Income planning considerations for Americans approaching retirement

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Millions of Baby-Boomers are retiring every year and preparing for income needs and expenses in retirement is always at the top of mind. During the pandemic, an additional 1.7 million Americans retired earlier than what would have been expected, according to a recent report from The New School’s Retirement Equity Lab. Inflation, medical costs, and housing are just a few of the expenses retiree’s must consider as they begin the next phase of their lives. A common question retirees ask is how to best utilize their savings effectively and efficiently after their careers end. So, what are some intelligent financial planning strategies for those approaching retirement and once retired, how should money best be used? 

Retirement (qualified) savings

1. Maximize savings leading up to retirement.

  • The IRS has very specific rules governing how much American’s can save each year towards their retirement accounts. For those who participate in a corporate retirement plan — 401(k) & 403(b) — the normal contribution maximum is set at $19,500 with an additional $6,500 allowed for workers over age 50. 
  • For those who are not eligible for a corporate retirement plan, the limit for Individual accounts is set at $6,000/year with a $1,000 catch up contribution for those over age 50.
  • There are other retirement accounts such as SEP-IRA’s, SIMPLE-IRAs and Profit-Sharing plans which have various contribution limits you can read about here.
  • As you approach retirement, it is important to place more importance on funding your retirement account(s). If you are over age 50, try your best to take advantage of the ‘Catch-Up’ rules to supercharge your annual contributions

2. Consider converting to a Roth account.

  • In a traditional retirement account, your contributions and all the growth is considered tax-deferred, meaning you will pay taxes on the account when funds are withdrawn. A strategy to consider is to convert your traditional retirement assets into a Roth account. Roth retirement accounts grow tax free forever!
  • When you convert your traditional retirement savings to a Roth, you will be required to pay taxes up-front on the conversion. Given the historically low tax rates, it may be worth considering. Be sure to consult your CPA or financial advisor before making this transition, though.

3. Withdrawing money from your account. 

  • Remember that money you have saved in a qualified retirement account is tax-deferred. Any time you withdraw money from these accounts you may face ordinary income taxes.
  • A strategy commonly employed by retirees is to take monthly or quarterly distributions from qualified accounts and elected at the time of withdrawal a Federal and State tax withholding so at year end, there is no big, nasty tax bill due.
  • Be sure to consult with your CPA regarding the amount of taxes to withhold. If you choose not to withhold taxes from distributions, you will have to include the distributions on your tax return and may be subject to federal and state taxes on the entire amount.
  • So, how much should you withdraw each year from your retirement accounts? That is entirely up to you! Remember, it is important to consider inflation when making your projections. A strategy to consider is the 4% rule.

Social Security

When to start taking Social Security. 

  • Social Security payment amounts are determined by how much you earn while working and when you elect to start receiving payments. Married individuals are eligible for spousal and survivor’s payments. Triggering Social Security benefits is another personal decision which may be based on short term income needs and time horizon. The longer you can wait to begin Social Security, the higher the benefit you will receive.
  • As per US News, Social Security monthly benefits are reduced if you start payments before your full retirement age, which is 66 for most baby boomers and 67 for everyone born in 1960 or later. Workers who sign up at age 62 will get 25% smaller monthly payments if their full retirement age is 66 and a 30% benefit reduction if their full retirement age is 67.
(Source: Social Security Administration)

Non-qualified savings

Using savings to supplement retirement income.

  • If you were able to save money in a non-qualified account (meaning any type of post-tax account outside of a retirement plan), you can consider supplementing retirement income with these savings. As we discussed before, traditional retirement account distributions are subject to ordinary income taxes. Money saved in non-qualified accounts on the other hand, are potentially subject to long-term capital gains if you held the asset(s) for more than a year. 
  • Consider employing the 4% rule to this money as you did your traditional retirement assets. 
  • Speak to your CPA about the tax implications of using your non-qualified savings versus your qualified retirement savings and which source of funds are better given your personal tax situation.

Julian Schubach is Vice President, Wealth Management at ODI Financial. Julian serves a broad range of creative clients including artists, entertainers, and digital influencers, providing comprehensive financial education, planning and wealth management. Julian’s clients include multi-platinum selling musicians and producers, award winning actors, directors and choreographers and best-selling writers. In addition to his private client work, Julian provides financial education and literacy seminars to arts grant recipients and clients of arts non-profit organizations. Julian has been named a ‘Top-100 Financial Advisor’ by Investopedia and in 2018, Julian was a contributing writer for New York Foundation for the Arts book, ‘The Profitable Artist,’ penning three chapters focusing on personal finance for creatives.