After 25 years of working with people preparing for retirement, do you know what surprises them the most? All the changes.
In retirement, most people experience changes in:
- Their lifestyle
- Their priorities
- Their day-to-day pace of living
- How they manage their money
It’s up to us to consider how all these factors affect our bottom line; that is, our ability to stay financially secure throughout retirement.
No two retirements look alike, but we can generally count on:
- Working less
- Pursuing other interests such as hobbies and time with family
- Looking at a much different balance sheet at the end of every month.
Whether you are planning to retire in the coming years or you are already enjoying retirement, two major things will help you balance the scales in your financial favor.
- Knowing the facts about your money in retirement
- Making informed decisions based on those facts
We all need to be aware of these basic changes that affect our money in retirement:
Fact #1: Distribution Matters
Retiree beware: source and sequencing matters. Take a close look at the sources of income you have. Keep in mind, in what sequence you tap which sources can make a costly difference.
The order in which you draw down from your investments and retirement accounts impacts your tax burden as well as the amount of funds available.
When you turn 70-1/2, you will be required to withdraw money from your IRA and 401(k) accounts, then pay taxes on it. Of course, it may seem natural to let that money grow until the mandatory withdrawal time. However, that may not necessarily be the financially wise choice.
Why? You may find yourself in a different tax bracket.
Upon retiring, we want to keep our taxes to a minimum. In addition to Social Security, say you have a small pension and some money in a brokerage account. You may well have a low taxable income that puts you in the 15% or 25% tax bracket. If you choose to defer your healthy IRA until 70-1/2, you might discover that your required minimum distributions will force you into a higher tax bracket with a substantial tax increase. In such a case, it’s far better to take IRA distributions earlier, while you’re still in the lower tax bracket.1