For those of you that wish you had a list of what to do and what not to do in retirement, today is your day.
I’m going to refer to an article written by Sheryl Rowling for MorningStar.com titled 8 Financial Do's and Don'ts for the 7-Figure Retirement.
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8 Financial Tips for a Successful Retirement
First, I will list Rowling's 8 financial tips for a successful retirement, and then I will go into more detail about each one.
- Don’t retire too early.
- Do watch your taxable income level.
- Don’t take Social Security too early or too late.
- Do consider Roth conversions.
- Do consider retirement stages and safe withdrawal rates when determining spending budgets.
- Don’t lock in expensive payments or financial commitments.
- Don’t write checks to charity.
- Do consult a financial professional.
These tips center around an example couple that the author refers to as a “Good Saver Couple.”
She defines this as “a couple that has worked a full career, is somewhere between ages 62 and 66, and is considering retirement. They have a 401(k) in the low seven figures, own a home that is partially paid for, have consumer debt consisting only of car loans or leases, and no longer have kids who are financially dependent.”
This example couple is the basis for the following 8 tips.
1. Don’t retire too early.
Retiring one year earlier than planned means you’ll have one less year of contributing to your retirement savings and one more year of spending.
Beyond the financial considerations, people often experience boredom when they retire because they don’t consider what they are going to do next. They are retiring from something instead of retiring to something. Creating a purpose in retirement can ensure that you don’t get bored.
2. Do watch your taxable income level.
If you avoid withdrawing money from your retirement accounts early on in retirement, you may be putting yourself in a very low tax bracket during the early years of your retirement, which sounds like a good thing.
However, it often makes sense to voluntarily pay more taxes now and significantly less later on so your income doesn’t spike at age 72 when you are required to take minimum IRA distributions.
One way you can spread out your taxes and lower your life-time tax liability is by converting IRA money to a Roth IRA, where your money will continue to grow tax free. I will talk about this more in a little bit.
Implementing careful tax planning strategies can often save you over the course of your retirement.
3. Don’t take Social Security too early or too late.
Generally it’s best to wait until full retirement age to start taking Social Security benefits, and even better if you can wait until age 70, especially if you are married.
If you are not working, it could make sense to take Social Security earlier if it will benefit your lifestyle.
Delaying benefits makes sense if you are planning to work or if you don’t need the income from Social Security.
With couples, I often recommend the higher-earning spouse wait until full-retirement age or age 70, whatever they are comfortable with. Then the lower-earning spouse can take benefits at age 62 or full-retirement age, whichever fits better into their cash flow.
And of course, if their investments happen to take a big dip, they can start taking their benefits then if they would like.
4. Do consider Roth conversions.
If you have an IRA, you have an opportunity for Roth conversions. This is a tool we use to help clients reduce their lifetime tax liability.
You’ll pay more in taxes now (at historically low rates), but the money in your Roth IRA will continue to grow, and you won’t have to pay taxes on the gains or distributions later because it was funded with after-tax money.
Roth IRAs are also valuable for estate planning purposes. The death of the stretch IRA for beneficiaries means your kids would have to withdraw inherited assets within 10 years, likely during their peak earning (highest tax bracket) years.
Since Roth IRAs are tax-free, they won't increase your beneficiaries' tax liabilities.
5. Do consider retirement stages and safe withdrawal rates when determining spending budgets.
According to the article, it can be ok to withdraw from your retirement accounts at a slightly higher rate in the earlier years of your retirement if you have some safeguards in place. This could include equity in your home, future Social Security benefits, and a plan to reduce spending over time.
It can make sense to spend more in the earlier years when you are feeling most healthy and active.
6. Don’t lock in expensive payments or financial commitments.
This might not be the time to lock yourself into luxury car payments. And I know you want to help your kids, but don’t train them to depend on you financially.
Your retirement bucket may seem huge, but its purpose is to fund your needs for the rest of your life. Making financial commitments outside your budget can potentially hurt your financial security in retirement.
7. Don’t write checks to charity.
There is no tax benefit for writing checks to charities unless you itemize your deductions. And the standard deduction is high enough that many retirees don’t itemize their deductions. An exception was the above-the-line $300 maximum charitable deduction included on 2020 and 2021 tax returns. Instead, consider donating appreciated stocks. This can save you more in taxes by avoiding the capital gains taxes from selling the stock yourself, and you can deduct the fully appreciated value of the stock as an itemized deduction.
You can contribute cash or stocks to a donor-advised fund and take the deduction as soon as you contribute to the account. After you contribute, the money is no longer yours. But then you can decide later what charities you want to support through your donor-advised fund over the course of the year or multiple years.
And your donor-advised fund can be invested to potentially increase in value. You can set up a donor-advised fund through a local community foundation..
If you are age 70.5 or older, another option is to forward your IRA required minimum distribution (RMD) each year to a charity as a qualified charitable distribution (QCD).
A financial advisor can help you with any of these charitable options. And that brings us to our final tip.
8. Do consult a financial professional.
I might be biased here, but I obviously agree with this tip. Consider consulting a CPA and a financial advisor to ensure you are considering every angle in your retirement plan.
A financial advisor, like myself, can give you tax advice spanning many years, and a CPA can advise you on how to implement that advice in the current year.
A financial advisor can also manage your investments for you so you don’t have to worry about that anymore.
There you have it: 8 Financial Do’s and Don’ts for your 7-figure Retirement.
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