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Planning Your Finances in Retirement

Robert Henry Louis


  • Pre-Retirement Financial Planning: Maximize tax-deductible contributions, explore retirement account options, seek expert advice for healthcare financing and planning.
  • Distributions from Retirement Accounts: Follow IRS rules on mandatory distributions, consider delaying if still employed (non-5% owner), minimize taxes strategically.
  • Social Security and Medicare Decisions: Carefully choose Social Security start age, weigh Medicare options, seek expert guidance for optimal choices.
Planning Your Finances in Retirement

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When you have made a decision about retirement, or semi-retirement, or a change in career direction, you still have work to do. If you have been careful, you will have accumulated a retirement account, plus perhaps some non-retirement account assets. You, and your spouse if you have one, will also be eligible for Social Security and Medicare benefits. You will surely have plans to some extent of what you want to do in your later years, but finances will be a constraint on what you can do. This brief article discusses what steps you can take to maximize your enjoyment of retirement with your financial resources.

Saving While You’re Still Working

If you are still working to any extent, you need to maximize tax-deductible contributions to your retirement account. The ability to deduct those contributions is probably one of the most valuable benefits available to individuals under the Internal Revenue Code. You need to obtain advice on what combination of retirement accounts you can make use of, whether on a pre-tax or after-tax basis. If you are practicing in a law firm, it is likely to sponsor a retirement plan, but you should determine whether there are other tax-favorable ways of saving. These might include a traditional individual retirement account (IRA), a nondeductible traditional IRA, or a Roth IRA.

While considering what to do while you’re still working, consider as well tax-favorable techniques in healthcare financing. The use of a health savings account in conjunction with a high-deductible health plan might be an effective planning technique for some people. If your employer doesn’t offer this option, you should ask that it be added. But here’s a caveat: it won’t be the best method for everyone. In fact, little of what I am discussing works for everyone in all circumstances. And this is a good reason not to carry out a type of planning just because it worked well for a colleague or friend. What you should do will be informed by your healthcare needs and those of your family. Healthcare funding is another situation in which you would be well-advised to seek expert advice.

To sum up, tax and financial planning expertise is needed to maximize your retirement savings and coverage of your healthcare expenses as you near retirement or other changes in your work life. An expert financial planner can assist you in finding all the ways that work for you.

Taking Distributions from Retirement Accounts

Federal income tax law requires that you begin taking distributions from retirement accounts, including qualified retirement plans and IRAs, upon reaching a certain age. The reasoning is simple: you received a tax deduction, in most cases, when contributions were made, and enjoyed tax deferral while the contributions earned income, but the IRS eventually wants to collect its revenue. For many years, that certain age was 70 1/2, but it was changed in recent years to 72. There is a formula pursuant to which distributions must be taken, based on your age and, if you are married, your spouse’s age. The amount you must withdraw each year is reported to you by the plan or account provider, and you have until December 31 of the year (except for the first year, when the rule is slightly different) to take the distribution. The failure to take the distribution when required will result in a 50% penalty in addition to the tax due, which is a strong incentive to follow the rules.

Minimizing Taxes on Distributions

But here are two points to consider with respect to retirement plan distributions. First, if you are still employed, and not a 5% owner (there are more detailed rules on this subject), you can delay distributions from your employer’s retirement plan until you stop working, permitting further tax-deferred accumulation. (What does it mean to continue to work? What if you work ten hours per month? Unfortunately, the IRS has provided scant guidance on this question.) Again, you need to plan this technique carefully and get professional advice as needed.

Second, if you retire but are not yet 72, you don’t need to start taking distributions from retirement plans and IRAs. But, of course, you can take distributions, and if you do you will be subject to federal income tax on whatever you withdraw. To minimize your federal income tax “hit,” consider taking withdrawals from any taxable accounts (that is, not tax-deferred retirement accounts) you have before withdrawing from retirement accounts. Unless you are withdrawing from a Roth IRA, whatever you withdraw from retirement accounts will be taxed as ordinary income (with one obscure exception). By contrast, withdrawals from taxable accounts might produce taxable capital gains, but the tax bill will be much lower. As a very general rule, it’s better to pay taxes later than sooner, and to pay at a lower rate.

