At Keil Financial Partners, we specialize in helping people get ready for retirement. While this might be our area of expertise, we realize that for most, preparing for your ideal retirement isn’t always easy — especially since you likely don’t know what you’re facing. After all, you’ve probably never experienced retirement before.
That’s exactly why it’s so important to get ready for retirement, before you retire! You’ve spent your whole life saving, and once you reach retirement, you’re going to spend the rest of your life spending without adding back to your investments. That can be a tough adjustment to make, especially if you don’t have the certainty that comes with knowing that your money will keep working for you as long as you need it.
After helping countless clients navigate their path into retirement, we’ve learned a lot of valuable tips for helping pre-retirees put together the pieces of their retirement puzzle.
Today, we’re sharing the six key questions that retirees should be asking (but most aren’t) when preparing for that ideal retirement.
Read on to learn what they are!
1. What Will My Retirement Income Be?
Many people try to figure out how much they can take home in retirement — but it’s not always easy to do. Why? Because there aren’t always certainties around retirement.
For example, you know when your retirement will start, but you don’t know when it will end. This can make it difficult to save when you don’t know how long your retirement will last.
However, there is a lot of guidance out there around how to calculate the income you’ll need that isn’t as helpful as it may seem. For example, magazines and newspapers might tell you that you need 70-80% of your pre-retirement income for your retirement. But when they write this, they’re talking to millions of people. How does that apply to you?
Or perhaps you’ve read about the 4% rule. If you have a million dollars, that would mean you can take out $40,000 a year for the rest of your life. If only it were that easy, that all you had to do was follow a simple rule? But this so-called rule was calculated almost 30 years ago when interest rates were higher and the stock market was in the middle of an incredible bull market. And how does that apply to you specifically when you have a pension, social security, health care and other considerations to take into account?
When you’re trying to come up with your retirement income, what you’re really trying to figure out is how much you can sustain over your lifetime..
A general rule of thumb we like to recommend is that you start off by figuring out what you’re living on right now – your take home pay. Then when you do your planning, you can figure out if you can actually live on that amount, and if not, then some adjustments need to be made.
One reason why we focus on your take-home pay is because that’s what you’re living on right now. What you have in your investments doesn’t matter right now. You aren’t living off your investments. Instead, you’re living on a certain dollar amount. Whatever it is that shows up in your checking account each month, you’re probably spending it — and that’s likely what you should be shooting for as your retirement income so you can sustain the lifestyle you’re living right now.
Whatever your take home pay is, that’s what you’re probably spending right now. That’s what you need to build towards. And remember, you can use your pension, social security, and investments to help you hit that exact take-home pay amount.
2. How Do I Enjoy Life Now, But Still Live Comfortably Later?
Planning for your ideal retirement is all about finding that perfect balance between today and tomorrow. You don’t want to spend too much money today so that you’ll run out of money later. At the same time, when are you going to have more fun? When you’re 62 or 92? We think you’ll have more fun when you’re 62.
A good retirement plan allows you to spend a little bit more when you’re younger and accounts for having enough when you’re older. That plan will allow you to go ahead and enjoy your life now without feeling guilty about taking out money that might be needed for tomorrow.
Oftentimes, finding this balance means that you spend a little bit more those first few years in retirement, but still have enough later on so that you don’t have to worry about running out of money — no matter how long you might live. After all, between technological and medical advances and increasingly healthy lifestyles, it’s more than likely that you’ll live a longer life (and retirement) than the generations before you.
Finding this balance can be challenging, but it’s one we want you to walk through and to help you figure out. You deserve to enjoy life now AND later.
3. How Much Income Does The Surviving Spouse Need?
Chances are, by the time you and your spouse get to the end of your retirement, there will only be one of you left.
When you’re doing your retirement planning, things might look very rosy when one of you has a pension and both of you have social security. But part of the retirement income equation involves figuring out how much income your spouse will lose when you pass away, otherwise known as the survivor gap.
Why plan for the survivor gap ahead of time? Because oftentimes, it’s an 82-year-old widow who ends up living on the decisions of her 62-year-old husband.
When the first person passes, your social security is going to go down. Depending on how it’s set up, the pension you’re receiving might go down as well. The default pension usually has a 50% survivorship, meaning that if you’re getting $1,000 with your pension, after passing away, the spouse will only continue to receive half of that amount, or $500.
Thankfully, with pensions, you get a little bit of a choice. If you haven’t yet chosen your pension, we recommend meeting with professionals like us who can help you figure out how your decision is going to affect you and your spouse in the long-term.
However, when one spouse passes, many believe that their expenses will go down since there are fewer people depending on that income. But this isn’t necessarily true. Your property taxes won’t go down, your tax bracket will likely go up, and the changes in your utility expenses likely won’t be significant enough to provide you with enough savings to offset the difference of your other income losses.
