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5 Things Investors Transitioning Into Retirement Cannot Afford to Overlook

November 18, 2020 | By Matthew Gordon, CFP®, RLP®
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As you plan for retirement, it’s important to take time to consider the lifestyle you want and the financial resources you’ll need to support it. This Insight will cover the following 5 strategies for transitioning into this significant life stage, and ensuring it provides you and your loved ones the relaxation and fulfillment you deserve.

Financial strategies for successful retirement:

  1. Develop and execute your retirement tax strategy
  2. Assess your retirement healthcare costs
  3. Prevent boredom by bridging the gap with part-time work
  4. Review your risk tolerance and asset allocation
  5. Look into long-term care (LTC) insurance

Retirement Tax Strategies for High Income Earners

Tax planning will look different when you’re transitioning into retirement, especially since your taxable income could fluctuate significantly. In the year you retire, you might still be in a high tax-bracket and want to utilize deductions such as charitable gifting. In the years following retirement, your taxable income might be much less for a few years but then start to go up again when you opt to receive Social Security and must take RMDs from your retirement accounts. This timing issue brings up some great tax strategies:

Charitable Gifting 
One strategy that could help you save on taxes is to establish a Donor Advised Fund (DAF) prior to retirement. Through a DAF, you can donate assets, like appreciated stock and receive a tax deduction in the year you make the gift. If you donate stock shares directly to the DAF without selling them first, you won’t pay taxes on the capital gain. Besides these benefits, you’ll feel accomplished knowing that you’re helping worthy causes.

Once you turn 72, you must take Required Minimum Distributions (RMDs) annually from your traditional retirement accounts, which include 401(k)s, 403(b)s, and IRAs. This is the government’s way of ensuring that it’ll receive taxes from your retirement plans. 

While RMDs have been suspended for 2020 as part of the CARES Act, you’ll still want to have the resources in place to determine what you need to withdraw in future years. Speak with a fiduciary financial planner. Failing to take your RMDs will result in a 50% penalty of the RMD amount.

Roth IRA Conversions 
If you think you'll be in a lower tax bracket for a few years following retirement, but then expect to be in a higher bracket in the future, it could be wise to do partial Roth conversions in those lower-tax years. A Roth IRA provides tax-free growth, is not subject to RMDs, and could be a more tax-advantaged way to pass assets to your heirs. Consult your fiduciary financial planner before implementing a Roth conversion.

Healthcare Costs in Retirement

According to the National Bureau of Economic Research, people face $122,000 in medical costs from the time they’re 70 through the remainder of their lives. Planning carefully for anticipated medical costs will benefit your financial health as much as your physical health.

For those retiring before age 65, be sure to ask your employer about healthcare plans for retirees or part-time workers. If your employer offers health benefits for part-time workers, it could make sense to work part-time for a few years when transitioning into retirement. Regardless, you’ll want to work with your fiduciary financial planner and check your employer’s plan documents for specific language surrounding your coverage, how long it would last, and whether the employer can change it at any time.

At age 65, you’d be eligible for Medicare, or government-funded health insurance. Be sure to sign up within the allotted time frame (3 months before and 3 months after the month of your 65th birthday) to avoid surcharges on Medicare part B. Medicare part B covers outpatient services, lab tests, and more.

Finding Fulfillment In Retirement

While rarely acknowledged or addressed, the emotional impact of retirement must be accounted for as you plan for your future. Consider, for example, the retiree who is used to accumulating wealth throughout their lifetime, then suddenly finds themselves grappling with becoming a “decumulator,” and having to find new ways to gain the sense of purpose that came along with their career. When transitioning into retirement, prioritize your own sense of wellbeing and fulfillment by pursuing new hobbies or interests.

You might want to transition to retirement by working part-time. You’ll still have plenty of free time and you might be able to access employer benefits. Part-time work will also provide a stream of income, which could prevent you from tapping into your retirement accounts prematurely and may help you opt to delay taking Social Security to age 70. For more details on social security planning strategies, see “Social Security Retirement Benefits: How and When Should You File?

Review Your Risk Tolerance and Asset Allocation

When you were younger, you might have had a portfolio leaning mostly towards stocks in investments like equity mutual funds and ETFs. As you near retirement, it is a good idea to revisit your risk tolerance and asset allocation since you have less time to recover from a market downturn.

While you’ll want to revisit your risk tolerance as your approach retirement, keep in mind some risk can lead to higher expected long-term returns; therefore, stocks shouldn’t be avoided entirely.

Many retirees focus on the yield from their investments because they are looking to their portfolio to supplement their income. This can lead to concentrating investments in higher dividend paying stocks and higher coupon paying bonds rather than building a diversified portfolio. When investing, consider the total return. By considering the total return, you’ll have investments that can provide both yield and capital appreciation.

As you near retirement, you may wish to increase the size of your cash reserve from the typical 3-6 months of living expenses to something larger. This provides a buffer in case of market downturns and other emergencies.

Consider LTC Insurance

Those turning 65 today will have an almost 70% chance of needing some type of long-term care in their lifetimes. Nursing homes, caretakers, assisted living facilities, adult daycares, and related services can be extremely expensive. The average monthly cost for a semi-private room in a nursing home is $6,844, and the cost of a health aide averages more than $20 per hour.

Long-term care insurance can be valuable coverage to have. It could pay for large out of pocket costs and give you more options with the quality of care. If you rely on Medicaid, then you’d have a much smaller selection of providers. Also, this program doesn’t pay for assisted living in many states.

Always evaluate the pros and cons of LTC insurance with the help of a fiduciary financial planner.

Pros of LTC Insurance:

  • Protection from high expenses.
    It can reimburse you for high out of pocket costs with nursing homes, assisted living facilities, and related services.
  • Tax-advantaged.
    LTC benefits are tax-free and a portion of the premiums may be deductible.
  • Flexible.
    These policies can be tailored to fit your needs and you can purchase riders, or additional benefits, for extra protection. Some riders can help offset inflation.

Cons of LTC Insurance:

  • It may never be needed.
    Keep in mind, however, that no combination of factors can accurately determine whether you’ll need it; it’s impossible to predict the future.
  • Premiums can increase over time.
    Review the contract as most companies can raise premiums, which is more likely to occur on older plans

Carefully evaluate if LTC insurance is right for you. If you foresee needing assistance, then the right LTC policy can prevent your hard-earned retirement dollars from being used toward assisted living expenses.

Review your Options with a Fiduciary Financial Planner

Transitioning into retirement can be exciting, but potentially daunting at the same time. There will be many changes that you’d need to make once you’re not working 40+ hours per week. One of these includes becoming accustomed to not having a fixed routine. 

To prevent boredom, some retirees consult, volunteer or take on hobbies which gives them a sense of purpose and in some cases income. Reviewing your healthcare options, retirement tax planning strategies, Social Security election, risk tolerance, asset allocation, and LTC insurance plans are some other simple action items that will prepare you for this lifestyle adjustment.

Need more help when transitioning into retirement or your near retirement investment strategy? Schedule a complimentary 30-minute consultation with one of our advisors today!

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