By Brian Bloxom, ChFEBCSM
You’ve worked hard to build your retirement savings, whether it’s been through decades of contributions or through other means. Now, as you approach the next phase of your financial journey, it’s essential to strategize wisely to optimize the benefits of your nest egg.
Now is the time to activate your savings and establish a reliable income stream that can support you throughout your retirement. However, with the complex web of tax rules and financial choices ahead, you might feel a bit overwhelmed. That’s where we come in. In this blog, we guide you through the common pitfalls and traps so you’re well prepared to navigate the path to a stable and prosperous future.
Tax Rules
Believe it or not, there are more tax rules to consider in retirement than there are when you’re working. And each decision you make affects more decisions—it’s like a domino effect.
An example: It’s important to have the right balance between tax-deferred accounts (like a 401(k) or IRA) and tax-free accounts (like a Roth IRA). If you don’t have a good balance and want to move things around, you could consider a Roth conversion, where you convert a portion from a tax-deferred account into a Roth IRA.
However (and here’s where that domino effect kicks in), if you do that, not only can it affect your income taxes for the current year, it could also impact how much you pay in Medicare payments, and how much tax you pay on your Social Security benefit.
There are a lot more moving parts to consider just like this one. One mistake or overlooked decision could result in an unexpected tax bill. But there’s hope. It is possible to actually lower or even wipe out taxes during retirement.
Portfolio Diversification
I’ve seen many retirees limit their portfolios to stable investments like bonds and CDs. My professional opinion is that it’s more important to maintain a balanced asset allocation during retirement.
Given the historically low returns of CD and bond investments, the unpredictability of inflation, combined with whatever distributions you’re already planning to take, you’re putting yourself at major risk of running out of money during retirement if you don’t diversify.
Withdrawal Order
There’s a specific order for withdrawing income from your retirement accounts without jeopardizing your future.
A smart way to do that is to carefully analyze your distribution plan if you have money in taxable, tax-deferred, and tax-free accounts. This helps you make wise tax decisions this year, and then apply that knowledge to your income strategy 10 years from now.
In other words, while taking money from one account right now might seem like a good idea, you should consider how that decision might play out in 10 years.
Longevity Risk
It’s time to think about what would happen if you outlived your retirement savings. The human lifespan is getting longer, and making your savings last throughout your lifetime is essential.
A professional retirement planner can help you, working with you to find a sustainable withdrawal rate, a smart investment strategy, and suggestions for when to withdraw Social Security. All these decisions can affect your odds of having enough money throughout your lifetime.
Social Security Decisions
While it might be tempting to withdraw your Social Security benefits as early as possible at age 62, the sooner you start, the lower your benefit amount. It’s important to consider the long-term effects of that lower amount, and how it could potentially impact your lifestyle during your 70s, 80s, and 90s.
Additionally, if you’re still working and receiving a paycheck and you withdraw Social Security benefits, there are significant tax ramifications to consider—and even more when you add a Roth conversion into the equation.
Choosing the Right Medicare Plan
Thinking about retiring before age 65? Remember that Medicare doesn’t kick in until 65, which means you’ll need health insurance to fill the gap until Medicare is available.
Also, you’ll have a new set of decisions to make once you’re eligible to sign up: you can sign up for the Original Medicare (parts A and B) or a Medicare Advantage plan.
If you choose Original Medicare, additional decisions include which Medicare Supplement plan you’ll need. Each option has a variety of variables, including price, coverage areas, co-pays, and deductibles.
Keep in mind that if you don’t enroll in the right time frame, Medicare actually penalizes you with higher premiums for the rest of your life. It gets even more challenging if you work past age 65 and get health insurance coverage from your employer.
Partner With a Trusted Advisor
Keep in mind that every new session of Congress can bring changes to these rules and regulations. That’s a lot to stay on top of.
You deserve to enjoy your retirement without the stress of navigating financial complexities. Let Sentinel Wealth Partners handle the details so you can focus on living out your retirement dreams. We’re here to help make that happen.
Reach out to us today by calling our office at 703-832-0164, sending an email to [email protected], or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.