Your successful retirement - financial planning tips

There are many considerations to take into account when planning your retirement. Kathleen Kenealy, CFP®, CPWA®, Director of Financial Planning & Senior Wealth Advisor, SVB Private, shares the items that make for a successful retirement, including:

  • Tracking important birthday milestones
  • The importance of simplifying your finances before you retire
  • Understanding if you can retire. How much is enough?
  • Replacing your paycheck - cash flow and tax planning
  • Social Security and Medicare considerations
  • SECURE Act Implications on legacy planning

If you're considering retiring in the next five to ten years, this information is for you.

Audio transcription

Kathleen: Hi, everybody. Thank you for joining us today. I'm Kathleen Kenealy, Director of Financial Planning at Boston Private. And I'd like to welcome you to our webinar. Today we're going to talk about what steps you can take to get ready for retirement, or as I like to call it, how to prepare for seven-day weekends.

Boston Private's recent Why of Wealth study surveyed a number of high net worth respondents. And nearly a third of individuals indicated that preparing for a comfortable retirement is one of the most important factors driving their use of wealth. Living a comfortable life, providing family with financial security and financial freedom also ranked high, and are all factors that can be addressed through proper retirement planning. In addition, the uncertainty that we've all experienced over the last year as a result of the pandemic has accelerated saving for retirement for 14% of the individuals in our survey. So we felt it was timely to host this webinar to discuss steps that everyone can take in order to set themselves up for a successful retirement.

Today, I'm going to cover some important birthday milestones that everyone should know, the five steps that you should take to prepare for retirement. And I'm also going to discuss potential legislation changes as well, as well as the impact that the SECURE Act had on retirees. I'm happy to take any questions that you may have. Feel free to submit them throughout our discussion today, and I will answer them during our Q&A session at the end. If you would like to ask a question during today's call, simply click on the Q&A feature on the right hand side of your screen and type in your question. We have a lot to cover today, so let's get started.

Get organized!(01:45)

Here we have some significant ages that retirees and pre-retirees should really take note of. So at age 50, you become eligible to make catch up contributions to retirement plans. So this means adding an extra $1,000 to your IRA and an extra $6500 to your employer retirement plan, like your 401(k). At 55, you become eligible to make catch up contributions to a health savings account, if you have one, of an extra $1,000 a year. At age 60, you become eligible for Social Security survivors benefits as a widow or widower. And age 62 is the earliest age that you can collect your retirement benefits through Social Security. At age 65, you become eligible for Medicare. And then your Social Security full retirement age actually depends on what year you were born. So this could be anywhere from age 65 to 67.

At age 70, if you have delayed claiming Social Security, that 8% credit that you get each year for delaying stops accruing. So it makes no sense to really delay your Social Security past age 70. But at seventy and a half, you become eligible to make qualified charitable distributions from retirement accounts. So this is when you can donate up to $100,000 each year from your retirement account directly to charity, and not have it count towards your taxable income, although it does fulfill your required minimum distributions. And now at age 72, this is a recent change from the end of 2019, required minimum distributions must start for those of you with retirement accounts out there.

So now we're going to talk about some of the steps that you can take to prepare for retirement. So this first step that I'm going to talk about seems really simple and unexciting, but I think it's one of the most important steps. And you really don't want to wait until the week before you retire to start getting your financial house in order. So, tracking down all the different resources that you're going to be able to bring to the table when you enter retirement is really important. And a lot of these things, you know, I bet you probably don't know the answers to if I were to ask you. So, you know, the easiest place to start is to create a net worth statement. And basically, you just want to gather a list of all of your accounts and all of your assets. I usually recommend making note of how those accounts and assets are owned and titled. You want to list all of your liabilities so that you know what you need to take care of, now, or during retirement, or that you want to pay off before retirement.

And so making note of the repayment terms. You know, what's the interest rate? When is this due? Is it you know, due over the next two years? Is it a 30-year mortgage that you still have 18 years left on? And while you are pulling together all of this information regarding your assets, it's a great time to review the beneficiaries on your retirement account. I can't tell you how many times I've asked people to send me confirmation of their beneficiaries and to have someone say, "Oh, it's my spouse." And then when they check, you know, they find out that it's their ex-spouse that they divorced 15 years ago, and they never updated the beneficiary. So this is really important.

