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For a More Secure Retirement, Make Sure You Know the Answers to These Three “When” Questions

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Discussions surrounding retirement typically involve one question after another. Often these questions come down to what you might call the nuts and bolts of retirement, the “who, what, where, how, why and when” questions that we feel we have to answer in order to enjoy what might be called a successful retirement. What will retirement look like? Who will I trust to look after my interests as I age? How will I afford all the costs associated with a retirement that could last 25 or 30 years? Why do I want to retire in the first place?

As we were thinking about our own retirement questions, we discovered this recent article from Kiplinger in which the writer, San Francisco-based financial planner Bradley Geddes, suggests that some of the most important retirement questions actually are the ones that start with “when.” These begin with the obvious – “When will I retire?” – but they also take into account a host of related questions that come down to timing. Getting these right, Geddes suggests, will help ensure your retirement security.

Is he right? We asked Rajiv Nagaich his view. As expected, Rajiv’s assessment was that Geddes’ info is helpful, but seriously incomplete.

In Retirement, “When” Questions are Often Most Important

“People approaching retirement ponder numerous questions,” Geddes writes, “but I’ve found that many of the most important questions revolve around the word ‘when.’  When do you plan to retire? When will you take Social Security? When must you start withdrawing money from your retirement savings?”

Geddes states pretty emphatically that, in retirement, “when” is everything. “That’s because so many financial decisions related to retirement are much more reliant on timing than on the long-term performance of an investment,” he explains. “Unfortunately, too many people who are approaching retirement — or are already there — don’t adjust how they think about investing to account for timing’s critical role.”

Part of the reason for this failure, he suggests, is that, as we age, we fail to shift from the wealth accumulation mindset we had when we were younger toward the attitude we need to adopt in retirement. “The game changes,” he writes, “and your approach to handling money needs to change, too.”  This is where the “when” questions enter the retirement picture.

When it’s Time for RMDs, What Will Be Your Strategy?

The first “when” question concerns RMDs, or required minimum distributions, which are a looming reality for those approaching their early 70s. “Many people use traditional IRAs or 401(k) accounts to save for retirement,” says Geddes. “These are tax-deferred accounts, meaning you don’t pay taxes on the income you put into the accounts each year. But you will pay income tax when you begin withdrawing money in retirement. And when (there’s that word again) you reach age 73, the federal government requires you to withdraw a certain percentage each year whether you need the money or not.”

RMDs can catch unprepared savers off guard, and the penalties for missing a withdrawal are steep. “One way to avoid the required minimum distribution is to begin converting your tax-deferred accounts to a Roth account long before you reach 73,” Geddes suggests. “You pay taxes when you make the conversion, but then your money grows tax-free, and there is no requirement about how much you withdraw or when.”

(He doesn’t mention other options to use RMDs creatively, such as by making a Qualified Charitable Deduction from your pre-tax retirement account. We suggest you get some good advice well before it’s time to figure out your best RMD strategy.)

When Should You Tap Your Different Types of Assets?

We’ve written before here on the Blog about the difficulty many retirees have in spending their savings. Geddes alludes to this in his next “when” question: “When is the best time to spend certain types of assets to fund your retirement?”

“In retirement,” he writes, “your focus needs to be on how to best use your assets, not just how they are invested — once again, long-term performance is not the main concern anymore. For example, you may have accounts with different tax implications — taxable, tax-deferred and tax-free (such as a Roth). You need to draw on these accounts to live on, but when should each account come into play?”

Here Geddes states the obvious: these decisions depend on each retiree’s personal situation. “A financial professional can help you devise a strategy that fits your needs and tax status,” he writes. Of course, we would add an imperative: seek out a financial planner who will work with you to develop a financial dashboard. We’ll have more to say about that in a moment.

When Should You Claim Social Security?

For many retirees, this is the ultimate “when” question. You could fill Yankee Stadium with the articles written every year about the various timing strategies involving Social Security!

“Social Security plays a significant role in retirement for most Americans,” Geddes writes. “On average, Social Security makes up 30 percent of a retiree’s income. When you claim your Social Security affects how big those monthly checks are.”  Geddes explains what most people already know, namely that beneficiaries can start drawing Social Security as early as age 62 – but if they do, those benefits are permanently reduced. What’s more, people who start benefits at 62 and plan to continue working will see benefits further cut once they exceed a specific income level.

“If you wait until your full retirement age (66 to 67 for most people), there’s no limit to how much you can make” from earning a salary, says Geddes. But waiting past full retirement age may be the best strategy: postpone claiming your benefit past your full retirement age and your payment will continue to grow by about 8 percent per year until you reach age 70. This will benefit you for the rest of your life, and also help your surviving spouse if he/she is receiving spousal benefits.

When Should You Start Passing Your Wealth on to Your Heirs?

“If you plan to leave something to your heirs and want to limit the taxes they pay on that inheritance as much as possible, then ‘when’ can come into play again,” says Geddes. “For example, you could begin giving your beneficiaries some of their inheritance before you die by using the annual gift tax exclusion. For 2023, you can give up to $17,000 to each individual without the gift being taxable. A married couple can give $17,000 each.”

Geddes’ bottom line is to be a wise and well-informed retiree. “When it comes to retirement planning, there are plenty of things you can’t control,” he writes, “such as inflation and market downturns. The trick is to focus on the things you can control, such as when you withdraw money from which account or when you choose to claim Social Security.” Again, his recommendation is to work with a qualified planner to help you implement all those “when” strategies.

Rajiv Responds: There’s Something Missing

As we often do, we asked Rajiv Nagaich for his take-away on this Kiplinger article. His response: “It’s okay as common-sense financial advice, but it doesn’t tell the whole story by a long shot. In my view, it’s pretty incomplete.”

Rajiv does like the idea of thinking ahead about the kind of retirement you want. “That’s a good first step,” he says, “and it’s one that many people overlook. But,” he goes on, “after that this writer talks about nothing but money. I’ve said it repeatedly: a financial plan and a retirement plan are simply not the same thing at all.”  

When it comes to creating a strategy for your spending, saving, and investing, Rajiv highly recommends meeting with a fee-for-service financial planner who will prepare a financial dashboard – an instrument that lets you see at a glance both the short-term and long-term impact of your decisions and assumptions. Without it, we believe, you’re like a pilot in the fog without instruments, flying blind. (We’ll be happy to recommend a planner to you if you’ll contact us at AgingOptions.)

As Rajiv explains, true retirement planning means thinking and planning so that your finances, housing plans, medical coverage, legal preparation and family communication all blend together seamlessly. “For that,” he states, “you need a LifePlan. There’s simply no substitute.”

Breaking News: Rajiv’s New Book is Here!

We have big news! The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public.  As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.

You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then this book is must-read.

Through stories, examples, and personal insights, Rajiv takes us along on his journey of expanding awareness about a problem that few are willing to talk about, yet it’s one that results in millions of Americans sleepwalking their way into their worst nightmares about aging. Rajiv lays bare the shortcomings of traditional retirement planning advice, exposes the biases many professionals have about what is best for older adults, and much more.

Rajiv then offers a solution: LifePlanning, his groundbreaking approach to retirement planning. Rajiv explains the essential planning steps and, most importantly, how to develop the framework for these elements to work in concert toward your most deeply held retirement goals.

Your retirement can be the exciting and fulfilling life you’ve always wanted it to be. Start by reading and sharing Rajiv’s important new book. And remember, Age On, everyone!

(originally reported at www.kiplinger.com)

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