Make smart distribution moves to secure a comfortable lifestyle throughout retirement

At the time of this writing, Congress was entertaining a $3.5 trillion social spending plan. Partly, the proposal is aimed at kickstarting personal and retirement savings with measures such as requiring employers who don’t offer retirement plans to auto-enroll associates in IRAs or 401 (k)-type plans. Other savings-geared measures are on the table, alongside exceptions to these requirements based off of factors such as type and size of business. Regardless of where one stands on the political aisle, there is no denying the new challenges and opportunities presented by workplace, social, demographic and health care shifts in recent decades. These changes underscore the need for a knowledgeable and experienced wealth management partner, a firm that you can trust.


Partly, those changes include:

  • You’ll probably live longer in retirement than your parents or grandparents did. The U.S. Centers for Disease Control and Prevention reports that life expectancy at age 65 is almost another 21 years for women, and slightly more than 18 years for men. Additionally, boomers who are spending a quarter of a century or longer in retirement, are turning the notion of retiring on its head. They are more active innovators and reinventors of what it means to be “retired.” Of course, pursuing new passions or maintaining the lifestyle that one always had while working takes money, which in turn takes careful planning for a longer time horizon than retirees of yesteryear.

  • On the flipside, you’ll be staring down potentially astronomical costs for health care. Longer lives and advancements in medical technologies can add up to crippling expenses that one’s retirement planning may not have adequately accounted for. It is critical that one budgets for health care. So, these expenses will not overly stress or consume your assets earlier into retirement.

  • You likely don’t have your parents’- or grandparents’-style pension plans to fall back on. Over the past 30-plus years, pensions have really taken a hit. Just in recent years, between 2008 and 2018, the percentage of private sector employees covered by defined benefit/pension plans as collapsed, from 20% to 13%. This means that the onus for savings has substantively shifted from employers to employees, and alternatives including 401 (k)s and IRAs.


Strategize, strategize, strategize!


Many aspects of retirement planning present opportunities for smart strategies to keep more monies in your metaphorical “pocket.” Consider how most distributions from retirement plans are subject to income tax (and, potentially, an additional 10% tax), there is ample room to consider how and when to pull from your savings in a way that minimizes the tax burden. The IRS, for one, provides a handy chart which details exceptions to the early distribution tax. Generally, “early distributions” are those withdrawals taken before the investor reaches age 59 and a half. Unless exceptions apply, the additional 10% tax on premature withdrawals/distributions also applies.


Along with Social Security benefits and funds from other savings and investments, it is these IRAs and retirement plan distributions that play a key role in the income that sustains you and your lifestyle through a potentially very long retirement. It may pay off to assess and alter investment holdings in retirement to attain tax savings, while preserving the principal. Specifically to distributions, one may wish to avoid or postpone Required Minimum Distributions (RMDs). Strategies may include transferring funds to a charity (thus, the RMDs are not subject to tax within the traditional IRA). As with other strategies, there are requirements and annual limits. It also pays to stay on top of changes associated with the COVID-19 pandemic. Our team has stayed abreast of the likes of relevant CARES Act-driven changes throughout the crisis; i.e., partly involved the suspension of RMDs for traditional IRAs and 401 (k)s.


Furthermore, one may consider investing in deferred annuities. This allows one to postpone RMDs and, again, there are limits placed on the amounts that may be used to purchase this investment, known as a Qualified Longevity Annuity Contract (QLAC), exempt from RMD calculations. Likewise, tied to another potential source of income, our clients may choose to delay the receipt of their Social Security benefits. During that time, additional credits can be earned, which boosts monthly benefits, and they aren’t subject to taxes on the benefits. Keep in mind that, since the taxable parts of these benefits depends on other sources of income, there are yet more opportunities to manage the retirement income that actually gets saved and doesn’t go to Uncle Sam.


For instance, contributing to deductible IRAs and 401 (k)s (if one is still working) can reduce the Adjusted Gross Income (AGI). It may be feasible and a smart move to limits sales of securities, and to invest in and make withdrawals from a Roth IRA. This is an awesome tool as withdrawals from a Roth are tax-free (in retirement). They are not factored into the calculation of the tax on Social Security benefits. A big takeaway here is, even though Social Security and/or pensions may represent a small part of your monthly income, they should still be factored into a distribution/withdrawals strategy. They can have bigger implications on your overall planning than their dollar amounts, at face value, might indicate.


“Universally-appropriate” takeaways


Retirement planning strategies often come down to timing, timing, timing. It may, for instance, behoove you to withdraw funds from sizeable assets in taxable investment accounts (outside of an employer’s plan or other retirement accounts) first. Reason being those distributions from employer’s or tax-deferred accounts are subject to federal income taxes. You may be in a more positive financial position when long-term investments are sold, and the proceeds are instead taxed at the capital gains rate. As referenced earlier, there are considerable benefits to those tax-deferred 401 (k) and traditional IRA accounts funded with pre-tax dollars. The aforementioned 10% penalty for early withdrawals (and at regular income tax rates) applies for those younger than aged 59 and a half, otherwise you won’t pay any taxes on these monies.


Considering the implications to one’s tax bracket is also a must, especially if you are sitting in between two brackets. Withdrawals can push you to that higher tax range. So, it’s important to reevaluate deductions, as a means of bringing you down to a lower tax range. As noted, charitable deductions may be applicable and offset higher incomes. Likewise, write-offs of qualifying business expenses may be in order. Withdrawing from a Roth IRA, too, won’t increase one’s tax bracket, gets more cash flowing and avoids taxes. Furthermore, after you’re gone, your heirs enjoy tax-free distributions from Roth IRAs, which is not the case with its “traditional” counterpart. However, certain income levels are not eligible to contribute to these accounts. Still, worth looking into!

While many of the items that we have noted apply to most investors, we appreciate that there is no situation quite like yours. We also understand that you can’t map out a plan if you don’t know where you are going. It is possible that you need to go back to “square one”; rethink the amount that you formerly thought you’d have to save. Or, you may need to have a professional sit down with you and crunch the numbers – answering these basics in an accurate, complete, and objective (third-party perspective) way is a critical start to this process, and to setting you and yours up for a comfortable retirement.


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