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  • Writer's pictureJames McGlynn CFA, RICP

Mastering Retirement Planning

RETIREMENT PLANNING is complex because there are so many topics to master. In my chapter for the HumbleDollar book My Money Journey, I organized those topics into four categories: guaranteed income, medical expenses, tax-free accounts and asset allocation. In the book, I went into more depth, but here’s my 10,000-foot view of each one:

Guaranteed income is reliable income that isn’t affected by changes in the stock and bond market, and it includes pensions, Social Security and income annuities.

If you’re fortunate enough to have a pension, there might be choices regarding survivor benefits and whether you want to accept a lump sum instead of regular monthly payments. Retirees usually have just one chance to get these decisions right, and choosing poorly can have lifelong implications. Take it slowly, and involve your spouse and financial advisor in these decisions.

Similarly, claiming Social Security is usually only done once, though there is a 12-month window to redo your decision, providing you pay back every cent of benefits received. A bad choice—say, claiming too early—can crimp income for life. Unlike a pension, however, Social Security survivor benefit rights can’t be waived and there’s no lump-sum withdrawal option.

A third source of guaranteed income is annuities. There are many options to choose from, but most HumbleDollar readers say “no” to all because so many annuities are accompanied by high fees and commissions. Still, if you want to boost your guaranteed income, an immediate-fixed annuity could be worth investigating.

Medical expense planning necessitates understanding health savings accounts (HSAs), Medicare and long-term care insurance. In the years before retirement, it might be possible to accumulate significant money in an HSA for your retirement medical expenses. In 2024, for example, a couple age 55 and older could together save $10,300 if they enroll in a high-deductible insurance plan.

Medicare, which typically provides health insurance starting the month you turn 65, has many options and parts to understand. When to sign up and which plans to choose are only “simple and easy” if you do your homework.

Long-term-care insurance has become expensive, as insurance companies abandon the business or jack up their premiums after underestimating the amount and duration of claims. More folks would likely insure for long-term-care expenses if these policies weren’t so expensive.

Tax-free accounts allow workers to amass a nest egg and then use 100% of the money saved to cover their retirement expenses. But instead, many workers favor tax-deferred accounts, thereby postponing taxes until withdrawal, in a bet their tax rate will be lower in retirement. That may not always be a winning strategy. Thanks to required minimum distributions and potentially higher tax rates after 2025, it could pay to have more money in tax-free retirement accounts. The three tax-free accounts available are HSAs, Roths and cash-value life insurance.

HSAs are doubly tax-advantaged, offering a tax deduction for contributions and tax-free withdrawals when the money’s spent on medical expenses. Roth accounts are excellent for those still working, even though savers must forgo the current year’s income-tax deduction. Early in retirement, when taxable income is often low, it can be wise to convert a traditional IRA to a Roth IRA so that the money and its potential earnings won’t be subject to taxation again.

A third tax-free account is the cash value in a life insurance policy. If you have a whole-life policy, it might be possible to borrow against the cash value and spend the money without paying taxes. Of course, whole-life premiums are a whole lot higher than those for term insurance, so you could pay a high price for its tax advantages.

Asset allocation refers to how we divide our investment money among key investment categories like cash, fixed income and stocks. Having ready cash in retirement is helpful so you don’t have to sell investments at a loss during a market downturn. With savings accounts paying 4% and more, cash is currently a more attractive option than it’s been in a decade.

Fixed-income investments include certificates of deposit, bonds and bond funds. They serve two purposes: Their prices are usually more stable than stocks and they provide an extra dollop of current income. Just remember, bonds and bond funds lose value when interest rates rise, as we saw in 2022.

Stocks provide the potential for growth, income from dividends and the capital for major purchases like a new car. Just don’t get too myopic about them. Too many investors make stocks their sole focus, when cash and fixed income deserve their money and attention as well.

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