Roth IRA Planning

If you have a Roth IRA, which offers no tax deduction when amounts are contributed but imposes no tax on withdrawals (if certain requirements are met), you need to consider how that taxation difference works best for you. Taking money from a Roth IRA produces no tax, which is good, but the amounts withdrawn will no longer grow on a tax-free basis. Add to that the fact that during the participant’s lifetime, there are no required distributions, and it is clear that Roth IRA planning will be somewhat different. Do you have enough assets that you won’t need the Roth money during your lifetime? If so, you might want to keep it as a legacy for children or grandchildren. They will have to withdraw the Roth money over a period of years, but will have continued tax deferral while amounts remain in the Roth. That can be a valuable inheritance to leave behind. But the wisdom of doing this depends on your particular circumstances, and this is another reason for you to seek expert financial and tax advice.

Social Security and Medicare

During our working years, Social Security and Medicare are very simple: you pay in at the rates required by law. But when the time comes to begin receiving benefits, some complicated decision-making is needed.

Social Security can start as early as age 62 (earlier under limited circumstances). The amount of benefits will be reduced because of early commencement. At a later age, between 66 and 67, normal levels of benefits can begin. Until then, if you are still working, your Social Security benefits can be reduced. For that reason, if you are still working, it’s probably not advisable to start receiving benefits before 66 or whatever is your age for full benefits. But there will be people who should begin benefits sooner: if they have a shorter life expectancy, or if they just need the money to live on. The statement that is sometimes heard, that everyone should wait to receive benefits until later ages, is simply wrong. You can postpone the receipt of benefits beyond the normal or full retirement age of 66 to 67, and by doing so you will increase benefits by 8% for each year of postponement, up to age 70. After 70, there is no further increase, so no one should delay benefits beyond 70. Postponement to age 70 will be the right choice for many people, especially those still working, but this is yet another area where expert advice probably pays off. But, as indicated above, there is no one strategy that is right for everyone.

In a similar way, Medicare offers many choices as to when and how to receive benefits. For most people, Medicare can begin at age 65. You may choose to continue the private insurance by which you were covered before age 65, or opt for Medicare in its various parts. Parts A, B, and D offer various types of Medicare benefits, and Part C is a sort of substitute for regular Medicare. There are charges for several parts of Medicare, and there can be a surcharge depending on income levels. A complete explanation of Medicare is beyond the scope of this article, but the choices made can have a significant effect on finances in retirement. As with everything else discussed here, the best Medicare choices will usually require expert guidance. And also again, no choice is right for everyone.

Medicare coverage is usually not enough to cover all medical expenses in retirement, so most people obtain a supplemental insurance policy from a private company. Having the right level of coverage is another important financial planning decision and can affect your financial well-being in retirement in a significant way. Should you choose the policy that advertises most frequently on television, or that sends you the most mail offers? Maybe not.

Planning your finances in retirement is akin to a new course of study. You need to have at least a modicum of knowledge of several topics, including retirement and taxable accounts, Social Security, and Medicare. You need to be a prudent user of medical benefits through Medicare and private insurance, getting the preventive care and treatment that will make your retirement more enjoyable. By doing so, you can get the maximum enjoyment from the results of your many years as a lawyer.

While you are planning your finances for the remainder of your life, you might also consider planning for your children and grandchildren, or other family members you want to benefit. Tax-favorable planning for succeeding generations can include choosing beneficiaries for retirement accounts in a way that maximizes the value to them of whatever you don’t use during your lifetime. The topic of estate planning for retirement benefits has generated books with hundreds of pages, as well as web-sites and courses. In addition, the ability to save for the education of family members through Section 529 plans and similar tax-advantaged education savings plans can provide significant help in defraying the growing cost of education for your family.

Two final points, or footnotes. We often see articles and videos about the best places to live in retirement. There are states that have lower (or no) income taxes, lower property taxes or, no inheritance taxes. This is a factor in deciding about the rest of your life, but there are so many other factors that go into that basic decision that focusing on tax issues should probably be considered of only minor importance. The best place to live in retirement is probably near family and friends. Second, law firms and other employers of lawyers need to consider offering financial planning to older lawyers as a means of promoting the process of lawyer succession, helping those lawyers to plan a successful retirement, and encouraging the retention of younger lawyers.