Once you have gone through collecting all of your assets, liabilities, next is to make a list of all the income sources that you might be eligible for in retirement. For most people, this is Social Security. So, my recommendation is, get a copy of your statement online, at the Social Security's website. This is ssa.gov. So you can create an account and download a copy of your statement. And your statement will show you, not only what Social Security is projecting that you will receive when you start collecting benefits, but it's also going to show your entire work history. And you want to make sure that you review that and make sure that it's correct, so that by the time you start collecting, you've cleared up any inaccuracies on your report well in advance. You also want to list out any pension that you might be eligible for. Do you know what your payment options are? Have you gotten a benefit estimate? Because usually, there's a number of different ways that you can be paid out when you go to collect the pension, if you're eligible for one. So, finding out the details of that are really important.

And a lot of people talk to me about their, you know, potential inheritance. And, you know, I think this is one of those things where it's great if it happens and you receive something, but don't necessarily count on it unless you are the financial planner for your parents, and you know that they have really done a lot of planning to leave something behind as a legacy. It's also important to collect information about any insurance policies you have. So if you decide that you want to retire early, and the only life insurance you have is a policy that you have through your employer, you know, if you retire and that policy lapses, you might leave your family at risk of being underinsured, should something happen to you. So it's important to review that as well. And it's important also to review your estate plans. You know, these are some of the things that people don't necessarily like to do. But it's really important to make sure, you know, again, that you leave your family well protected, should something happen to you.

And along those same lines, you know, do you know where everything is located. And more importantly, does your spouse, or your partner, or whomever you're sharing your life with know. If something happened to you, does your family know where everything is and how to access any assets or benefits that you might leave behind? So, just, you know, taking a step to organize your financial life, and more importantly, simplify. I find that so many people, you know, start to think about retiring, but once you sit down and go through the exercise that I just talked about, you find old 401(k) accounts that were left and abandoned at old employers, you find investment accounts that have multiple custodians, and then you find sometimes that people still have paper stock certificates, or miscellaneous dividend reinvestment accounts. These things can be a big pain to consolidate and clean up. But it's so important. You know, it's sort of like spring cleaning every spring, just to kind of consolidate and organize. This is one of those circumstances where less really is more.

How much is enough?(09:08)

Okay. So, once you have taken the steps to get your financial house in order, the next big question that people usually ask me is, how much do I need to retire? And it's really hard for me to answer that question without knowing anything about you, what your current standard of living is, what standard of living that you would like to have in retirement. Everybody is so different. So, you know, my answer, unfortunately, usually is, well, it depends. You know, this is the time, as you're thinking about retirement, to sit down and really think through, what are your goals? Like, how much do you want to be able to spend? How are you going to live? What is your lifestyle going to look like? You know, I work with some people where they can maintain a very comfortable retirement collecting Social Security and maybe spending an extra $3,000 a month. And then there are other individuals where, you know, they can't get by on anything less than $20,000 a month. So it's really different, and it's very personal. But it's really important to just sit down and figure out, you know, what that looks like.

There are also other considerations to think about as you think through how much you are going to need. You know, how long are you going to live? You know, the longer your life expectancy, the more you're going to need to save. How are you going to invest? If you have a very conservative investment portfolio, you might need to save more, because you're not going to earn as much. And how worried are you about running out of money? You know, for some people, the thought of potentially running out of money, or being a burden to their children or grandchildren is very concerning. And so that might make it more advantageous to save even more than you might normally have, if that's really a concern for you. How flexible do you think you could be if you did have to make some mid-course corrections? You know, all these things go into figuring out what that number is for you.

So, how much you are going to want to spend in retirement. The easiest place to start is with what you are spending now. So what expenses are likely to go away when you retire? Usually it's dry cleaning bills, and commuting expenses, and professional dues. Those sorts of things that, you know, are really incurred when you are working, but then tend to go away as you retire. And what expenses will be added or increased when you retire. And this typically is things like travel, or potential charitable contributions, entertainment, those sorts of things. And so it's really important to, you know, take this time to just close your eyes and think about what you want your retirement to look like. And then take that vision and try to quantify as best as you can, what that spending is going to look like. And keep in mind that your spending is probably going to fluctuate over time. It's not going to be static forever.

So this chart talks about my point before about life expectancy. So if you are 65 today, you know, the probability of living to a specific age definitely can vary. And how likely it is that you are going to live to these various ages can impact how much you are going to need to save for retirement. So for a woman who is 65 today, there's a 55% chance that she is going to live until age 85, and a 34% chance that she's going to live till 90. And so, you know, those are some pretty long life expectancies and pretty long time to spend in retirement.

