Income in Retirement should be the happy result of lifelong savings, yet somehow, this has become a hugely complicated issue and one that the Government likes to meddle in, changing up the rules as often as they can! Or so it seems. Here are 3 mistakes rookie retirees make that I’d like to help you avoid ~
1. Buying in some place that you always dreamed of, but haven’t actually lived a full year there yet!
Selling your home and buying another in what is intended to be your retirement city/state without having lived there for an extended period of time, is often a mistake. I advise that individuals/couples spend at least 4-6 months in the areas they are considering as retirement destinations before buying a property. Renting in various parts of the same city, for example, is advised, and/or renting in various cities is smart, and doing so in both seasons, is even smarter. I warn folks of the summer heat in Florida and Arizona, for example, so best to experience that first hand prior to “pounding in stakes permanently” so to speak.
2. Social Security Benefits – taking it too soon!
Additionally, many retirees make colossal mistakes on their receipt of Social Security benefits. The benefits and/or perils of waiting until 70 ½ or any later year other than their “normal retirement age” needs to be considered, especially in the case of couples. The death benefits payable to a surviving spouse are significantly increased if the major earner “number holder” (that’s Social Security vernacular) waits even a few years to take their social security benefits. In my job as financial planner, when I plan for a couple, I have to pay particular attention to planning to ensure that a surviving partner has adequate funds to live well into their 90s, if not age 100, and Social Security benefits loom large in many clients’ cases.
3. Matching Tax Deductions to Taxable Income – making fullest use of tax deductions which can be deferred and matching up the amount of income you take in that year to offset it.
Asset distribution is also a target area many retirees err in. It is significantly important for retirees to strategize how to take retirement funds in the most expedient and tax-friendly fashion. Since taxes and investments are inextricably connected, it is important to calculate exactly how much fully taxable income to receive in any one tax year. Plus if elective expenses can be planned for, one should take specific care to bunch deductions in one tax year, and then perhaps defer the receipt of taxable income into the next, to better ensure full or partial deductibility of said elective expenses or expenditures, including but certainly not limited to elective surgery, elective dental work, charitable bequests and the like.
Generally it is prudent to allow tax-favored assets to continue to grow under their respective tax umbrella. Yet if an individual may take a year off from full time work, for travel or other leisure/not paid activities, and expect to begin consulting or earning income in a subsequent year, a distribution from a qualified plan—401(k)/403(b) or IRA may be prudent in the year of no earnings, since their tax bracket would be particularly low. Even a Roth IRA conversion could work well in this instance, whereby one declares all or a portion of their Traditional IRA as “taxable income” by converting it to a Roth IRA, so that 1) there will be no required minimum distribution at that person’s age 70 ½ and thereafter, and 2) all monies grow tax-free from that date forward, even to next generation beneficiaries, or better yet to grandchildren, or great nieces or nephews.
This process is a unique way to stretch income out over several generations, having paid the tax on only today’s value, with all future growth compounding tax-free. To ignore such planning strategies may be a costly mistake for wealthier clients—those who will not spend all of their retirement and other funds in their expected lifetimes.