Even after entering retirement you’ll want to keep an eye on your plan. Continuing to estimate expenses, review payout options, and identify potential sources of income are all a part of a comfortable retirement.
Tax Effects of Retiring
When you retire and start to use your investments there are a variety of tax changes you’ll experience, pitfalls you’ll want to avoid, and investment options you can use to avoid depleting your funds too quickly.
Upon turning 70½ the federal government requires retirees using a traditional IRA to take a Required Minimum Disbursement (RMD), the amount of which is based on the current expected lifespan. Failure to do so can result in penalties as high as 50% of the required amount. This may have a bearing on the tax bracket you fall under, so it may help to talk to a retirement consultant to figure out when to start taking withdrawals. People using a Roth IRA are not required to take out a required minimum distribution.
Another way to avoid higher or unnecessary taxes - while generating income - is by investing in tax-free, tax-deferred, or low taxed investment options such as municipal bonds, index funds, and real estate investment trusts (REITs). Each offer different advantages that can help lessen your tax burden and potentially increase your income. Learn more with our in-depth articles below.
Manage Your Investments and Cash Flow
By now, you should be pretty used to budgeting and paying attention to the amount of cash going out and coming in. And although the amounts may have changed, it’s important to keep the skill and discipline of creating and following a budget.
When creating your retirement budget, be sure to consider using taxable investments first, such as capital gains, CDs, real estate gains, and income from part-time work. Then you can move on to tax-deferred sources like 401ks, and later tax-free sources like life insurance and Roth IRAs to avoid losing the benefit of reduced tax rates.
Adjust Your Plan
After reaching retirement, you might not need to spend as much time managing and adjusting your plan, but to stay in control it might make sense to automate certain financial transactions. Setting up things like direct deposit for your Social Security benefits, or auto-disbursement for your RMDs into your bank or broker account can save you time and headaches dealing with paperwork.
As you evaluate your plan as a retiree, you’ll have to change how you examine it. Before your focus was on the growth of wealth, but now your focus should shift to wealth preservation and providing a steady flow of income to help you live the life you want. You may find that all of your hard work and discipline in making those regular contributions has provided you with exactly what you want and need. But you may find the desire to provide for grandchildren or take that trip to Spain tempting. To help you achieve these new goals and dreams you may want to make adjustments to your plan that provide you with some growth without exposing you to too much risk.
Talk to one of our retirement consultants to discuss ways to fund your new goals.