So, how are you going to invest your nest egg? You know, I spend a lot of time talking with my clients about figuring out what the right asset allocation is. And so, usually, I frame this as trying to balance a three-legged stool. You know, one is how much risk you want to take in your portfolio, sort of your psychological, emotional preference for taking risk. And the other is how much risk you need to take in order to beat your goal. And the third leg is how much risk you can afford to take. You know, if we experienced a pretty significant market decline, is that going to jeopardize your ability to continue living a comfortable retirement. So balancing these three legs of the stool is really important. And so we're staying diversified. You know, we never know what asset classes are going to perform better or worse at any given time. And so maintaining a properly diversified portfolio is hugely important, as is planning for market surprises.

You know, I don't think coming into the beginning of 2020, anybody really expected to go through in the market what we did when COVID hit the world. And so that's one of those times where cash is king, and planning for unexpected surprises is really important so that you are not depleting your portfolio during severe market declines, and you're not doing any panic selling during severe market decline. So, I know it's really tough, especially in these times where we have just crazy low interest rates, to, you know, not want to have any cash on the sidelines, not earning anything. But when we do go through rollercoasters, that's really when you want to have that cash on hand.

So one of the nice things about working with us here at Boston Private is we do have the ability to map out your retirement with you. And we can forecast what your retirement might look like, given all of your spending assumptions, and your goal assumptions, and also your asset allocation. And, you know, we stress test it. We run not just one scenario, assuming, you know, let's say you get a 5% return, and that happens every single year, year after year, with no deviation in the market. You know, that's one scenario that you can look at. But my job would be very easy if I could count on a static market return every year with no market volatility. So, our planning software uses a Monte Carlo analysis to run 1000 different iterations of retirement, assuming all sorts of random returns throughout your retirement, to come up with, you know, what's the probability of meeting all of your goals and not running out of money before the end of your lifetime. And so that number is going to change based on the assumptions that you input.

So as you might expect, you know, increasing your life expectancy might knock that number down, or reducing the expected return over time might knock that number down, or adding higher inflation might knock that number down. But other things such as, you know, delaying retirement by another couple of years, or cutting back on your spending a little bit, or working part time in retirement. There are a lot of different levers that you can pull to get that probability of success number to, you know, a place that you're comfortable with. And so when we look at this, you know, there can be situations where that number is too low. You know, if it's a 50% chance of probability of success, to me, that says there might not be enough flexibility in your plan to be able to make the mid-course adjustments, should something happen along the way. And there's just too much uncertainty baked in.

But on the other hand, if you have a 95% probability of success results, then maybe you're giving up more than you need to in order to have that higher number, but maybe you are totally okay having that not higher number because you just tend to be very conservative in your planning. So, there's usually this middle range of comfort, where you know it's a good balance between your current and your future lifestyle, you probably have enough flexibility in there to be able to withstand market shocks or any other shocks that come along the way. So there's this fine balance of getting to a number that's comfortable for you.

So, you know, coming to this number, some of it is based off of all of the different assumptions in there. And then a lot of times, what we will do is run multiple scenarios, side by side, to show, okay, well, if we start with something with an 81% probability of success, what do they need to do to adjust in the plan to get us up above 90%? So, as I mentioned before, is that working longer? Is it cutting your spending? You know, this number tends to be very personal for people. And I think it's a little bit like risk tolerance, where somebody might be totally fine with 100% allocation to stocks, knowing that they can withstand the volatility, and then somebody else might not be comfortable at all and want little to no money in stock because they just can't stand the rollercoaster ride. You know, I have other clients where they see a 65% probability of success, and, you know, to them, that's totally fine. They think that they can make adjustments in the future. We usually don't include home equity in the analysis, unless you know that you're going to downsize at some point in the future and free up some of that liquidity. So it's all about, you know, how much flexibility can you bake into your retirement plan, and how flexible can you potentially be later, should you need to be.

Replacing your paycheck(20:26)

So once we have sort of mapped out what you want your retirement to look like, you know, when the day finally comes, and you depart work for the last time, and you enter the glorious world of retirement. Now, you know, you need to figure out how to replace your paycheck. And so this can be kind of complicated, especially if you drill down into the different tax treatment of all of the different potential income streams that you could be. So each one of these, you know, once you have created that list of different income sources that we talked about earlier, it's important to review each of these each year, review the tax treatment of each year, and then really map out what new paycheck is going to look like.

