By Brandon Miller, CFP–
As a kid, I loved a board game called Stratego, which is different each time you play it. You try to protect your flag, while uncovering the other person’s. This requires moving your pieces just right to avoid the obstacles your opponent puts in front of you (miners can diffuse bombs, for example).
I find retirement income planning a bit like playing Stratego. You have a lot of pieces with different values—IRAs, 401(k)s, Social Security, etc.—that you can shift in various ways. There are hidden bombs, such as rampant inflation or a serious illness, which can blow up part of your wealth. But there are also strategic ways to avoid or work around those challenges.
The first step in setting up your retirement “pieces” is to determine how much money you’ll need. For this article, let’s assume that you’ve already calculated that sum. Now you need to plot out where those funds will come from each month.
A good rule of thumb is to spend down your taxable accounts and savings first. Then turn to tax-deferred vehicles, such as IRAs and 401(k)s, and, finally, tax-free Roth accounts. This helps keep the tax advantages going for as long as possible.
Here are some other moves to consider:
Be strategic about taking Social Security income.
There’s more to claiming SSI then we have space for here, but these are some key points: At age 62, those of you who are eligible can start drawing on your benefit, though it will be significantly less than if you wait. That reduced amount lasts for the rest of your life. At full retirement age—67, or 66 and change for those born in the ‘50s—you get your full benefit. Hold off taking SSI until 70 and your monthly payment will be 32% higher.
Health, savings, marital status, and other factors enter into your timing. But, in general, if you have additional sources of income to tide you over, waiting as long as possible to collect SSI is a good move.
Install financial guardrails.
One tactic is to recreate your paycheck by funneling all the income you get from various sources into one bucket, then taking out what’s needed each month or every two weeks. This provides the discipline and structure to help you spend what you should.
Knowing that the market is fickle, you can also create a shock absorber by funding an emergency account with 1–2 years of expenses. Draw on this account in ugly years instead of selling assets at a loss, then replenish the fund when the market recovers. Keep repeating this and you can help avoid wrecking your plans whenever the market crashes.
Pay attention to taxes.
Your retirement income can dramatically impact what you pay for healthcare. Unlike income taxes that are graduated, Medicare expenses are a steep cliff. For example, individuals making $88k or less in 2021 ($176k or less for joint-filing couples), will pay the standard premium of $148.50 each month for Medicare Part B. Make more than half/three-quarters of a million for individuals/couples and now you’re paying $504.90 each month for the next calendar year—almost 3.5 times as much. So, getting a large inheritance or selling your home might result in significantly higher healthcare expenses.
Also, when you’re 72, Uncle Sam gets impatient and demands you withdraw some money from tax-deferred instruments. These required minimum distributions (RMDs) are based on your balance and life expectancy. Note that tax-free Roth money doesn’t have RMDs in your lifetime—because the government already has its money—though your beneficiaries may have to pay RMDs to avoid penalties.
RMDs for high-balance IRAs could put you into an expensive tax bracket. Instead, you could convert to a Roth IRA or significantly draw down your traditional IRA before RMDs kick in. Those who plan to give pots of cash to charities can use Qualified Charitable Distributions. This gives all or part of your RMDs to charity(s) you name. The gift doesn’t count as taxable income for you, and your charity doesn’t pay tax on it either. Win-win!
In sum, Stratego is a game; your retirement is not. But in both cases, smart planning can help protect what’s most precious—your flag on the board and your dreams in real life.
Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Brio Financial Group is a registered investment adviser. SEC Registration does not constitute an endorsement of Brio by the SEC nor does it indicate that Brio has attained a particular level of skill or ability. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.
Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
Published on September 9, 2021
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