Retirement planning takes on two phases: accumulation and distribution. The pinnacle is the point in which people retire, and the biggest question they ask is, “Will I have enough to live comfortably in retirement?”. That’s where we help our clients the most.
Retirement Optimization: Comprehensive knowledge of your tax situation allows me to better understand the role each of your retirement accounts plays in your overall financial strategy.
Tax-Sensitive Withdrawal Strategies: Taxes are one factor to consider when withdrawing money from your accounts during retirement. I can show you illustrations so you can better visualize why tax management is a critical factor when making withdrawal decisions.
Retirement Planning - Accumulation Phase
During the accumulation phase, this is when clients can take advantage of tax-preferred opportunities such as 401(K)s, 403(b)s, IRAs, Roth IRAs, SEP IRAs, pensions, etc. During this phase, it’s important to assess a client’s current and anticipated marginal tax brackets so that they utilize the most appropriate and tax-effective retirement savings vehicle. Further, it's important to assess one's investment risk to maximize growth potential without taking undue risk.
Retirement Planning - Distribution Phase
During the distributions phase, it takes on an entirely more important concept, which is a science of its own. This is when its important to understand the mathematical phenomenon known as sequencing of returns, as improper planning could have an enormously adverse impact on the success of one’s retirement goals if they experience a downturn in the markets in the early years of retirement.
Also, during the distribution phase, it become imperative to have a firm grasp on the tax effects of taking withdrawals from taxable retirement accounts. Most notably, it is important to understand the impact of those distributions on Social Security. Specifically, the taxation of Social Security income is predicated on other income such as income from pensions, IRAs, and other investment income. Thus, certain amounts of income will effectively cause the Social Security income to be taxed, causing phantom taxation of Social Security, and an abnormally high effective marginal tax bracket. Strangely enough, we have encountered a retired client who has about $40,000 in IRA and investment income, and that placed her into an effective marginal tax bracket over 50% (that means for an extra $1,000 of IRA income, they would pay an extra $500 in Federal tax). Further, it is important to understand that Medicare premiums are also means-tested, so additional income in retirement could cause these premiums to increase.
Why Work with an Advisor for Retirement Planning
It is never too early to start saving for retirement. Choosing to work with a Certified Financial Planner can help you leverage the appropriate tax-preferred opportunities during the accumulation phase of your life. Additionally, a Certified Financial Planner can help you fully understand the tax effects of withdrawing and using your retirement savings to create a plan that works for your life and avoids unintended consequences in the long run.
At M&A, we are well-versed in both phases of retirement planning, but we also help clients when they are deciding if and when they can retire. We assist in helping our clients understand the financial and non-financial impacts. We also work with our clients to develop a financial plan that demonstrates if they can retire on their current assets and/or develop a plan of action to pursue their goals.