Instead, it’s more helpful to plan ahead and use strategies like delaying social security or your pension, taking a survivorship on your pension, setting some money aside or having life insurance to get ready for that survivor gap.
You can’t go back in time and you can’t change the decisions you made years ago — so it’s important to be proactive and think ahead of time about what might happen so you can make the best decisions for you and your spouse no matter who becomes the surviving spouse.
4. How Do I Arrange My Taxes To Get More Deductions?
In retirement, a lot of retirees have property taxes and state income taxes, all the while giving a good amount to charity.
Up until a few years ago, many retirees had itemized deductions when filing their taxes. With the Tax Cuts and Jobs Act, the standard deduction was doubled, but it’s also now it’s harder to reach the threshold for deductions (in 2020, for a retired couple both 65 or older you can now itemize after you hit $27,400 of deductions). In addition, they now limit you to $10,000 in deductions from state income and property taxes, essentially making it harder to reach the higher bar they’ve set.
However, while it might be harder to get itemized deductions these days, there are still ways to get that extra tax help and to capture back those deductions, especially when it comes to giving to charity.
These strategies include:
- Bunching Together Charitable Contributions
- Using Qualified Charitable Distributions
- Using Donor Advised Funds
We give a more in-depth explanation of these strategies in our blog post on how you can make the 2019 & 2020 tax laws work for you — read it here!
5. How Can We Leverage Social Security to Lower Our Lifetime Taxes?
For a lot of people, the major focus of social security is around how soon they should take it.
However, we believe you should also focus on what options will give you the most money over your lifetime, what helps your surviving spouse the most — and how that social security gets taxed.
Your social security will be taxed at whatever your normal income range is. There’s no special rate on social security. But what is different about social security is that either none of what you get from social security is taxable or up to 85% of what you receive is taxable — or anywhere in between.
Social security and taxes can be a complicated situation. That’s why it’s worth meeting up with a trusted tax planner to help you make the most of your circumstances.
At the end of the day, we believe that if you’re going to play the game, you have to know the rules. And unfortunately, the way the tax code and laws are written out, it’s very much like a game — a very, very complicated game. So bring in an expert that knows the rules and can talk to you about this, because this is not a game you want to lose.
For more info on how to make social security work for you, check out our podcast, “Planning ahead for Social Security.”
6. How can I use Roth Conversions to Lower My lifetime Tax Bill?
Retirement life is very different from your working life.
When you’re working, you’re making a salary, and you get a paycheck and a W-2 form to use on your tax form.
When you’re in retirement, you get a lot more control over your tax bill including choosing when things become taxable! You can choose where to take money from, like your bank account or places like an IRA, which both offer different tax situations. You can choose to give money in the current tax year or the next, and claim deductions based on that choice.
You can also choose when you take money out. If you take money out in December but use it in January, that’s also a different tax situation.
We have a lot of choice, and when you understand how the tax brackets and social security work and are taxed, you can then put it all together for your advantage and lower your lifetime tax bill.
One of the biggest ways to do this is to avoid waiting until you’re forced to take money out of your IRA at 72 (the new required minimum distribution age). Instead, plan for it ahead of time by making use of something called Roth Conversions.
Right after you retire and haven’t taken your full social security yet, you might be in one of the lowest tax brackets of your lifetime. The time when you’re in that bracket is the time when you have the option to pay taxes because you want to — especially when you’ve planned it out and can see that your taxes are lower now than it will be later.
You can choose whether you want to leave your investments in your traditional IRA and keep pushing off the taxes, or doing something called a Roth conversion.
Some people believe that doing a Roth Conversion would create too much taxes because they are thinking that they have convert their entire account, but it could be a dollar, your entire account, or anywhere in between.
Others think they can’t do a conversion because they think it’s related to the word contribution – but you can still do a conversion if you’ve already contributed towards a Roth IRA or 401(k), and you can still do a conversion if you don’t have any working income.
And sometimes you don’t want to do a conversion because you believe that your Traditional account is performing better than your Roth IRA, but when you move your investments from a traditional IRA to a Roth IRA, nothing has to change with your investments.
If you like the Traditional IRA investments keep them! Just move the dollar amount you want to the Roth, you’ll get a tax form that says how much you moved and your money stays invested. All you’re doing is choosing to pay the taxes this year and allow it to grow and become tax free in the future when your taxes go back up.
For more in-depth information on these six questions you should be asking and the planning strategies around them, be sure to read our white paper, ‘6 Questions Retirees Aren’t Asking But Should Be,’ along with other retirement planning ideas on our Resources Page.
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