Your retirement is about much more than just saving money. It’s about making informed decisions that help you “draw down” your assets in the most efficient and cost effective way.
Here are four keys that could help you preserve your savings so you can get the most out of the process.
The Trick of the Draw
You’ve saved, so now what?
Do you know what distribution and income sources are?
When you retire, while it’s important to invest to preserve your capital, it’s also extremely important to have a strategy that considers the order (and timing) of the investments you draw upon to pay your expenses.
It may seem like a minor concern, but these choices will have a big impact on not only how you are taxed, but how long your money lasts.
A well thought out plan is not only essential, it’s creative, it’s ongoing, and it needs to be continually updated to account for changes to tax laws, inconsistent account balances, stock market gyrations, and other concerns.
The key is to avoid the belief that all your money should be treated the same.
Social Security and Divorce
Although you can expect to see major changes to our Social Security laws in the next few decades, you can still make decisions that could translate into thousands of dollars in your pocket over the course of your retirement.
First, the age at which you apply for your Social Security matters. If you are in a position where you have other income sources and don’t need to start receiving benefits at age 62—which is currently the earliest age you may apply—then it can pay to wait.
In fact, if you can hold off claiming benefits until you are 70, the difference adds up to an additional 8 percent—plus interest. That’s not bad.
Yet, conversely, if you have other income sources, and may never even “need” Social Security income to meet your day-to-day expenses, you may actually want to apply early to avoid any potential future changes to the law, such as means testing or higher taxes, which could greatly reduce your monthly benefit.
What about those of you who were married for a long time, but are now divorced or widowed? If you are widowed, you may be eligible for survivor benefits. Similarly, if you are divorced, you may be eligible for spousal benefits from your ex (and your ex will never know). In these scenarios, you may only collect on one, so work with a credentialed professional to weigh the difference and determine the most beneficial course of action for your situation.
What about common retirement account distributions? When you reach the age of 70½, by law, you are required to take a certain amount of annual minimum distributions from your IRA. Simply, you have to take money out. (The amount starts at just under 4 percent and rises each year according to a formula set by the IRS.)
One mistake that I have seen many times is when folks automatically defer their IRA for as long as possible, with the hope of maximizing its growth before their automatic draw-down years (70½) kick in. The costly error here is not considering what your income tax bracket will or might be once you begin IRA withdrawals.
One couple I spoke to had been drawing a modest dividend from a large brokerage account, which placed them in the 15 percent tax bracket.
That doesn’t sound too bad.
But by the time they turned 70½, their deferred IRA had grown to such a large balance, that the required minimum withdrawals actually shoved them into the 25 percent income tax bracket.
That difference translated into a tax increase of more than 66 percent—a devastating loss of thousands of dollars that could have been avoided with early withdrawals, or by converting those withdrawals into a Roth IRA.
Live Necessarily Long, Not Necessarily Large
At the end of the day, you can’t predict how long you will live—and as average lifespans continue to increase each year, you may very well live far longer than you ever imagined.
We want to do everything we can to ensure that your money lasts as long as you do.
No matter how much money you have saved, continue to find new ways to decrease wasteful spending. I can’t tell you how many times I’ve met with people who were wasting hundreds of dollars a month—automatic billing for expensive cable or a landline in a home they rarely used, or insurance on a boat or vehicle that hadn’t operated in years—and weren’t even aware of it.
The point is that little things add up into big things. And over time, those little things can cost you tens of thousands of dollars that you may sorely need at some point in your life.
If you’re a client of Hanson McClain, you know the priority we place on debt and expense management.
But if you’ve yet to select an advisor, make sure you choose a credentialed advisor with a fiduciary responsibility who will always have your best interests at heart.
If you have any questions, contact us today.