So, as I said, it's important to understand the tax treatment of all of these different sources of income. So, Social Security income is taxed at ordinary income tax rates, but how much of it is taxed depends on how much other income you have. Pension income, part time work, you know, those are taxed at ordinary income tax rates. Any traditional IRA, or 401(k), or 403(b) distributions are also taxed as ordinary income. Although if you have made non-deductible contributions to those accounts over time, some portion of those distributions might be returned to you tax free. And then if you take IRA distributions from a Roth IRA account, those are not taxable, as long as you meet certain conditions. And investment income, you know, generated by your portfolio can also vary. So it could be taxed at ordinary income tax rate, it could be taxed at dividends tax rate, or it could be tax exempt income. So it's important to understand, you know, what you own in your non-tax deferred accounts, to understand what the income tax implications of your investment portfolio will be. And then, of course, if you take portfolio withdrawals from a brokerage account, usually, you will pay capital gains if you are selling appreciated securities to distribute cash to yourself.

And so, you know, as we talked about, there are lots of different types of income that you might have in retirement. And how all those add up together and then layer in together is going to impact your tax situation. And so it is important to be aware of what your income tax situation is. And as you approach retirement, perhaps do some multiyear projections to see, you know, where you are today, as you're still working. And then where you might be over the next few years as you retire. Or even, you know, out further as you start to take IRA distributions to figure out what makes the most sense from a tax bracket management perspective. And so you can look at all the different resources that are available to you and figure out, you know, do I accelerate IRA distributions to take advantage of the fact that I'm going to be in a low tax bracket year? Or do I take a distribution from my Roth IRA, because I know I'm going to have other income that's going to push me up into higher income tax brackets? So, these are the marginal rates that apply today. I am just basing this off of current tax law and not necessarily on what could come down the pipeline when tax law changes come into effect.

And so, you know, as I sort of alluded to, the types of accounts do matter. So, if you have a brokerage account in which you've invested in growth stocks, that has cost basis in it, those stocks that you invested in, you know, 20 years ago, have cost basis, and there's appreciated gain in there. If you sell securities to take a distribution, you're going to pay capital gains taxes. But if you have an IRA account, and you sell securities to take a distribution, you pay no capital gains on selling those securities within the IRA. But once you distribute that cash to your bank account, you are going to get taxed on that amount of that distribution. And so, you know, depending upon your situation, the difference between those two accounts can be pretty sizable. So, you know, according to this just basic chart that I have here, you want to have, I'll call it $200,000 into your pocket, after you pay taxes. You would likely have to take $263,000 out of your IRA account to pay the taxes, and then only $213,000 out of your brokerage account to pay the capital gains taxes.

So, it can be, you know, quite a big difference and can have a meaningful impact over many years, if you are not taking into account that these types of assets are treated very differently from a tax perspective. And, you know, this is just an example. Obviously, your personal situation will dictate, but there can be circumstances as well, where taking it out of your IRA makes more sense, and deferring gains in your brokerage account makes more sense.

Okay. So let's talk about understanding required minimum distributions. So required minimum distributions must start when you turn 72. That's a recent change that took effect January 1st, 2020. There are some exceptions, like, if you are still employed, with an employer, and you have your 401(k) with that employer, as long as you're not more than a 5% owner, you can defer your distributions from that retirement plan. But for most people, age 72 is sort of the magic number when you have to start taking distributions. And what not everybody realizes is that that first required distribution, you have a little bit of flexibility for when you take it. You have to take it by April 1st of the year, following the year you turn 72. So if you turn 72 this year, you have to take your first distribution for 2021 by April 1st of 2022. The caveat to that is that if you wait and take your 2021 distribution in 2022, you have to then also take your 2022 distribution next year as well. So you essentially kick this year's into next year's, and double up next year's, because in subsequent years, it has to be taken by December 31st each year.

And as I mentioned, those distributions are fully taxable at ordinary income tax rate. But you can structure your distributions so that you can have taxes withheld. So, you know, you can say, my gross distribution is $50,000. I want you to send $10,000 to the Fed and $5,000 to the state for taxes, and then you get the net amount in your paycheck. You don't have to do that, but I think that's not something that is widely understood until people get to 72 and start figuring this stuff out. The other thing I just want to remind people of is, the IRS does force you to distribute the money, but they don't force you to spend it. So it's totally okay to just take that distribution, plop it into your investment account, and reinvest it and continue to let it grow, if you don't need it. And the amount you do need to take is going to change annually, depending upon your retirement account balance as of December 31st last year, your current age on December 31st of this year, and your marital status as well. You get to use a special calculation if you are married and your spouse is more than 10 years younger than you.

