Tip 1: Before Retirement is  “live,” consider how you will spend your time.

Out of the 24 hours in a day, the average American sleeps for 7 hours and works for 9 hours, which leaves 8 hours of “free time” per day.

A healthy exercise (that we recommend to all “nearing retirement” clients) is to think through the following question- “How do you spend your 8 hours of free time today, and how will this change when your free time goes from 8 hours per day to 15?” 

Next, draw two pie charts. Each chart represents your 24 hours in a day. Pie chart #1 represents your time while working, and chart #2 represents your time while retired. Fill these out with as much detail as possible and include things like work, sleep, spending time with family, hobbies, etc.

Lastly, compare the charts. How do you spend your time now? And how will this change when you are no longer working?

As the saying goes, “everyday is Saturday during retirement,” so our best advice for clients nearing this phase of planning is to thoroughly think through how you will spend your time. Time is our greatest asset, so be prepared!

Tip 2: Mange your tax exposure by taking distributions from a mix of “taxable” and “tax-free” accounts to take advantage of lower federal rates and avoid higher federal rates.

Sound distribution planning and tax bracket management can potentially save thousands of dollars over the life of a retirement.

In general, the majority of retirees accumulate retirement dollars inside of pretax accounts. These are the most “tax friendly” retirement savings vehicles for people in the accumulation phase of retirement because each dollar contributed is deductible for federal income taxes. For example, contributing $20,500 into a Pretax 401(k) saves $7,585/year in tax for someone in the 37% marginal tax bracket.

However, when it comes to distribution planning, these accounts are not attractive because each dollar that is taken out is taxed as ordinary income, putting retirees at the mercy of future tax rates. Furthermore, once someone attains age 72, they are required to take an annual distribution from pretax accounts (this is known as a Required Minimum Distribution, or RMD) which forces retirees to realize taxes even if they do not need the income.

If additional income is needed on top of things like pensions and Social Security, evaluate if you should take this from a pretax account (such as a Traditional IRA), from a tax-free account (such as a Roth IRA), or from a Brokerage account (which receives capital gains tax treatment vs ordinary income tax treatment).

If you are already in retirement and do not have any tax-free dollars (Roth IRA), consider converting funds from Pretax IRAs to a Roth IRA to begin diversifying your tax exposure.

Tip 3: When it comes to Social Security, peace of mind should be prioritized along with other factors when deciding when to claim benefits.

In meeting with many retiree clients over the years, our firm has found that the Social Security decision most often impacts beneficiaries more than the retiree themselves. That is because retirement income must come from somewhere, whether it is from the Social Security system or from a portfolio. Therefore, if you claim early, this reduces the need to pull from your portfolio (since you have an income coming in each month).

In general, it is easier for someone to spend a check from the government each month rather than withdrawing from savings, especially during turbulent markets.

While you may come out ahead financially by delaying Social Security to age 70 (the latest possible deferral age), it is important to consider:

1.      Life expectancy. It is important to consider the length of your retirement because there is a breakeven age for claiming Social Security benefits. Typically, this is somewhere between 86 – 88 years old when looking at claiming early vs delaying until age 70. This is assuming you have a 6% rate of return on money that is not being spent as a result of claiming Social Security early. So, if you live beyond 86 – 88, deferring benefits to age 70 would have been the “right financial choice” as you would have lived long enough to receive enough of the higher benefit to outweigh the lower payment that would have started sooner (had you decided instead to claim early).

2.      Importance of Legacy. If legacy is not a top priority, consider claiming early for your own peace of mind. As mentioned above, it is usually easier to spend a Social Security check vs spending from savings. Many could argue that peace of mind during retirement years outweighs having a bit more leftover for beneficiaries later.

3.      What is the impact? Most articles, videos, research, etc. state that delaying benefits until 70 is the right choice. We agree, if only looking at financial implications. But when considering peace of mind, sequence of returns, and other factors, claiming earlier may be the right choice for some. The bottom line is, if someone delays to age 70 and lives to age 90 vs. someone who claims at age 66 and lives to age 90, the difference in present value terms is between $40k – $100k (which would end up in a beneficiary’s hands anyways). So, for someone with a net worth under $1M, this should be a huge decision, but for someone with a net worth over $2M, the decision is somewhat irrelevant in comparison to long term net worth (meaning this decision will be a 1-3% difference in total net worth). Our advice is to approach Social Security from a peace of mind standpoint and do not worry about making the exact right decision because the “right answer” will depend on factors that no one can predict (such as market returns and your specific lifespan which you will not know either in advance).

