Retirement Planning Doesn’t End at Retirement

Congratulations, you’ve officially retired! You’ve worked hard throughout your career to make smart retirement planning decisions and build a nest egg that will provide financial independence for the rest of your life. You’ve rolled over and consolidated employer retirement plans into IRAs, you’ve decided when to begin receiving Social Security benefits, and you’ve met with an estate attorney to ensure that your legacy wishes are up-to-date. All done, right?

Well, as famed basketball coach Abe Lemons said, “the trouble with retirement is that you never get a day off.” And he’s right, especially when it comes to retirement planning—which is truly just beginning at retirement.

Your lifestyle

Your new retirement lifestyle will likely be very different from your friend’s or neighbor’s, so the planning involved to ensure a successful transition should be different as well. There are a lot of questions to ask yourself. How will I spend the hours I used to spend at work? Do I see myself staying in my current home or should I move to a new home? Do I plan to live in the same state or live closer to my children? Do I want to travel more? 

If your answer is to move to a new home, you should be sure to understand how this change will impact your financial situation. The state in which you decide to establish residency can have a significant tax impact on your income and potentially how your assets should be titled for estate purposes. Increased travel could mean higher levels of spending compared to when you had a regular paycheck, so be sure to include a conservative expense assumption in your financial independence analysis. Should you reward yourself and splurge in retirement? Absolutely—you deserve it, but make sure to do it with confidence every step of the way.

Replacing your paycheck

How you pay yourself in retirement can have a significant impact on the longevity of your assets. In order to replace your previously earned income, you’ll need a plan that takes opportunity cost and tax efficiency into consideration. There is no magic number, but most retirees should have approximately 6-12 months’ worth of expenses in cash. 

For planning purposes, it’s important to understand what your expenses and sources of income will be for the next 3-5 years. Immediate cash needs could be kept in a high-yielding checking or savings account, while the rest of your liquid assets should be invested in a globally diversified portfolio of stocks and bonds. Bonds can provide you with stability needed for cash distributions during down markets, while stocks provide you with the opportunity for capital appreciation needed to grow the base of your portfolio to last your lifetime.

Changes in your tax bracket

For individuals who retire prior to age 70, you may suddenly find yourself in a much lower tax bracket. This can present a great opportunity. As you probably know, when you turn 70½, the IRS requires that you begin to take IRA distributions based on your life expectancy. These Required Minimum Distributions, or RMDs, will be taxed at ordinary income tax rates. In addition to RMD income, many retirees also begin taking their Social Security benefits at age 70. The combination of these income sources can result in a much higher marginal tax rate, sometimes as high as when you were employed. One way to reduce future RMDs and perhaps reduce future taxes, is to take opportunistic IRA distributions in the form of withdrawals or Roth Conversions.  

Gifting assets in retirement

Many successful retirees are passionate about giving back to their alma mater or supporting charities that align with their beliefs. Others have the desire to help the next generation get a head start by contributing to tuition or a first home purchase. We recommend first sitting down with your financial advisor to determine the amount that you can gift—either in a lump sum or on a regular basis. Once an amount is determined, the next step is to optimize your gifting strategies in the most tax efficient way. Potential strategies could involve contributing highly appreciated stock to a donor advised fund, directing required minimum distributions to charity through qualified charitable distributions, or gifting cash to family members.

Keep your estate plan up to date

As you continue to age throughout retirement, be sure to keep your estate plan relatively fresh. We recommend revisiting the documents every 3-5 years, or as often as your situation and the laws change. No matter where you establish residency, your will should remain valid. However, laws may vary state to state and may invalidate some clauses. 

At CI Private Wealth, we specialize in planning for all the possibilities and potential challenges of retirement.

ABOUT THE AUTHOR