How Tax Planning Changes Through Four Stages of Retirement

February 22nd, 2020
February 22, 2020
Joseph Vecchio CPA, CFP, MBA

Your tax exposure will change throughout four stages of retirement, you’ll need a strategy that anticipates both traditional taxes AND possible taxes, surcharges, and penalties related to Social Security, Medicare, and other income sources.

That means you’ll need an informed and proactive plan that addresses how you create your income in retirement.

My goal is to introduce you to the major aspects of such a strategy and show you the challenges we all face, and then explain what makes up a workable solution to our retirement tax problem.

The first step is to develop an understanding of the types of “taxes” you may face. What do I mean by taxes? I’m talking about all the costs that can increase as your income does, including some that aren’t actually called a tax.

To me, if your cost goes up as your income rises, it’s a tax in my book.

You also need to understand the retirement expenses you’ll face. And you’ll need to create a strategy that will help you decide which of your assets to tap first, how much you should be taking from those assets, and when those distributions should occur. Getting this right will help you pay as low a tax rate as possible.

Four stages of retirement

First, there’s pre-retirement, the final “work and save” years of 50-60.

Next, the early years of retirement – 60-70, the “go-go years.” People often have grand plans for this time, like traveling, volunteering, starting new hobbies, working part-time, and spending more time with family.

Next, you reach the middle years of retirement – 70-80, the go-slow years, which bring more financial decisions such as how to deal with required minimum distributions from your IRAs and other retirement accounts.

Finally, there’s the later years of retirement, when your health may not be as good and you’re thinking about your legacy and estate – the no-go years, starting around age 80.

There are a wide range of issues that must be planned for in each phase and this can be a lot harder than it seems because…

Retirement is full of surprises! And even the best planning will divert from reality at some point.

One future unknown is inflation. People tend to view their future costs in current dollars, and don’t always anticipate how those costs grow with inflation. Think back 30 years ago to the cost of a gallon of milk, or a gallon of gas, or a visit to the emergency room. Now think about those costs today and what they’ll grow to over the next 30 years when you’re not working. That’s inflation.

Or how about your longevity? Many people end up living far longer than expected, and that requires more money at a time when it’s difficult to work. How long do you think you will live?

Many people also underestimate how much money they need to maintain a pre-retirement standard of living. And who wants to see their standard of living drop?

And then there are healthcare costs, the 10,000-pound gorilla. That includes your out-of-pocket payments for services and drugs plus Medicare and insurance costs, which keep rising.

Because your tax exposure will change throughout retirement, you need a strategy that:

  • Anticipates how and when you tap assets to cover your personal expenses
  • Understands the range of taxes you will face at various stages
  • Manages your actions so you pay as a low a tax rate as possible

TOGETHER WE WILL CREATE A PROACTIVE PLAN THAT ADDRESSES HOW TO CREATE YOUR INCOME IN RETIREMENT IN THE MOST TAX-EFFICIENT MANNER

Shore Financial is a fee-only, tax-focused financial planning firm located in Monmouth Beach, NJ.

Joseph Vecchio CPA, CFP®, MBA is the firm’s President and has dedicated his professional life to the finance and accounting professions.

Joe believes that people are being exploited by financial salespeople who are merely motivated by quotas, product sales and commission-based income! Shore Financial Planning was founded to provide peace of mind through conflict-free, value-added advice.

When you work with Shore Financial Planning, the financial advice we provide is ALWAYS in your best interest.

As a Certified Financial Advisor, NAPFA Professional, and Fiduciary Advisor, Joseph Vecchio offers unbiased and conflict-free financial advice & retirement planning services.

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