So, for someone using the Uniform Life Table, which is what most people use, if you are married with a spouse of the same age as you and you have roughly $2 million in your IRA account today, at age 69. Assuming a 5% investment return, the IRS gives you this life expectancy table and tells you that, at age 72, you need to take your account balance and divide it by 25.6, which works out to be just shy of about 4% of your account. But you can see this required minimum distribution amount in that first year is already almost $100,000. And so it continues to grow each year, assuming your portfolio continues to grow. And then at 97, you're looking at almost $165,000 of fully taxable ordinary income. So it's important to, you know, look at what your projected required distributions might be over time, to take those into consideration with your annual cash flow planning. And you can see here, this assumes your spouse is more than 10 years younger, same investment return, but slightly different calculation.

Social security & medicare considerations(30:30)

Okay. So I want to talk about Social Security and Medicare. So my first recommendation is, if you have not looked at your Social Security statement in a very long time, then you should find a copy of your Social Security statement. And the easiest way to do this is to download a copy on the Social Security Administration's website, which is ssa.gov. So you are going to download your earnings record. Your statement is going to have your earnings record as one of those pages. And it's important to review your earnings record to make sure that it's correct, because you do want to make sure that you are eventually going to collect the amount of Social Security that you are entitled to. And it's nobody's responsibility but your own to make sure that the Social Security Administration has the correct earnings history on file.

So one of the things that, you know, doesn't necessarily get translated or overlooked is that your Social Security benefit estimate that you see on your statement is a benefit estimate calculated by Social Security. They take your highest 35 years of earnings, they adjust them for inflation, and then they crunch the numbers behind the scene and say, okay, your benefit estimate is $2300, at your full retirement age. The one thing that people really do need to be aware of, particularly if you were thinking about early retirement, is that they look at those 35 years of history, they assume that you are going to collect and earn roughly the same amount of income until your full retirement age, as you do now. So if you're 55, and you make $300,000 a year, your benefit estimate is going to be based on you continuing to earn $300,000 a year until age 65, or 66, or 67, whatever your full retirement age is.

So it's really important to keep in mind that what your benefit statement shows might not actually be what you get if you're planning on retiring early. So, Social Security Administration website have a great calculator where you can actually go and plug in your earnings history and plug in what you think you're going to earn over the next however many years until full retirement, to get a more individualized number that takes those lower earnings years into consideration.

So I mentioned that your full retirement age depends on the year that you were born. And so if you were born between 1943 and 1954, your full retirement age is 66. And if you were born in 1960, or later, your full retirement age is 67. And if you were born in the years in between, your retirement age is 66 and some number of months. So, once you reach your full retirement age, you can collect your Social Security benefits with no reduction in the amount. But if you decide that you don't want to wait until your full retirement age, and you want to claim early, remember on the birthday page, I talked about the earliest date that you can collect is age 62. If you collect at 62, your benefit is going to be reduced for the rest of your lifetime. And it's a pretty substantial reduction.

So if your full retirement age is 66, but you decide to collect at 62, your Social Security benefit is going to be reduced by 25%. And if you're 67 full retirement age, your benefit is going to be reduced by 30% if you retire at 62. But on the other hand, if you actually wait and don't collect Social Security right away, and you wait until a later year, you get a delayed retirement credit of 8% each year up until you turn 70 years old. So, for a lot of people, especially if you have other means with which to supplement your retirement spending, it can make a lot of sense to delay claiming until that later age.

So, when should you collect? It's a very personal answer. It depends on your individual situation and your family's situation. So there's no best age to begin receiving Social Security retirement benefits. If we had a crystal ball, and we knew exactly how long you were going to live, then we could make a determination because the benefits really are based off of life expectancy. But we really have no idea. And so, you know, usually it makes sense to crunch the numbers and not just default to, okay, well, I'm going to collect a 65, or, oh, I'm going to collect until 70. You really want to evaluate your personal financial and family considerations. So if you have an illness that might result in a shorter life expectancy, it might make sense for you to delay claiming. However, a surviving spouse is going to collect whatever you were receiving. So it could also make sense to delay so your surviving spouse collects the higher benefit. But we do have tools that we can use to project out what your benefits would be at various claiming ages. And see, you know, what gives you the greatest amount of lifetime benefits based on these different claiming scenario.

So, spousal benefits are the probably most frequently discussed benefits that I talk about with clients. So if you are married, you are eligible to collect either your own benefit or 50% of your spouse's benefit, whichever is greater. So, there are some weird rules you need to know. They changed the rules about three or four years ago, and they did away with something called file and suspend. And then they also modified the rules to something called restricted applications. Because now, if you want to collect a spousal benefit, you can only collect your spousal benefit when the primary spouse is already collecting their own benefit. But if you were born before January 2nd, 1954, you are able to file what's called a restricted application, where you say to the Social Security Administration, "Hey, I'm eligible for my own benefit, as well as my spousal benefit. I want to collect my spousal benefit now, and delay my own benefit until age 70." So that continues to grow. So, again, it all kind of depends on your ages, and your situation, and what your benefit is, and what your spouse's benefit is. But it's important to kind of work through the numbers and not just guess.

