This article on savings during retirement is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA at Borgida & Company, P.C.
1.Consider Working One Year Longer Than You Planned
Not exactly what you wanted to hear, right? Sorry about that. Stick with me here. Why would we suggest this? It is one more year for you to earn income.
More importantly, its one less year you need to draw down from your Portfolio.
This really matters. While there were tons of lessons learned from the Great Recession of 2007-2009, the greatest was:
The sequence of returns really matters.
For example, you retire and in year one, the market is down 20% and you need to take a distribution from your portfolio. Then in year two, the market is down another 20% and you need to take another distribution.
This was an absolute disaster for many retirees.
The solution here is to have three years of your living expenses in your cash reserve. After one year, sell your stocks and bonds pro rata and replenish this fund annually to maintain the three years of living expenses in your cash reserve. This will allow you to maintain your Asset Allocation. By having these funds in your cash reserve, you are not forced to sell your positions when the market is down. You may be selling annually during a market decline. Keep in mind; you are only selling enough to cover your living expenses for one year. While some losses may be incurred, they should not be that significant.
2.Consider Working Part-Time in Retirement
Again, this is just more of what you did not want to hear. Sorry about that. So, why would you consider this? First, you may need the money. That is very straightforward.
Second, you may want to transition into retirement over time. Working part-time could be that bridge.
Third, having earned income will allow you to continue to fund an IRA or Roth IRA. Taxpayers over age 50 with earned income can contribute up to $7,000 per year to their IRA or Roth IRA. The Roth IRA may be the preferred choice and here are 3 Proven Reasons You Need a Roth IRA.
The Roth IRA is not tax deductible. It is funded with after-tax dollars. If you are semi-retired, your income tax bracket should be lower. The lower the income tax bracket, the more funding the Roth IRA makes sense. The advantage with the Roth IRA is when distributions are made. If the Roth IRA account has been open for at least five years and you are over age 59 ½, then all of the distributions from this account are Tax-Free. Another advantage to the Roth IRA is that it is not subject to the Required Minimum Distribution Rules (RMD) listed below. They are not subject to the RMD rules during the owners or surviving spouse’s lifetime. They are subject to the RMD rules for non-spousal beneficiaries like children and grandchildren.
Finally, go the supermarket, barbershop or the local gin mill and everyone is talking about the same thing. It’s all about the recession, inflation and a possible Bear Market.
Talk about the trifecta of doom and gloom!
Working part-time could provide a hedge against some of these potential storm clouds.
This advice has been timeless. In the current environment, however, it may be difficult to execute. The housing shortage is still with us. Although the froth may be slowly starting to come off, the housing market remains strong due to a shortage of inventory.
Ridiculous asking prices and increasing interest rates on mortgages have made this approach more challenging. Keep in mind; this is The Last Bidding War for Homes.
4.Plan Your Withdrawals from your IRA’s and 401(k)s
Taxpayers are subject to the RMD rules mentioned above. These IRS rules essentially make certain taxpayers take distributions from their IRA’s and 401(k)’s annually over their life expectancy. In the past, the Required Beginning Date to take distributions was age 70 ½. This was increased to age 72 in 2020. There are proposals to increase the Required Beginning Date over time to age 75, but at this time, these are just proposals. The RMD is based on your age and the Market Value of your IRA or 401(k) account from the prior December 31st.
If you are asset heavy and income light in your 60’s, you might consider taking distributions before you are required to. Income light means you are not generating a lot of income. If this is the case, consider taking annual distributions from your IRA’s or 401(k)’s. This will allow you to pay income taxes at a more modest rate. Additionally, taking distributions will reduce the account value. By reducing the account value, this will decrease your RMD’s when you are required to start taking them.
Another tool investors over age 70½ can use is the Qualified Charitable Distribution (QCD). This allows them to make a donation to a qualified charity directly from their IRA and not have it included in their taxable income. Distributions made through the QCD count towards the RMD. Individuals can give up to $100,000 per year. Here are the 7 Reasons Investors over Age 70½ Should Make a Charitable Donation from Their IRA.
5.Remember the 4% ‘Safe’ Withdrawal Rate
Bill Bengen, now a retired Financial Advisor, put forth the 4% ‘Safe’ Withdrawal Rule in 1994. This rule essentially said if you had 50% in stocks and 50% in fixed income, you could withdraw 4% of your portfolio annually and it would last you about 30 years.
Recently, however, the question has become:
The government’s response to the Great Recession of 2007-2009 was to cut interest rates to zero. Then they held them there for a decade. So if 50% of your portfolio was in Fixed Income, it was likely yielding near zero. The worm has turned as the Fed has increased interest rates. It’s also indicated it will continue to raise rates in the near future. This will provide Fixed Income Investors with a return again.
As Mark Twain said, “Reports of my Death are Greatly Exaggerated.”
6.Have these Steps Coordinated with your Social Security Collecting Strategy
One of your biggest financial decisions will be your Social Security Collecting Strategy. These benefits are administered by the Social Security Administration (SSA). You can start collecting Social Security at age 62. However, if you do this, you will take a huge haircut on your monthly benefit. This haircut shrinks when you file closer to your Full Retirement Age (FRA). The FRA, depending on when you were born, is about age 67 now.
Additionally, if you collect your benefits before your FRA and continue working, you may have to pay back some of your Social Security benefits. For 2022, you can earn up to $19,560 annually from working. If you earn more than this, you will have to pay back $1 for every $2 earned above the limit. Said differently, if you collect your benefits before your FRA, this is the penalty for collecting early and earning more than the threshold mentioned above. Just be aware of this if you plan on collecting early and continue to work.
Why would you consider claiming your Social Security early?
- You need the money.
- You have health issues.
- Your family history does not have longevity in it.
These are all very valid reasons.
If you can wait to your FRA before collecting this is great. No haircut for you.
Depending on your personal situation, you MAY want to consider delaying collecting your Social Security benefit. Every year you delay filing for your benefit, the SSA will pay you 8% more in benefits. They will do this up to age 70. After that, there is no more increase so it is time to collect.
The common wisdom (?) is to recommend not delaying. You should consider taking your benefit at your FRA. If you delay, the break-even point varies depending on several factors and is about 12 years. So, if you:
- Need the money and, or,
- Don’t have longevity in your family
Again, you should consider collecting your benefit at your FRA.
If, however, you do not ‘need’ the money, consider this approach. Please note need was put in quotes. Keep in mind; you do not have to wait from say age 67 until age 70. If you are 67 and can wait one year, do it. If you decide to collect then, so be it. You earned another 8% on your benefit. If not, see if you can hold out another year before collecting and increase your benefit another 8%.
Oh, and using the break-even point to do this analysis is not helpful at all. This is not a break-even decision. This is a worst-case decision.
The best case is you live a very long life. The worst case is you run out of money!
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Tom Scanlon and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.
Borgida & Company, P.C. is not affiliated with nor endorsed by Raymond James Financial Services, Inc. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.