Strategic Tax Planning: A Real Case Study

Here’s a recent retirement plan we worked on for Mike and Sarah – names changed for privacy – as they prepare to retire. When they stop working, they’ll need to withdraw income from their investments, like their IRAs and taxable brokerage accounts. Many retirees default to withdrawing from their brokerage account first to keep taxes low initially, leading to a false sense of success. However, this approach often results in a tax bomb when they start withdrawing from their pre-tax IRAs, most of which was saved up in a 401k.

We created a multi-year tax plan to determine the optimal withdrawal strategy. In this case, we used a strategy of Roth conversions, projected to save them $943,000 in taxes over their lifetime. In today’s dollars, this still translates to a significant amount of $377,000 in savings.

Mike and Sarah have saved well, with just under $2 million. That’s a lot of taxes to save. Tax planning doesn’t need to be just for the rich. The U.S. tax code is structured with incentives. If you’re giving to charity, consider giving from your IRA or appreciated investments instead of writing a check. Shifting how you give can save thousands.

There can be such a focus on maximizing income and investment returns. But remember, it’s not what you earn, it’s what you keep. If you’re not planning to save taxes, you’re essentially giving the IRS a tip.

The Importance of Spending in Retirement

Retirees often don’t spend as they should. I recently had a client say, “I want to enjoy what I’ve worked hard for, but I also don’t want to run out of money.” This sentiment is common and valid. The key to finding the right balance is by having a plan that projects into the future.

No plan or estimate will be perfect, but it can provide guidance. Regular strategy meetings with clients are essential to continuously look forward and adjust strategies based on changes in life or external factors like tax law changes or a declining stock market.

Running out of money is potentially devastating, leading many to lean toward unnecessary frugality. While frugality can be good, it becomes a problem when experiences are missed unnecessarily. A clear and confident plan can help retirees understand what they can spend, ensuring they don’t miss out on life’s experiences.

Finding Purpose and Routine in Retirement

Just because you can spend doesn’t mean you should do whatever you want, whenever you want. The beginning of retirement can feel like a honeymoon, free of commitment or routine. Most clients who sustain their success in retirement find productive ways to use their time, creating fulfillment and purpose.

They have a routine and daily structure, even if it’s not as regimented as during their working years. Without a productive lifestyle and community, the loss of purpose can sneak up on retirees.

Healthcare Costs in Retirement

The average couple expects to spend $47,000 on healthcare in retirement, but the actual cost is $315,000 per couple, according to Fidelity. This figure doesn’t include over-the-counter medications, dental expenses, or long-term care. Older adults are responsible for increasing their medical bills due to inactivity, leading to higher health costs.

The American Family Physician reports that inactive older adults face substantially higher medical costs. The New York Times notes that people who start exercising before or during middle age save anywhere from $824 to $2,874 annually on healthcare costs after retirement. The earlier they start, the greater the savings.

The Importance of Financial Advice

Everyone in retirement should seek financial advice. Retirement is a journey requiring dynamic planning to adjust strategies for life changes, tax laws, and economic shifts. A good advisor collaborates with you, helping to navigate through this journey.

Balancing Conservative and Growth Investments

Almost all retirees should have conservative investments in high-yield savings, CDs, treasuries, or high-quality bonds. These assets serve as reserves for emergencies and help stabilize income. However, playing it too safe can be risky. Finding the optimal balance between conservative and growth investments is essential to meet long-term goals.

Optimism has paid off historically. An overly pessimistic view can result in not keeping up with inflation, causing cash flow to tighten over time.

Conclusion

Planning for retirement involves understanding taxes, spending, healthcare, and investment strategies. With proper planning and guidance, retirees can enjoy a fulfilling and financially secure retirement.

Seek Professional Guidance

Navigating retirement decisions can be complex. Consulting with a certified financial planner can provide personalized insights and strategies tailored to your unique circumstances. Whether you’re nearing retirement or planning ahead, expert advice can help you optimize your Social Security benefits and achieve greater financial confidence in your retirement years.

Plan Your Retirement with Confidence

At One Degree Advisors, we specialize in helping individuals and families navigate retirement planning with confidence. Our team of experienced financial advisors can assist you in developing a comprehensive retirement strategy that aligns with your goals and priorities. Visit our website to learn more about our services and schedule a consultation today.

This post integrates key insights from Don and Lisa’s situation, providing a clear, informative guide for readers considering their own retirement planning strategies.