If you are divorced, you can actually collect on an ex-spouse's earnings record, as long as you were married for more than 10 years, and you have not remarried. So if you were married for more than 10 years, and you think that your personal Social Security benefit would be $500, but your ex-spouse would receive $2,000, and 50% of your ex-spouse's benefit would be $1,000. You can actually collect as a divorced spouse on your ex-spouse's earnings record. And then I talked about before as well that there are benefits for widows and widowers that you can collect as early as 60. But similar to retirement benefits, they are reduced if you collect early. And as I mentioned before, if both spouses are collecting Social Security and one of them passes away, if their benefit is higher, the surviving spouse will no longer receive their own benefit, they will get that higher benefit from the spouse that passed away.

So, some other considerations to take into...to think about are that your benefit will be reduced if you claim Social Security benefits early and you're still working. So they look at your tax return and they see that you have earned income. If you are already collecting Social Security, they're actually going to reduce how much Social Security you receive, based on how much other income that you are collecting from working. Once you hit your full retirement age, you can earn whatever you want, and there's no reduction in your benefits. The two other considerations to just generally know about are the Windfall Elimination Provision as well as the government's pension offset. So this applies to people that have worked for an employer that did not collect Social Security taxes from your salary. So it's basically a reduction either for your own Social Security benefit, or for a Social Security benefit that you might collect as a spouse or a widow.

This does actually impact a lot of our Massachusetts clients, because Massachusetts teachers do not pay into the Social Security Administration. They have a separate pension plan. And so if you have a married couple with one spouse that has a Social Security benefit, and one spouse that has been a Massachusetts teacher for the last 30 years, there's likely going to be some offset to their Social Security spousal benefits. So just something to keep in mind if that could perhaps impact you.

So Medicare kind of goes hand in hand with Social Security. Enrollment is at age 65. But it's actually the seven-month period around age 65. Medicare covers different types of coverage. So Part A covers inpatient care, Part B covers outpatient care. Part C covers... it's a Medicare Advantage sort of, like, standalone plan that kind of combines these different parts. Part D covers prescription drugs, and then a Medigap policy will cover some of those things that Medicare does not cover, like dental and vision. The other thing that Medicare does not cover is long-term care. So, it's important, as you're sitting down and thinking about retirement and planning for retirement, you think through the potential cost of long-term care at some point in your future, and how you want to plan for that, since Medicare does not cover that.

We actually did a webinar last fall on how to decipher your Medicare options, which is available on our website. And so if you are approaching Medicare age, age 65, I highly recommend you check out that webinar, because it's got a lot of great information. One of the things that we did cover during that webinar was something called the IRMAA, income related monthly adjustment amount. So when you become eligible for Medicare, your Part B premiums and your prescription drug coverage might have an additional monthly cost to it depending upon your income. So, again, as we go through and plot out your retirement spending, here's where all that tax planning comes into consideration, because you're taking lots of money out of your IRAs, generating lots of capital gains to pay for your lifestyle. And this jacks up your taxable income on your tax returns. You could potentially end up spending a lot of additional money on your Medicare premiums. So, it's important to know what these are and be aware of them.

But there is a way that you can actually appeal the additional premium costs, if you had a life-changing event that resulted in lower income. So if you got married, or you got divorced, or your spouse passed away, or you have some sort of work stoppage, whether that's retirement or something else, you can actually file a form with the Social Security Administration and provide documentation to them. So hopefully, appeal that higher IRMAA adjustment amount. And so, this isn't...you know, it's not foolproof, it's not guaranteed to result in lower premium amounts, but it never hurts to try.

The next chapter(44:11)

So the last thing that we are going to talk about as you start thinking about retirement is, how to think about the next chapter. So what is your Ikigai? You know, this is a Japanese concept, referring to having a direction or a purpose of life, something that provides a sense of fulfillment, and satisfaction, and a sense of meaning. It's, you know, really a reason for getting out of bed in the morning. And for many people, not only is a lot of their time, tied up in their work, a lot of their identities, too. So it's really important to think about what the next chapter of your new adventure is going to bring and what you want that to look like before you pull the trigger on retiring cold turkey. So, if that's finding new hobbies, spending more time with family and friends, getting active in your community in some way, doing more travel, perhaps going back to school, or volunteering, or even working part time, because that can also have the added benefit of allowing your portfolio to keep growing.

