withdrawing money from those accounts to live on in retirement, their withdrawals are taxed. Plus, up to 85% of Social Security can be taxable, depending on your overall income. Pensions also are taxable.
This is why you need strategies for keeping your taxes as low as possible. One popular option is to begin shifting money from a tax-deferred account to a Roth IRA. You pay taxes when you transfer the money, but your dollars grow tax-free and you don’t pay taxes when you withdraw the money in retirement.
Another tax strategy people can use if they have company stock in their 401(k) is net unrealized appreciation (NUA). The NUA is the increase in value of stock from the time it was bought to the time it’s taken out of the retirement plan. Under this strategy, you can move stock to a brokerage account, and when you sell it, the appreciated amount is taxed at the lower capital gains rate rather than the higher ordinary income rate.
Income
As mentioned earlier, people often worry about running out of money in retirement. It’s a good idea to create a budget so you know how much you spend each month and how much income you need to meet those expenses.
Retirement income varies between individuals and can come from a number of sources: Social Security, a pension, rental properties, retirement savings or other investments.
With investments, look at your portfolio to make sure it’s balanced between your need for income now and your need for growth to cover future expenses. Some people use the rule of 100, subtracting their age from 100 to determine how much to invest in stocks and how much in bonds. Under that rule, if you're 65, then 35% of your investments would be in stocks and 65% in bonds.
Medical
Health care can be one of the biggest retirement expenses. Fidelity released a 2023 study showing the average 65-year-old retired couple may need about $315,000 saved to cover health care expenses in retirement. The estimate does not include over-the-counter medications, most dental services and long-term care.
Medicare is the health insurance for most retirees, but Medicare doesn’t cover everything. You may want to consider a Medicare supplement plan or a Medicare Advantage plan to fill the gaps.
One other note on Medicare: Understand the potential impact of income-related monthly adjustment amounts, or IRMAA. This is an extra charge high-income families pay on the Medicare premium for Medicare Part B and Part D (prescription drug plan).
Careful financial planning comes into play here. Go $1 over an income threshold and your premium increases. If you are near the threshold, consider taking action to keep your income below the magic number. For example, you could make a charitable donation or postpone making a withdrawal from a tax-deferred retirement account.
Legacy
Planning also is important when considering where and how to leave your legacy, and you should account for tax implications for your heirs. You can bequeath your assets through either a will or a trust, but there are differences to consider.
A will is generally simpler, but it must go through probate, which is a court-supervised process of validating the will and distributing assets. Wills are public documents once they go through probate, meaning that anyone can access the information in them.
A trust generally avoids probate, allowing for the transfer of assets to beneficiaries without court involvement. Trusts provide more privacy than wills because they do not go through probate and typically are not made public.
If you decide on a trust, you should have it reviewed and updated at least every three years to make sure it is in line with any changes in tax laws and estate planning laws, as well as changes in your life that could affect it.
Investments
With investing, retirees must find a balance between taking on too much risk and playing it too safe. With people living longer, retirements can last 20 to 30 years or longer. That means part of your portfolio needs to be for growth to make the money last. Otherwise, a combination of inflation and increasing living needs could shrink your money quickly.
A young person can afford to have an aggressive investment strategy because they have time to recover if the market plummets. In retirement, time is not on your side. In addition, withdrawing money from your portfolio to live on at the same time your investments are enduring market losses can be devastating to your finances. Even worse, a lot of portfolios have hidden risk but don’t get the correlated returns, leaving you vulnerable to a potential shortfall in retirement.
Although this gives you a general overview of what to consider for these five areas, there is plenty more to know about taxes, income, medical, legacy and investments. A financial professional can provide even more information and help guide you in making the decisions that are best for you in each of the five areas.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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