Being retired requires you to become the Chief Financial Officer of your own life. You need to manage your income, including Social Security, distributions from retirement accounts and any other sources and oversee investments.
Most people think of retirement as the time that they don’t have to make a lot of decisions or work very hard. Wrong! While you may not have job responsibilities in retirement, you do have a new job of managing every aspect of your finances. The challenge: unless you return to employment, the only income you have is that which you have generated from a lifetime of working.
With that in mind, The Brainerd (MN) Dispatch offers a few ideas to consider early on in retirement in its article, “3 Moves you should make in the first 3 years of retirement.”
Understand that retirement can be a long time. Compared to 60 years ago, we're seeing seniors who are retired for nearly 40 years! That means today's retirees must be prepared for a significantly longer retirement than their parents. Nothing is a certainty, but you should plan for a retirement that could last several decades. A percentage of your portfolio should be allocated in stocks and other growth-oriented investments that have historically provided the returns needed to preserve your portfolio for extended periods of time.
Roth Conversions. Diversification means having diversified tax treatments of your savings. If you have most of your savings in a 401(k), nearly every dollar you withdraw in retirement will be taxed. If your savings are only tax-deferred, you'll be hit with required minimum distributions (RMDs) when you reach age 70½. RMDs are a required percentage of your tax-deferred savings that you must withdraw each year—regardless of whether you need the money or not, resulting in a potential jump in your taxable income later in retirement. The solution is to proactively make Roth conversions, so the money will potentially grow tax-free, and you won't have to pay taxes on qualified distributions. You're also decreasing the amount of your savings that’ll be subject to RMDs in the future. However, you will pay taxes on the amount you convert, so consider the tax ramifications before doing a conversion.
Estate Planning. Think of estate planning as your "legacy planning." When you die, where do you want your assets going? Have a legal will in place and if it suits your situation, a trust. Talk to an estate planning attorney about whether a trust is appropriate for you. You should also ask your attorney about a power of attorney and a living will to protect you, in the event that you become incapacitated.
To protect your retirement, work with a trusted estate planning attorney and keep a close watch on your finances. By taking these steps in the early stage of retirement, you should be in good shape for what will hopefully be a long and fulfilling retirement.
Sixty percent (60%) of adults do not have an estate plan! In retirement, it is important to create or amend, and maintain your estate plan. If you would like to meet with an experienced estate planning attorney to discuss your estate planning options, please contact us today.
Reference: Brainerd (MN) Dispatch (June 16, 2017) “3 Moves you should make in the first 3 years of retirement”