You might be able to delay Social Security benefits, getting that 8% credit each year. You might be able to make Roth IRA contributions if you have earned income. But health experts and studies really say that maintaining social connections and staying physically active helps slow aging, contributes to better overall health, and reduces mortality risk. So, all things that can have a trickledown effect on to your financial security in retirement.

The SECURE Act(46:05)

Okay. So, the SECURE Act. The SECURE Act was really big news in December of 2019, and then the world sort of fell apart and it got quickly forgotten. There were a lot of different provisions that were included in the SECURE Act. But I want to talk about one specifically that impacts a lot of retirees. And that is the repeal of the stretch IRA or inherited IRA beneficiaries. So, as I talked about before, you know, the increase in the required minimum distribution age went from seventy and a half to 72. You actually can now make traditional IRA contributions past 72 if you continue to work and have earned income. But the elimination of the stretch IRA was really the big thing. And then I'm going to talk a little bit later about some other additional proposed legislation changes. But one of the things that is expected to go into effect in 2022 is a slight change to the life expectancy tables, so that is going to change RMD amounts soon too, as well.

Okay. So, the elimination of the stretch IRA. Most inherited IRAs and inherited qualified plans must now be distributed by the end of the 10th year after the original owner's death. It used to be that if my mom passed away and left her IRA to me, I could stretch required distributions out over the course of my lifetime. And now instead, if she passed away and left her IRA to me, I would have to distribute that out over 10 years. The difference is that there's no longer an annual requirement to take an annual distribution. It just has to all be taken out before the end of 10 years. So that could mean you take it all out as a lump sum on day one, you take it out, you know, sporadically over 10 years, or you wait until the last day and you distribute it all on the last day. There are certain exceptions. Surviving spouses can treat it as their own IRA if they inherit their spouse's IRA. If the beneficiary is not more than 10 years younger than the person who passed away, they're not subject to this. If you leave it to your minor children, they don't have to distribute it within 10 years right away. But once they reach the age of majority, they do. And then there are some exceptions for those that are disabled and chronically ill.

Okay, so this is not going to impact everybody in the same way. If you have no retirement accounts, or you're going to leave your retirement accounts to charity, like, clearly, this shouldn't matter to you. If you think you're going to send down most of your retirement assets during your lifetime, probably not a big deal. But if you have significant retirement assets, and you want to leave a lot of money to your beneficiaries, this could potentially be a big problem, because your beneficiary might be taking out income that's going to drive them into higher tax brackets in the future.

So there are certain things that you can do now such as filling up your lower tax bracket. So if you're in the 10% bracket or the 12% bracket, perhaps you accelerate taking additional IRA distributions to fill up those lower brackets. You could potentially use your IRA to make qualified charitable distributions, which go to charity. You could use your IRA assets to pay for large medical expenses if you can itemize those. And you can also do partial Roth conversions. But it's important to... You know, I talked about, right at the beginning of this webinar, that reviewing your beneficiary designations is really important because this is something that can have a big impact on your legacy planning. And so taking a look at, you know, who you have named, is really important.

Again, so I talked about tax bracket management, but just as a reminder, who are those tax rates again. But, you know, filling up these lower tax brackets now, if you think that your kids are going to inherit these IRAs when they're still in their prime working years, and they're in the 32%, 35% tax bracket, it might make sense to take additional distributions now, or convert to a Roth. So, if you decide to do a Roth conversion, the basics of this, basically say, you take money out of your IRA, you pay taxes now, and then you plop that money into a Roth IRA, and then you let that money grow tax exempt for the rest of your lifetime. There are no required distributions at 72. And then if your beneficiaries inherit that account, they are still subject to that 10-year rule, but the distributions come out tax-free.

So not everybody should consider a Roth conversion. It definitely does not make sense for everybody. But you might want to think about doing it if you're going to have a low income tax year, or you have something else that might help offset the taxes the you're going to pay. Like, you know, if you give a large contribution to charity, or you have a lot of basis in your IRAs, or you have other losses that you can use to offset the income, you really should have non-IRA funds pay the income taxes due on the conversion. You're going to get a lot more bang for your buck if you use outside funds instead of using the IRA money itself. If you think your tax rate is going to increase in the future, you might want to do a Roth conversion now. And I'm not just talking about, you know, potential increases in the tax rate that is being talked about by Congress. I'm really talking about, you know, looking at that in conjunction with looking at your personal situation. Because if you have other income that might drop off down the road, even if marginal brackets go up, it might make... You know, you really want to think carefully about that.

