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Take The Uncertainty Out of Your Retirement


The word itself can spark a lot of emotion. For many, retirement is the ultimate goal.

What that retirement looks like will vary from one person to the next. Retirement could be moving to a warmer climate, moving closer to family, traveling the world, taking care of the grand-kids, or being more involved in the community and with charities.

You get the point. People’s retirement may look different, but how you get there will be very similar…

Retirement Planning! And it is never too early to start.

How Will I Know When I am Able to Retire Comfortably?

Without sitting down and planning, it will be very difficult to determine when you are able to retire. Or more importantly, if you can achieve a successful retirement – not running out of money during your lifetime.

For a long time, age 65 was considered the default retirement age. This was the “full retirement age” used by social security. That number has gradually increased due to longer life expectancies, with FRA being age 67 for those born after 1960

But why live by default?

You have unique circumstances, goals and desires for when you want to retire. Some people wish to retire as early as possible, while others love the work they do and can never see themselves fully retiring. There is no right or wrong retirement age. What is wrong is not planning appropriately.

Determining a realistic retirement age requires getting a full and clear understanding of what your financial picture looks like at the moment, what you anticipate it looking like in retirement and determining the strategies to help you get there.

Nothing can be planned for with certainty, as life is unpredictable, but it is important to get a good sense of what your lifestyle will look like, your anticipated expenses and where your income will come from.

Most people would agree that a successful retirement involves not outliving your financial resources. There may be other desires, such as leaving an inheritance to family or charities, but your financial well being is the first priority. Unfortunately, none of us know exactly how long we are going to live – that would make this process so much easier! Therefore, retirement planning becomes a balancing act of making sure that your financial resources last while also enjoying those resources.

You aren’t working hard and saving for nothing!!!

Where Will my Retirement Income Come From? 

This is VERY common question.

Up until retirement you are working, receiving an income stream and saving/investing to reach your retirement goal.

But that all changes the day you say goodbye to the workforce. This can be an uncomfortable feeling for some, as it is a BIG life transition. You will no longer be receiving an income – at least not from working – and you will no longer be adding to your investments.

So, what will it all mean?!?

A general rule of thumb is that you will need to replace roughly 70% of your pre-retirement income (include link). That is because certain expenses tend to decline in retirement, even as other areas of expenses rise during this period, such as health care costs.

This income replacement may come from numerous sources, including, but not limited to:

  • Social Security – For years you have likely been paying into the Social Security system through FICA taxes. It is now time to benefit from those contributions. However, depending on your pre-retirement income, Social Security may only replace between 26-52% of your retirement income need. There are many different social security claiming strategies and it is essential that you make an informed decision on your claiming strategy.
  • Pensions – Pensions are becoming less common these days, hence the rise in defined contribution accounts such as 401(k)’s. But you may be one of the lucky ones that still receives a pension whether due to working for the government, an education system, or a large employer who still has a pension plan in place.
  • Annuities – You may have purchased a deferred income annuity in the past or are considering an immediate fixed income annuity. An annuity provides guaranteed income in retirement and may or may not be appropriate based on your financial situation.  
  • Retirement savings – You are not contributing to your retirement account for nothing! That saving is to assist you with your retirement income. Depending on the type of retirement account that you own, you may have to take Required Minimum Distributions (RMD) starting at age 72.
  • Liquid savings – Perhaps you are fortunate to be accumulating additional savings and investments outside of your retirement accounts. You then have an additional “bucket” of financial resources from which to draw from.

As you can see, there are a lot of retirement income sources and it involves coordination to ensure that your income strategy is handled appropriately and efficiently.

What does this all mean for your taxes? Just because you will be done with your working years does not mean that you are done paying taxes!

Taxes in Retirement

You now have a sense of where your retirement income will come from, but what will your tax situation look like?

During retirement you may incur ordinary income tax, capital gains tax, or tax-free distributions in certain situations.

  • Social Security – Up to 85% of your benefit may be taxed at ordinary income tax rates depending on your total taxable income.
  • Pensions – Your pension income is likely (but not always) fully taxable at ordinary income tax rates.
  • Annuities – Your annuity taxation will depend on whether it is a qualified or non-qualified annuity and what you “cost basis” in the annuity is. The taxable portion of your annuity is taxed at ordinary income tax rates.
  • Retirement account distributions
    1. Traditional IRA/401(k) distributions are fully taxable as ordinary income
    2. Non-Deductible IRA/401(k) distributions are partially taxable at ordinary income tax rates and the taxable portion depends on your contributions and earnings on the investments.
    3. Roth accounts distributions are 100% tax -free!  (assuming you are over age 59.5 when taking a distribution and that the account has been opened for over 5 years)
  • Liquid account withdrawals – from non-retirement savings and investment accounts – are not taxable upon withdrawal. Dividends and interest paid from the investments may be taxable as ordinary income and you may incur capital gains tax if an investment is sold at a gain.

Just as coordinating your retirement income may be challenging, so is understanding the tax implications.

Retirement Planning is More Than Just the Finances!

Planning a successful retirement relies heavily on coordinating your expenses with your financial resources to ensure they last your lifetime. But there are other areas that need to be addressed.

  • Estate Planning – Hopefully you already have an estate plan in place. But it may need to be revisited or updated. Do not put off proper estate planning before it is too late. Protect your loved ones appropriately and make your estate administration easier for them.
  • Health care and long-term care – As previously mentioned, health expenses tend to rise in retirement. There may also be instances where long-term care is required. Do not forget to take these aspects into consideration.
  • Living a fulfilling retirement – Just as important as the financial considerations is how you want to spend your retirement. Many have grand ideas in their mind, but it takes intentional planning to make those ideas a reality. How do you want to spend your days? How will you stay active and healthy? Mentally stimulated? These are all just as important as planning financially.

Do you want to know the best way to ensure a successful retirement…start planning early!

By planning your ideal retirement and creating goals, you can then work backward and determine what you need to start doing today to live the life you want in retirement.

The thought of all this can be overwhelming. But that is not a reason to default to inaction. Reach out to a financial professional for assistance in working toward achieving a secure retirement!  

Schedule A Call to find out how Crest Wealth Advisors can help you plan the future of your dreams!

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.