Part 3: 10 Years From Retirement, What is Your Financial Focus?

In Asset Allocation, Personal Financial Planning, Retirement Planning, Tax by Chip Hymiller

This article is the third of a three part series titled: 10 Years from Retirement, What is your financial focus?

In Part 1, we discussed the importance of tracking and managing your living expenses, as well as, making projections around how much you will spend in retirement.  We also stressed the importance of making strategic Social Security decisions. In Part 2, we explored pension decisions, ideas for strengthening your personal balance sheet and helping you think through how much money you will likely need during retirement.

In this article, we provide some insight into managing those retirement expenses that pre-retires are most concerned about:  taxes and health-related expenses.

Manage taxes

As you think about when to tap your various accounts for retirement income, remember to consider the tax impact of your strategy. For many, the impact of taxes should drive their distribution decisions. We make it our goal to help our clients manage and minimize income taxes when possible. Here are a few questions to analyze:

  • Should you consider withdrawing money from your taxable accounts first to allow your 401(k) plans and IRAs more time to benefit from tax-deferred growth?
  • Should you execute Roth Conversions to take advantage of low tax bracket years early in retirement (before taking Social Security)?
  • Is it appropriate to delay Social Security, in order to reduce the tax impact of accepting this benefit?
  • If leaving a financial legacy is a goal, is it important to consider how future income (and estate) taxes will impact your heirs?
  • What impact will required minimum distributions (at age 70 1/2) from IRAs and qualified plans have on your future tax rates?

Managing retirement income to result in the best possible tax scenario can be extremely complicated. Furthermore, tax laws and personal circumstances change just about every year.  Therefore, for most, we recommend annual tax planning to decide exactly which retirement account is best for withdrawals to cover your personal expenses in retirement. For more information, see our article, “Considerations for Retirees:  Which Account?”.

Health Care Expenses

In 2015, the Employee Benefit Research Institute reported that the average 65-year-old married couple would need $213,000 in savings to have at least a 75% chance of meeting their insurance premiums and out-of-pocket health-care costs in retirement. This figure illustrates why health care should get special attention as you plan the transition to retirement. See our article, “Projecting the Cost of Health Care In Retirement” to learn more about how we make projections in this area.

As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although Medicare will cover a portion of your costs, you’ll still have deductibles, copayments, and coinsurance. Unless you’re prepared to pay for these costs out of pocket, you may want to purchase a Medicare Supplemental insurance policy. These policies are sold by private health insurers and are standardized and regulated by both state and federal law. These plans cover certain specified services, but offer different combinations of coverage. Some cover all or part of your Medicare deductibles, copayments, or coinsurance costs.

Also think about what would happen should you or your spouse need home care, nursing home care, or other forms of long-term assistance, which Medicare and Medicare Supplement policies will not cover. Long-term care costs vary substantially depending on where you live and can be extremely expensive. For this reason, people often consider buying long-term care insurance. For more information on when you need to consider buying long-term care insurance, see the article, “At What Age Should I Obtain Long Term Care Insurance?”.

Ease the Transition

These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier. Most people also need to think about how they will spend their time in retirement. The happiest retirees are those that fill their days doing the things that they have postponed for years: golf, travel, volunteering, visiting family, and so forth.

Beacon strives to help our clients in the years leading up to retirement to be prepared for the years to come. Let us help you develop your retirement plan today!