If you think you're going to have a taxable estate, you might want to convert because the taxes that you pay on the conversion reduces the size of your estate. If you think you're going to have large required distributions in the future that are going to bump you up into those higher tax brackets when you turn 72, you might want to do some Roth conversions. And then again, this is sort of where the multi-generational planning comes into play. Where if you think your beneficiaries are going to pay a higher tax on distributing the IRA that they inherit, you might want to take distributions now or convert to Roth at lower tax bracket, so that you get that additional savings out over the next generation. You might want to not do a Roth conversion if you're already in the high tax bracket, and you expect to be in a high tax bracket in the future. It just might not make sense. But it's something to continue to look at.

It might not be right if you don't have any other resources with which to pay the income taxes that are going to be due. And again, sort of the flip side is, if you expect that your tax rate is going to decrease in the future, that you retire, and all of a sudden your $300,000 annual salary goes away, and you'd have nothing but some portfolio income and Social Security distributions. You might be in a lower tax bracket in the future, even if Congress does raise taxes. You might not want to convert if you don't owe, are not expected to owe estate taxes. Some people don't mind their children picking up the extra tax bill. You know, it's perfectly legitimate to just say, "You know what, whatever they get is theirs to worry about. I don't care." And if you're leaving your IRA to charity, the charity is a tax exempt organization. They don't care.

The SECURE Act 2.0(54:34)

Okay. So there are some additional potential changes on the horizon that are being talked about in Congress. So, recently, the Securing a Strong Retirement Act of 2021 was passed by the House Ways and Means Committee. It has some strong bipartisan support, but it's definitely not a done deal. But this is more affectionately known as the SECURE Act 2.0. So this would... Some of the potential changes that are being talked about are gradually pushing back the RMD age, again, from 72 to 75. Making the IRA catch up contributions indexed for inflation, which hasn't happened since, I want to say, like, 2006, I want to say. And they would add new catch up contribution limits in the year that you turn 62, 63, and 64. It would also require that your catch up contributions actually be made to a Roth IRA account. And that $100,000 qualified charitable deduction amount that I talked about before would be indexed for inflation. Because once that amount was... You know, it's always been $100,000, it's never increased. So that would be indexed for inflation.

And one of the things that I hope no one on here, having listened to me, is going to miss their RMD, after I talked about the timing of taking your RMDs. But if you do miss an RMD, the penalty for missing it right now is really substantial. So you end up paying 50% penalty on the amount that you were supposed to distribute, that you didn't. And so the potential changes on the horizon would reduce this to 25%, and then reduce it even further to 10%, if you, you know, take care of it and correct it in a speedy fashion. So that's certainly not everything that's baked into the bill, but some of the more interesting and applicable things that apply to a lot more people.

And so, with that, I have run out of things to say. I'm glad I packed it all into, you know, just under an hour. I know I went through a lot of information. So I have a couple of questions here that I will try to answer before we...in the last minute or two. But if you have any other questions, feel free to shoot them our way.


If I get taxed on an RMD from my 401(k) account and then reinvest it into an investment account, will I get taxed again when I take the money out of my investment account? Yeah. Though, the caveat is, you would get taxed again, basically, on any earning. So, you take your RMD out of your 401(k) account, you pay ordinary income taxes on the amount that you distribute. If you then put it into an investment account, and that money earns... You know, if it's invested in something that pays you interest, you're going to report that interest on your tax return every year. Or if you just take it and invest it into, you know, stocks that don't pay dividends, there won't be any taxes due every year until you sell that stock at a capital gain in order to then take the proceeds out of the investment account.

Do mandatory withdrawals at age 72 feed into the IRMAA calculation for Medicare? Yes, they do. So the IRS looks at your taxable income. So that includes all your investment income, it includes pension income, IRA distributions. It looks at all of that. And it does use that to figure out your IRMAA adjustments. So if you have a really big IRA, and you have a really big RMD, that's going to push you up into those higher brackets for the IRMAA calculations.

And I think that looks to be it. So, thank you to everybody for joining me today. I hope that you found this helpful and useful. My contact information is on here, if you have any additional questions that you think of. Please don't hesitate to reach out or to contact your Boston Private Wealth advisor. As I talked about today, there are a lot of different factors going on in here, a lot to keep track of, a lot to keep organized, lots of different things to consider. So, it's definitely a great time to reach out to your wealth advisor and talk through what is the right plan for you. And I hope you join us for our next webinar. I hope everyone enjoys the rest of their day. Take care.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of Silicon Valley Bank, a division of First-Citizens Bank and First Citizens BancShares, Inc. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.