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Ready, Set, Retire

03 May 2024

Have you given any thought to your retirement? Even if you don't expect to retire anytime soon, the earlier you start planning how you'll transition from work to retirement, the more likely you'll be to meet your personal and financial goals. Here are several questions to answer before you call it quits.

What Do You Plan to Do in Retirement?

There's much more to retirement than just finances. If you suddenly stop working without giving the future much thought, you might find yourself adrift with no sense of purpose. Consider the following options for some of your newfound free time:

Start or expand a hobby or pursue a passion,
Join a gym or take up a sport, such as golf, tennis or pickleball,
Become active in a seniors' group,
Volunteer for a charity,
Travel extensively and visit places you haven't yet seen,
Go back to school or learn a new skill, and
Work on a part-time basis.

These activities can bring more meaning to your life and improve your overall outlook. It's just as important to stay mentally healthy as it is to save enough money to live on.

Where Do You Want to Live?

You may decide to pull up stakes once you retire. For instance, you might move for one or more of the following reasons:

To be closer to your children and grandchildren,
To downsize or save money, or
To live in a warmer climate at least part of the year.

Also, consider the type of housing, size of the home you'll want and the surrounding area. For instance, many retirees prefer to live in a community exclusively for people age 55 or older that offers robust amenities and handles exterior maintenance.

Alternatively, if you decide to become a snowbird — someone who spends the summers up north and the winters down south — check into the state tax implications. It may be beneficial to change your permanent residency to a state with lower (or no) income tax, rather than being a resident in a high-tax state. In addition to meeting state-law residency requirements, you'll also need to change your driver's license, voter registration and other hallmarks of residency.

Similarly, applicable state estate and inheritance tax laws could affect your decision. But, if you are simply moving to be closer to the grandkids or you're staying put, that's understandable, too — just be aware of the tax consequences.

What Are Your Projected Monthly Expenses?

It's always smart to live within your means, especially when you're no longer working and have a fixed amount of assets and monthly earnings. With extra time on your hands, it can be easy to overspend, especially if you have access to a large nest egg and you want to share your wealth with loved ones or charities or indulge in your personal passions. A monthly budget can help prevent out-of-control spending. Start by compiling your monthly expenditures.

One of the biggest costs in retirement is health insurance. After reaching age 65, this is often covered by Medicare, plus a supplementary policy that you'll need to pay for out of pocket. Depending on your situation, you may incur other substantial medical expenses as you get older.

Everyday living expenses are another major cost to factor into your budget. The essentials may include mortgage or rent, property taxes, utilities, insurance, groceries and clothing, etc. If you plan to travel extensively or participate in an expensive hobby (such as golf or collectible cars), add those to your budget, too.

Your budget doesn't necessarily have to be set in stone. It's OK to spend a little extra now and again. But if your monthly spending routinely exceeds your budget, it may be prudent to find ways to cut back on discretionary items.

What Are Your Projected Sources of Retirement Income?

Retirees typically rely on the following four primary sources of income:

1. Social Security benefits. Uncle Sam will deposit Social Security benefits into your bank account each month, barring unforeseen circumstances. Generally, the size of your retirement benefit is based on your earnings during your working years and the age when you officially retire. The standard amount is paid when you reach "full retirement age" (FRA). The FRA for someone born after 1959 is 67 years old. But early retirees (starting at age 62) receive less, while those who wait to begin taking benefits later generally enjoy higher monthly checks. Social Security benefits max out once you reach age 70.

Beware: Social Security benefits aren't tax-free. Up to 85% of your benefits will be subject to tax, based on a two-tier system that kicks in at relatively low levels of combined income (defined as your adjusted gross income, plus tax-exempt interest and half of your Social Security benefits).

2. Retirement plans and IRAs. If you're diligent during your working years about saving for retirement with qualified plans, such as 401(k) plans, you can build up a sizable amount on a tax-deferred basis. Although withdrawals are generally taxable, retirees are often in a lower tax bracket than they were at the height of their careers. In addition, you may tap into traditional IRAs and/or Roth IRAs for income. In most cases, traditional IRA withdrawals are taxable, but payouts from Roth accounts are tax-free.

Important: You can manage retirement plan and IRA withdrawals to minimize taxes. It's conventional wisdom to pull money from taxable investments first to preserve tax-deferred compounding. But you must begin taking required minimum distributions (RMDs) from plans and IRAs after attaining age 73 under current law. (Note: The age threshold for RMDs will increase to 75, starting in 2033, for individuals who reach age 74 after 2032.) RMDs are based on your account balance at the end of the prior year and life expectancy tables.

3. Investments and savings. Other retirement income may come from various investments and accounts. This includes brokerage accounts — often featuring stocks, bonds and mutual funds — annuities, savings and checking accounts, and other investment vehicles. Generally, sales of investments, such as stocks and mutual funds, will result in taxable capital gains. However, capital gains may be offset by capital losses, so timing is critical.

4. Real estate and business interests. These assets can be sources of significant income on an ongoing basis or through sales. For example, you may receive a windfall when you sell your current home. If you sell a home that you used and lived in as your principal residence for at least three of the last five years, you can generally exclude up to $250,000 of gain from tax ($500,000 for married couples who file jointly).

Once you've compiled your projected monthly income, compare it to your projected monthly expenses. If there's a shortfall, you might need to revise your retirement plan by cutting back expenses, working part-time or postponing retirement until you accumulate enough wealth to fund your desired lifestyle.

Retirement Confidence Survey

How confident are you that you'll have enough money to live comfortably through retirement? Confidence among retirees fell considerably from 2022 to 2023, according to the 2023 Retirement Confidence Survey published by the Employee Benefit Research Institute (EBRI). The last time a decline of this magnitude was reported by the annual EBRI survey was during the global financial crisis of 2008.

The primary reason for the decline was concerns over inflation. Three in 10 retirees aren't confident their money will keep up with inflation, and 58% are concerned they'll need to make substantial spending cuts due to inflation. Moreover, eight in 10 retirees predict that inflation will remain high for at least the next year. The survey also found that workers' debt levels are on the rise and are negatively affecting how much they can set aside for future retirement.

For More Information

Planning for retirement can be a complex — and sometimes stressful — undertaking. Fortunately, your trusted professional advisors can help guide you through the process. With their assistance, you may avoid common mistakes and realize your vision for a comfortable and enjoyable retirement. Contact a member of our Tax Team for more information.

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