7 Questions to Consider in Retirement
Are you on the brink of retirement or settling into your golden years? This chapter of your life can be exciting and rewarding, especially if you're well-prepared. One of the biggest concerns on your mind, however, is probably money. Besides ensuring that you have enough to cover your retirement, it's essential to understand how you'll meet your goals and priorities.
To help you get the most out of your retirement, consider these questions:
1. How much will health care cost?
For most retirees, healthcare may be one of your largest expenses in retirement. As you age, a higher percentage of your income may go toward healthcare expenses, including anything from Medicare premiums to doctor visits and prescription drugs. Even if your premiums remain stable, out-of-pocket expenses can vary significantly and may be hard to predict from month to month. Depending on your situation, you may want to explore options such as long-term care insurance or medical gap coverage.
2. How much money will you need in retirement?
Are you planning an active retirement with frequent or extravagant travel? Do you plan to spend your free time with friends and family, or purchase a vacation home? As you consider your big and small expected expenses, remember that retirement income to fund your lifestyle can come in many forms — savings and investment accounts, other active and passive income sources, and Social Security or pension benefits. If outliving your expenses is a concern, consider adjusting your savings, investment, and spending habits, or generating extra income through part-time work, consulting, tutoring, or freelance work.
3. Should you change your investment strategy in retirement?
If you're like most people, your income needs, goals, and risk tolerance look different in the years leading up to and throughout retirement than they did during your income-earning years. You may have focused on building wealth and growth in earlier years, but as you approach or enter retirement, your goals have likely shifted toward income, lifestyle sustainability, and wealth preservation. Regardless of your financial goals, income needs, and risk tolerance, a well-balanced portfolio may help generate growth and help provide stability once work becomes optional. Maintaining a mix of cash investments, bonds, and stocks may help support your wealth and lifestyle throughout your retirement years.
4. What is a Required Minimum Distribution (RMD)?
Although you may wish to postpone paying taxes on your retirement funds indefinitely, the reality is that you'll eventually be required to make withdrawals — and pay taxes on them. Current tax law generally requires most people to begin these withdrawals at age 73, though the exact age can depend on your birth year (this age is scheduled to rise to 75 for individuals who turn 73 after 2032). Once mandatory withdrawals begin, they continue every year for as long as you're alive. You can withdraw more than the minimum, but you must withdraw at least the required amount to avoid tax penalties.
5. What are some effective tax strategies for retirement?
Although taxes are an inevitable part of life — even after you retire — certain strategies may help reduce the amount you owe. It can be helpful to categorize your taxable assets into buckets, then think through the order of your withdrawal strategy. Some account types are taxed upon withdrawal, whereas withdrawals from a Roth IRA typically are not, since contributions were made with after-tax dollars.
As with any life stage, tax rates in retirement are based on income level. Effective retirement planning involves thinking through when you'll access income from various sources — a strategy based on factors including your age, the types of assets and income sources you have, and your lifestyle goals.
Generally, such a strategy might involve withdrawing from taxable investment accounts first, since those gains are often taxed at long-term capital gains rates, which are typically lower than ordinary income tax rates. From there, you might draw on tax-deferred accounts like a traditional IRA or 401(k). If you have a Roth IRA, you may want to draw from it last, since it isn't subject to RMDs (for the original owner) and allows the money to continue growing tax-free for as long as possible.
6. What are some tax-efficient strategies for gifting and legacy planning?
Leaving behind a legacy can benefit future generations and/or causes you care about. Start by considering your biggest concerns for the future, your intended recipients, and who or what you'd like to honor. If you're focused on leaving a financial legacy but concerned about outliving your money, you might consider how life insurance could help preserve assets and fill potential gaps for your beneficiaries.
You might also consider trusts — including Charitable Remainder Trusts — as part of your gifting and legacy planning, since these can serve as a structured way to distribute assets according to your wishes in a tax-efficient manner. Rather than giving everything at once, a trust can allow for structured giving, with conditions or specifications for when and how much beneficiaries receive. Gifting gradually or through other planned approaches may also help reduce the tax impact on your legacy.
A Charitable Remainder Trust generally provides an income stream during your lifetime (or a beneficiary's lifetime), with the remainder passing to a named charity after a specified period, such as your passing.
Another approach some use to help sustain cash flow for beneficiaries is sometimes called sustainable distribution — spending less than what's earned or received, and reinvesting the difference. If spending doesn't exceed net income, available funds may grow over time. This kind of strategy requires guidance, careful planning, and discipline.
7. Who gets your assets after you die?
The answer depends on whether you have a will. If you pass away with an effective estate plan in place, an estate executor generally helps distribute your estate, including personal property, real estate, and other assets you legally owned at the time of death. Without a will, how and to whom your assets are distributed is decided by the courts — which can also create tension and added stress for your family.
Beyond easing frustration after you pass, a will can also let you make other important arrangements, such as setting aside funds for future generations and choosing a guardian for any minor children in your care. You can also specify funeral arrangement preferences. You can amend or revoke your will at any time, though changes should be made official through your legal representative as soon as possible.
Planning for retirement can feel overwhelming, but you don't have to do it alone. Let's schedule a meeting to discuss these questions and more, to help you move forward in your preparations for your retirement.
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For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Registered Representatives of Cetera firms may not give legal or tax advice.
Such trusts are used to develop a vehicle for donations to a favorite charity, which also allows for the reduction of income taxes through a charitable deduction and favorable tax treatment at the date of the gift by non-recognition of built-in capital gains.
The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
