Better Late Than Never – Did COVID Postpone Your Retirement?
Your retirement picture is as unique as your fingerprint. With a variety of investment strategies, savings plans, and retirement planning methods, there are many ways to peel retirement’s onion.
Interestingly though, as unique as everyone’s financial picture can be, the official date of retirement as determined by many government-based policies and social services is the same for everyone, generally between 65 and 67.
Your retirement date is mostly your prerogative. But deciding when you’ll retire greatly affects how you will retire. If you decide to retire late, keep the following important financial considerations in mind while making your retirement plan.
Required Minimum Distributions (RMDs)
Pre-tax retirement accounts enable you to deduct new contributions every year, up to a certain limit. Accounts like Traditional IRAs, SEP IRAs, and pre-tax 401(k)s give you the opportunity to potentially reduce your taxable income annually, while investing for the future.
The time will eventually come, however, when the pre-tax accounts become after tax. This takes place through Required Minimum Distributions (RMDs) starting the year in which you turn 72. Accountholders are required to make an annual withdrawal, which is calculated based on the balance of their accounts and which considers their ages. Since withdrawals from pre-tax retirement accounts are considered income by the IRS, RMDs are taxable events, and must occur until your pre-tax account balance is zero or you pass away.
Generally speaking, your tax bracket is lower in retirement than it was during your working years, so the tax consequences of an RMD may be low. But if you’re still working, the extra tax from a large RMD on top of your taxable income may be higher than expected.
Until recently, you could not make additional contributions to your pre-tax IRA beyond age 70-½. You were only allowed to take money out through RMDs or other withdrawals, even if you were still working. Thanks to recent updates in the law, if you work past your RMD starting date (now age 72), you can continue contributing to your IRA.
If you don’t entirely need the funds from your RMD and want to save on taxes, you can direct the money from your RMD directly to a qualified charity. This is called a Qualified Charitable Distribution (QCD) and is potentially not taxable. (For more on QCDs, read our recent blog post: Giving to Charity in Retirement? Here’s a Tip.)
RMDs are just a part of owning a pre-tax account. Be sure to plan for the potential tax consequences of your RMD.
Anyone with any assets they’d like to protect should have an estate plan. But if you believe you’ll be retiring later than usual or later than you once thought, you may need to go one step further.
At a very basic level, it’s important to have an estate plan that covers you and your family. Some of the essentials of an estate plan include a will, a power of attorney, and a trust. (Here’s why!)
Once you have an estate plan in order, the next step is to keep it up-to-date. Folks who retire later or prolong their work-life can potentially add to existing assets like retirement investments, bank accounts, land, valuables, and the like.
In addition to accumulating more assets, situations and priorities change. Both retirees and non-retirees should check their estate plans regularly.
Social Security is a major pillar of most retirees’ financial lives. While Social Security may not be your primary source of income during retirement, it’s a very valuable supplement to your other income vehicles.
You can receive Social Security benefits as soon as you turn 62. But taking your benefits early diminishes the amount of your monthly payment. The longer you wait to start taking your Social Security benefits, the more you’ll receive on a monthly basis, up to age 70, when increases stop.
Retiring later can also increase your monthly payment, as the Social Security Administration compiles your highest-earning 35 years of covered wages (wages subject to Social Security tax) and creates an average. If you make more for longer, your benefit can actually increase, even if you've already begun receiving the payments.
Retiring later may not change your healthcare priorities, but it may give you slightly more wiggle-room to be strategic with your coverage. All individuals become eligible for Medicare at age 65, but it’s important to look at each service component to save money and cover your needs.
Regardless of when you sign up for Medicare, Part A, which is hospital coverage, it is free as long as you have a work history of at least 10 years. But Parts B through D can have premiums and copays, averaging around $135 and $30 for each, respectively. Also remember that higher-earners will pay higher premiums.
If you’re retiring late, you can consider delaying signing up for the more expensive parts of Medicare, perhaps only enrolling in Part A. Receiving healthcare benefits from your employer or spousal benefits (if applicable) can add a big boost to your healthcare savings.
Help from a Financial Advisor
The added income from working can be a big boost to your retirement plan. But it’s extremely important that you have your retirement planning in place, so the added income isn’t taken for granted. Working with a financial advisor to craft a comprehensive financial plan can help you maximize your existing assets, in addition to factoring in the additional income you’ll receive if you retire later in life.
Naturally, life has unknowns, and a fair share of twists and turns. Work with a financial advisor who can help you navigate the important elements of retirement, including estate planning, monthly budgeting, tax planning, and all the other pieces of your financial puzzle, regardless of what life throws at you. Combined with all of your retirement planning efforts, your advisor will work to make sure you live your best life in retirement.
Retirement planning in Texas, Atlanta, GA, and Alabama is our specialty at Linscomb & Williams. As a fee-only, fiduciary financial planning and investment management firm headquartered in Houston, Texas, our team has half a century of experience helping families with their retirement planning needs, so they live the retirement they want.
Retirement planning in Texas has its own uniqueness. If you have a question about retiring later in life that is not addressed here, contact us and get the conversation started.