Your retirement portfolio may look pretty good right now. We’re in the midst of a bull market, and still enjoying the effects of the so-called Trump rally. You may be looking at those balances and thinking – maybe for the first time – “This might be an actual possibility, and sooner than I thought!”
But there are many things to consider before you make the jump. For example, what if the market declines? Do you have the right insurance in place? What about taxes – will you retire into a higher bracket, or maybe a lower one? Here are a 4 important retirement planning considerations before you make that big decision.
Healthcare is a huge concern for most retirees, and with the current uncertainty about the future of the ACA, it can make it hard to know what the best plan is. Some retirees incorrectly assume that at the age of 65, Medicare eligibility immediately eliminates your healthcare costs. According to an estimate by Fidelity Investments in August of 2016, the average couple retiring at age 65 will need $260,000 for retirement healthcare expenses during their retirement. Another report from the Kaiser Family Foundation noted that the number of firms with more than 200 employees offering retiree healthcare benefits has been declining as well. There are a number of ways that you can plan for healthcare costs, including Health Savings Accounts (HSA’s) and supplemental coverages.
Taxes are a big stumbling block for many new retirees. It’s important to remember that if you have an IRA, those dollars went into the account pre-tax, so your distributions will be taxed. However, ROTH IRA’s are built on pre-tax dollars, and so the distributions aren’t taxed. It’s generally a good idea to have accounts with different tax treatments. It’s also a good idea to put some thought into whether you will retire into a higher or lower tax bracket as well - this can help you decide whether to use a traditional IRA, a ROTH IRA, or both. Finally, it’s important to remember that you’ll be responsible for your own taxes. Many new retirees have spent years working for a company who automatically withdrew their taxes for them, and now have to budget to put money aside to pay Uncle Sam each year.
3. Required Minimum Distributions (RMDs)
If they’ve saved and planned well, some retirees may not need the distributions from their IRA, especially if they have diversified their income streams. They can take advantage of the tax-sheltered compounding interest that the IRA can afford them, even after retirement. However, once you reach age 70 ½, you’ll be required to take minimum distributions. If your IRA had a high balance to begin with, with added years of compounding interest added in the mix, your RMD could push you into a new tax bracket. It’s worth noting that ROTH IRA’s aren’t currently subject to RMDs, and that even in the case of a traditional IRA, you don’t have to spend the distributions, and can instead reinvest them in a taxable account, or even in a ROTH IRA.
Inflation is a constant, whether we like it or not. Usually, gas prices can be a good barometer of costs rising and falling, but many costs are less easily noticed. The cereal that used to be 20 ounces shrinks to 18, or the cable bill goes up. Over time, it will cost you more to live the same lifestyle, and so it’s important when planning your annual withdrawals (many financial advisors will use about 4%), to factor in a small raise for yourself each year. It’s also wise to consider hedges against inflation in your portfolio. Treasury Inflation-Protected Securities may be a good idea, and there are a number of indirect hedges you can consider as well. The bottom line is that costs will increase, and you won’t be able to count on your cost of living increase from a job or company anymore – you’ll be in charge of giving yourself a raise.
So can you retire early? It can be complicated! These are just 4 of the many potential topics that you need to consider, and everyone is different. The best way to figure it out is to talk to someone who can consider your situation from all angles – financial, tax, insurance, and legal. At the Lineweaver Financial Group, we use the Financial QuarterbackTM Model to look at every major decision you face, from every single angle. We find this gives many of our client’s peace of mind, and lets them focus on the retirement they deserve, without compromising their lifestyle to do it.
If you’d like to learn more, please click here, email us at firstname.lastname@example.org, or give us a call at (216) 520-1711, and we’ll be happy to answer your questions. There’s no obligation, and we don’t believe in high pressure – it makes us uncomfortable! We do believe that everyone’s situation is different, and it takes a conversation – not a form – to find out if you might benefit from our services. We also believe in offering thoughtful, thorough, and efficient advice, and helping clients to make the best choices for their specific situations.