5 Things to Avoid in Retirement


Volume 92 No. 9 - September 2021


09-2021 Newsletter
.pdf
Download PDF • 406KB




Most retirement advice you read covers how to accumulate the money to fund your retirement and how to invest the money you save. There is considerably less material that covers how to properly withdraw funds during retirement. Those who are successful at accumulating wealth are not always successful at withdrawing their wealth after they retire.


Similar to the planning we do during the accumulation stage, it is also important to establish a plan for retirement years so that your hard-earned savings can support your lifestyle. The best distribution strategies use tax-efficient ways to fund retirement just like the best savings strategies considered the tax implications of where and how you saved for the post-career years. When planning how to spend your savings in retirement, here are five things to avoid:


1. Not Switching from a Saving Mindset to a Spending Mindset

Multiple accounts can be used to fund retirement. For example, there are joint accounts, trust accounts, IRAs, 401(k)s, regular savings, and more. When most people reach retirement age, they reach first for their normal savings and checking accounts. These accounts are easily accessible and because they are after-tax funds, they generate no further tax liabilities beyond the interest they earn. However, to properly fund retirement, it is important to consider all of the tools and accounts that a person has.


Among these tools and accounts, there are several factors to consider when developing a retirement plan:


· How much money will be needed each year for retirement cash needs?

· How will debt be managed in retirement?

· What is the best strategy to take withdrawals and minimize taxes?

· What is an appropriate equity allocation?

· What is the plan for healthcare?

· How will social security factor into one’s retirement strategy?

· What family obligations should be considered?


While many investors are successful in their careers and in saving for retirement, these same people now must transition from accumulating these savings to spending them. In this change of mindset, they need to strategize how best to successfully manage their finances during retirement.


2. Withdrawing Too Much or Too Little

The accounts a person uses to source retirement funds will depend heavily on their respective circumstances. The tax implications of each account are paramount to consider. In a taxable investment account (e.g., individual, joint, trust), it is important to consider the capital gains and the subsequent taxes that may be incurred when selling a security to make cash available for withdrawal. In a retirement account (e.g., an IRA), while there are no taxes on capital gains in the account, distributions out of the account will be taxed.


The most common mistakes regarding withdrawals from these accounts are withdrawing too much or too little. If too much is withdrawn from the portfolio, it is possible to run out of money in retirement. If too little is taken out and Required Minimum Distributions (RMDs) are not met, fines and other penalties may be incurred. Also, if too little is taken out you may not be enjoying your retirement like your savings can support. The discussion about the amount to withdraw annually should also include how generous you want to be with your heirs. This concept stresses the need for proper planning and establishing the correct amount to withdraw each year.


3. Improperly Managing Capital Gains

Many people will try to avoid capital gains taxes by selling only their ‘losers,’ their stocks and bonds that have not appreciated. While this may avoid taxes in the short term, this short-sighted strategy could lead to a highly concentrated portfolio with fewer, more concentrated positions. Trimming positions that have greatly appreciated and have become overweight in the portfolio is a good practice. While this may create gains in a taxable account, it is important for the diversification and future success of the portfolio.


4. Improperly Withdrawing from an IRA

Retirement accounts such as IRAs, SEP IRAs, and 401(k)s are subject to RMDs. The age at which RMDs begin is 70½ if a person was born before July 1, 1949, and 72 if they were born after June 30, 1949. The amount of the RMD is calculated using the account balance at the end of the previous calendar year. A strategy that may make sense for some is to put the distribution into another investment account. If the money is not needed for everyday living expenses, this will allow the funds to continue to be re-invested and grow, rather than sitting in a savings account. It is also important to note that penalties are incurred for not taking RMDs.


In addition, if money is withdrawn from an IRA too early, there is also a penalty. While there are some exceptions, in general, withdrawals before age 59½ incur a 10% early withdrawal penalty. This can be avoided with proper planning.


5. Not Utilizing a Roth Conversion

If a person’s tax rate is low, it might be appropriate to consider converting an IRA to a Roth IRA. Soon after retiring, a person’s main source of funds might be from savings, rather than wages. As a result, they may have considerably less taxable income than they did during their working years, meaning their income tax rate may be very low. This could be an opportune time to transfer money from an IRA to a Roth IRA and let it grow tax-free. A Roth conversion is a taxable event. However, the conversion allows a person to utilize the tax rates at the time of conversion, as future Roth distributions are not taxed.


If a person does not need the money to fund living expenses, this can be a good strategy that allows one’s Roth IRA money to continue to grow tax-free even after retirement.


Help Is Here

Saving and investing for retirement is a difficult task. Those who have executed and achieved their retirement saving plan should be proud of their accomplishment. In other words, the most arduous stage has been completed, but there is work yet to be done. Devising a retirement spending plan is equally important for a successful retirement. Investment Counsel is here to help. We can help you review your portfolio of assets and devise the best strategy for funding your retirement years.


For decades—and across generations—our experience has given us perspective that can help you plan for retirement. Let us help you formulate a retirement distribution plan and, when the time comes, help you put it into practice.

Investment Counsel Inc., a Division of LaFleur & Godfrey, is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.