Transitioning into Retirement

Retirement is that one phase in life that sends chills down most people’s spines. How am I going to manage life without a paycheck? What if I run short midway? These are some of the questions troubling most people once they hit 50. Interestingly, even financially independent individuals might want to retire, but they never truly know whether they are ready. This episode aims to help individuals understand where they get their retirement money so that they feel comfortable taking the leap. We’ll use a hypothetical client and strategically select where we’ll withdraw the money while minimizing taxes.  

Maintaining Your Taxable Income Below the Social Security Limit

When formulating a strategy that will keep you below the social security limit, you first need to think about your expenses and income sources. This is because if you’re single and you take out over $25,000 in taxable income, your social security becomes 50% taxable. You obviously want to avoid that, and you can accomplish that by managing your tax brackets and analyzing all your income sources. We’ll approach this from a Roth conversion perspective where we’ll assume the tax rates are likely to go up; thus, it would make more sense if a client converts money into a Roth IRA. 

Additionally, when converting from a traditional to a Roth IRA, you need to pay attention to a couple of things. First is the tax arbitrage, where you analyze whether you’ll go up or down a particular tax bracket. The second is what the required minimum distribution will be. Remember, at age 72, you’ll be required to take out a certain amount of money from your Roth IRA hence the need to know what tax bracket that will put you in. 

Timing Social Security Withdrawals

The decision of when to start tapping into your Social Security is sorely dependent on your circumstances. Some start making withdrawals immediately, while others wait until they’ve reached full retirement age. While there’s no right age to start claiming for everybody, the general rule of thumb is that if you can afford to wait, delaying Social Security can pay off over a long retirement. If you are in a good financial situation, it would be best to wait a little longer before withdrawing your benefits. A long retirement period coupled with uncertain markets and inflation are the biggest risks. Delaying Social Security withdrawals can be an effective insurance policy against these issues.