In summary, this is a huge decision for most American households with net worth under $1M but the larger the net worth, the more irrelevant this decision becomes. Therefore, our advice is to worry more about the peace of mind aspect vs. financial implications.

A few additional notes on Social Security:

1.      Earnings test before FRA- If you are considering claiming before your full retirement age (FRA) and you plan to continue working, be aware of the earnings limitation. For 2022, if you claim benefits before your FRA and earn more than $19,560, there will be a 2:1 offset in benefits. For example, if you earn $29,560 ($10,000 over the limit), your annual Social Security benefit will be reduced by $5,000. If you are still planning to work, then you should wait until at least your FRA, so this earnings test does not lower your Social Security benefits.

2.      Claiming early / delaying benefits (for married couples)- If you are married and one spouse has less than half of the anticipated benefit of the breadwinner, it may make sense for the non-working spouse to claim benefits early. This provides immediate income and allows the remaining spouses’ benefit to grow (each year you delay, your benefit increases by 8%). Keep in mind that the higher benefit currently stays, meaning if one spouse passes away, the higher Social Security benefit between the two stays in place for the surviving spouse.

3.      Earnings history– Social Security benefits are based on the average of your highest 35 years of income. Be sure to take a look at your earnings record (available through www.ssa.gov) to see if continuing to work will replace a low-income year as this could increase your benefit.

4.      Divorce / spousal benefits- If you are divorced, your ex-spouse may be eligible to receive benefits based on your record if your marriage lasted longer than 10 years, your ex-spouse is unmarried, and your ex-spouse is age 62 or older. The ex-spousal benefit is typically about 50% of your FRA benefit, and only applies if it is higher than the ex-spouses’ own benefit.

Tip 4: Understanding Medicare premiums can potentially save you thousands during retirement.

Medicare premiums are based on income, so if you have an appropriate mix of taxable and tax-free accounts you can control how much you pay during retirement.

Here is a breakdown of the current Medicare Part B brackets:

Keep in mind that these premiums are based on your income two years prior to the current year (notice that 2022 premiums are determined by 2020 income).

Income from pensions, Social Security, Traditional IRA distributions, and Roth conversions are all counted towards these figures, so if you are nearing the end of a bracket and the start of another, carefully consider where you will withdrawal funds from to avoid Medicare surcharges.

These premiums will be a costly expense during retirement, and if the proper planning is in place, you can better control how much you pay.

Tip 5: Consider lifetime gifting to pass your values down to the next generation.

If your intention is to pass your assets to the next generation, a good way to start the process is to complete lifetime gifting. However, before deciding to gift, it is important to understand how this impacts your estate planning.

As of writing this, the current Estate Tax Exemption is $12,060,000 per person, and $24,120,000 for married couples. This means that no federal estate tax (40% tax that is paid by beneficiaries) will be due when you pass if the value of your estate is below these figures. Your estate includes items such as investment accounts, real estate, and life insurance death benefits.

While these figures may seem high, they are subject to change based on whoever is in office. The current limits are set to be reduced (cut in half) in 2026.

This is relevant to gifting because you can gift $16k (or $32k if married) to any individual “tax-free.” If you exceed $16k (single) or $32k (married) to an individual, then your estate tax exemption is reduced accordingly.

Example- if you are married and gift your child $132,000, $32k of this will be considered ‘tax-free’ and the remaining $100k will reduce your estate tax exemption.

If you anticipate a sizeable legacy, it is generally best practice to begin gifting assets to beneficiaries while you are living. This can spark conversations about how you achieved financial success, and you can use it as an opportunity to educate (instead of passing everything at once upon your passing).

Gifting can be achieved in many ways. Some common examples that we see are:

1.      Outright cash gifts.

2.      Helping children max out their Roth IRA, 401(k) (if they have their own earned income) or contribute to their brokerage accounts.

3.      Gifting into a 529 plan for education / college planning.

4.      Gifting into a trust, which can include specific language tailored for your goals to outline how much and when distributions can be taken.

Regardless of the gifting vehicle, the primary benefit to gifting is starting conversations about money with the next generation and teaching them how to responsibly manage this aspect of life.

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Disclosure: Content provided is for information purposes only from sources deemed to be reliable but not guaranteed. Nothing herein should be considered an offer to buy or sell securities. All investments involve the risk of loss including the entire principal amount invested. Past performance is not indicative of future results. EWA, a registered investment adviser, does not provide tax or legal advice.  Please consult a qualified Financial Advisor prior to making any investment decisions, consult a qualified tax professional prior to making any tax decisions and consult a licensed attorney for legal advice.