Climbing Down the Mountain
With the holidays quickly approaching, it can be a good time to take a look at your financial, estate and long-term income planning for any year-end planning and to prepare for tax season next quarter. Whether it’s bringing up family matters while children are in town for the holiday, or year-end charitable gifts, it’s something we find many times is pushed off to a later date.
If you’re like many investors, you’ve heeded the advice to continually save for retirement in your accumulation years while working, but haven’t put much thought and planning into how to efficiently plan for that distribution phase when you’ll be living off of those savings accounts. Most have done a pretty good job at climbing up the mountain while saving, but in our opinion, don’t have a clear plan to climb back down the mountain through retirement and leaving those assets behind effectively. Which accounts will you draw from first, and why? How will inflation and taxes affect your income?
One primary course of action in this phase that is often overlooked are taxes. If you’ve used your employer plan (401k, 403b, IRAs, etc) to fund most of your retirement savings, Uncle Sam is right around the corner with his hand out to collect. While these are great vehicles for deductions and tax-deferred growth, it can limit your options and flexibility of what actually goes in your pocket every month for the rest of your life. Have you considered that your retirement years could be almost as long as your working years?
When planning for that decent down the mountain, it’s important to know which accounts your income will be coming from and the potential tax consequences of them. You will likely have your retirement accounts and Social Security to live off of. Many others also have a pension, brokerage accounts, savings, rental income, Roth IRAs, inheritance, or even the sale of a business. This is very important to consider currently because of where we are in current tax rates. Since the tax reform of 2018, tax rates are historically some of the lowest they have ever been and scheduled to be going back up in 2026 and who knows what is to come for the next couple decades past that.
Something to consider is shifting savings from that tax-deferred savings to tax-free accounts, such as Roth IRA conversions, changing your funding at work to a Roth 401k, or funding certain types of insurance accounts that allow for tax-free income. If you end up taking too much funds from your IRA/401k, you could also end up paying unnecessary taxes on your Social Security income as well.
Another point of consideration is the Standard Deduction. For married couples in 2019, this is $24,400 and is typically indexed to increase each year. In retirement, people lose many of the deductions they used while working – child tax credits, mortgage deductions, charitable contributions, and 401k contributions. So, keeping your IRA/401k withdrawals, and Required Distributions at age 70.5, under this scheduled Standard deduction could help you make your investment savings last much longer while planning the rest from more tax-advantaged sources.
Lastly, another point of consideration that can be key is having a plan in place for potential long-term care needs. People are continuing to live longer, but in many cases also living sicker. Having a plan in place for that may help mitigate the risks of drawing down too much on your savings and running out of money before running out of life.
These few points are important things to consider when planning your way down the mountain to make sure you are fully prepared for income, longevity risks, taxes, and potential fees. There has been a lot of innovation in financial planning in recent years, so it may help to get a second opinion on your future income plans. We hope you enjoy this December, holidays and time with family. Take a little of that time to discuss the importance of your planning and wishes as well.
As always, if you’d like a complimentary second opinion for your financial and income planning, please reach out to Douglas Marion with Advanced Wealth Strategies. Feel free to call or text (704) 765-3653 or email Douglas@PlanWithAWS.com. Their local office is conveniently located at 19520 W. Catawba Ave, Suite 313. Their firm will put your best interests as priority.
Investment Advisory Services offered through AlphaStar Capital Management, LLC., a SEC Registered Investment Adviser. AlphaStar Capital Management, LLC and Advanced Wealth Strategies, Inc. are independent entities. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level or skill or ability. Insurance products and services are offered through Advanced Wealth Strategies by individually licensed and appointed agents in various jurisdictions. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The views presented here are the views of Advanced Wealth Strategies and does not necessarily represent the views of AlphaStar Capital Management, LLC. Advanced Wealth Strategies does not offer legal or tax advice.