Are you on the brink of retirement or settling into your golden years? This chapter of your life can be exciting and rewarding, especially if you’re well-prepared. One of the biggest concerns on your mind, however, is probably money. Besides ensuring that you have enough to cover your retirement, it’s essential to understand how you’ll meet your goals and priorities.

To help you get the most out of your retirement, consider these questions:

1. How much will health care cost?

For most retirees, healthcare may be one of your largest expenses in retirement. As you age, a higher percentage of your income may go toward healthcare expenses. That can include anything from Medicare premiums to doctor visits and prescription drugs. Even if your premiums remain stable, out-of-pocket expenses can vary significantly and may be hard to predict from one month to the next. Depending on your situation, you may want to explore options such as long-term care insurance or medical gap coverage, for instance.

2. How much money will you need in retirement?

Are you planning an active retirement with frequent or extravagant travel. Do you plan on spending your free time with friends and family or purchasing a vacation home? As you consider your big and small expected expenses, remember that retirement income to fund your lifestyle can come in many forms, such as savings and investment accounts, other active and passive income sources, and Social Security or pension benefits. If outliving your expenses is a concern, consider adjusting your savings, investment and spending habits, working a part-time job, offering consulting services, tutoring, or doing freelance work to help generate extra income.

3. Should you change your investment strategy in retirement?

If you’re like most people, your income needs, goals, and risk tolerance look different in the years leading up to and throughout retirement than they did in your income-earning years. You may have focused on building wealth and on the growth of your investments in earlier years, but if you’re on the brink of retirement or are already retired, your goals have likely shifted toward income and lifestyle sustainability and wealth preservation. Regardless of your financial goals, income needs, and risk tolerance, a well-balanced portfolio can generate growth and provide stability after work becomes optional. Maintaining a mix of cash investments, bonds and stocks can help preserve your wealth and your lifestyle throughout your golden years.

4. What is a Required Minimum Distribution (RMD)?

Although you may wish to postpone paying taxes on your retirement funds forever, the reality is that you will have to make withdrawals—and pay taxes on them—after a certain age. A Required Minimum Distribution (RMD) is the minimum amount of money you’re required to take out of your retirement savings. Most people need to begin these withdrawals once they turn 72 (or 70½, if that’s how old you were before January 1, 2020). Once these mandatory withdrawals start, they must continue every year for as long as you’re alive. Although you can withdraw more than the minimum, you need to withdraw at least the minimum to avoid tax penalties.

5. What are some effective tax strategies for retirement?

Although taxes are an inevitable part of life—even after you retire—certain strategies may help reduce the amount that you owe. It can be helpful to categorize all of your taxable assets into buckets, then formulate the order of your withdrawal strategy. Some account types will be taxed upon withdrawal, whereas withdrawals from a Roth IRA, for instance, will not be taxed, as the contributions were made from taxed dollars.

As with any other life stage, tax rates in retirement are based on income level. Effective retirement planning involves planning for when you will access income from various types of income sources. It is a strategic plan that’s based on a number of factors, including age, the types of assets and income sources you have, and your lifestyle goals.

Generally speaking, such a strategy might involve liquidating or withdrawing funds from taxable investment accounts first because they will be taxed as long-term capital gains versus income, which typically is at a much lower rate than regular income tax rates. Then, you might start drawing on funds from tax-deferred accounts—like a traditional IRA or a 401(k). If you have a Roth IRA, you would likely want to draw from this account last, as it has no RMD requirement and you’ll also benefit from allowing the money to grow (tax-free) for as long as you can.

6. What are some tax-efficient strategies for gifting and legacy planning?

Leaving behind a legacy can benefit future generations and/or your favorite charitable causes. You can start by considering your biggest concerns for the future, your intended recipients, and who, or what cause, you’d like to honor. If you’re eager to leave behind a financial legacy but are worried about outliving your money before you die, you might want to consider funding your legacy with life insurance. In the event of your death, an adequate policy can help preserve your assets and fill in potentially costly gaps.

You also might want to consider utilizing various trusts and Charitable Remainder Trusts in your gifting and legacy planning, as these mechanisms can serve as a reliable means to distribute your assets according to your wishes and in and tax-efficient manner. Instead of giving everything all at once, a trust can enable you to give in a structured way, with set conditions and/or specifications for when and how much beneficiaries receive. Additionally, by gifting gradually or in other specific ways, you may minimize the impact of taxes on your legacy.

A Charitable Remainder Trust, pays an income stream during your lifetime or the lifetime of a beneficiary, and any remainder after a specified period (such as your passing) goes to fund the named charity.

One additional strategy to help keep the cash flowing after you die is through a process called sustainable distribution. Your beneficiaries may be able to maintain a steady income flow by spending less than they earn, or receive, and then reinvesting the difference. If the spending never exceeds the net income, the available funds may increase over time. This strategy requires guidance, careful planning, and discipline.

7. Who gets your assets after you die?

The answer depends on whether you have a will. If you pass away with an effective estate plan in place, an estate executor should assist in distributing your estate, including any personal property, real estate, and other assets you legally own at the time of your death. Without a will in place, how and to whom your assets are distributed will be decided by the courts. However, the absence of a will can also create tension and put additional stress on your family.

Besides easing frustration and heartache after you pass, a will can also enable you to make other important arrangements, like setting aside funds for future generations and choosing a guardian for any underage children who are currently in your care. You can also specify the type of funeral arrangements you’d like. It’s important to remember that you can amend or revoke your will at any time (but any changes should be made official by your legal representative as soon as possible).

Planning for retirement can feel overwhelming, but you don’t have to do it alone. Let’s schedule a meeting to discuss these questions and more to help you move forward in your preparations for your dream retirement.

Source: Steve Lindquist – gbfinancial.org

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