- Determine how you’d like to spend your retirement years. Many people travel, devote more attention to family and friends, increase their volunteer involvement or concentrate on hobbies and leisure activities in their retirement. You should prioritize taking the time to determine what your unique mix of passions and pastimes will be. Always remember that retirement often morphs through several phases as you age, so be sure to allow yourself to develop new interests and relationships, as well as the possible need to accommodate eventual changes in health and mobility in yourself or your loved ones.
- Try to get a good sense of what your desired lifestyle will cost. In large measure, this will be a function not only of what you want to do, but also where you live or want to live – both the part of the country (or the world) in which you choose to settle and the nature of the four walls you call home. Recognize, too, that you might not live in the same place throughout your life or retirement. Moreover, be sure to continue to budget for the usual elements of life, such as personal and health care expenses (Medicare won’t cover everything!), as well as food, clothing, transportation, travel, special occasions, emergencies and our seemingly constant companion: inflation.
- Save as much as you reasonably can and invest appropriately. People often underestimate – sometimes significantly – what their desired lifestyle in retirement will cost. Others may be quite realistic about what they will need but have difficulty putting enough aside over the years or fail to manage their wealth responsibly. Whatever your situation, building your nest egg should be a high priority.
- To the extent possible, maximize the financial resources you can draw upon in retirement. A number of options exist, among them:
- Defined-benefit pensions – These are traditional pensions and, even though fewer and fewer workers are offered this perk, it is quite a valuable one if available to you. In a defined-benefit pension, your employer covers the full cost, and what you receive will usually be very reliable. Payments are fully taxable as ordinary income.
- Defined-contribution plans – These are sponsored by employers and generally take the form of so-called qualified retirement plans, such as 401(k) and 403(b) plans, or some types of IRAs, such as SEP and SIMPLE IRAs. These plans feature limits on how much can be added each year and are typically funded with some combination of contributions made by your employer and pre-tax portions of your salary or wages. Account balances grow tax-free, but distributions are fully taxable as ordinary income.
- Traditional IRAs – Depending on your level of income, traditional IRAs can be funded with your own pre-tax money or, less commonly, after-tax money. Traditional IRAs can also receive money “rolled over” on a tax-free basis from employer sponsored plans, such as 401(k) plans. Account balances grow tax-free. When distributions from a traditional IRA are taken, they will be taxable as ordinary income in proportion to the amount of pre-tax money you contributed or rolled over.
- Roth IRAs – These, too, are funded with your own money, specifically after-tax dollars. This means that both earnings and distributions come out tax-free, and whatever remains in the account grows tax-free. Note: Some employers offer Roth 401(k) plans, although these are relatively rare.
- Tax-deferred annuities – As the name suggests, these products enable you to invest your own after-tax money. Tax-deferred annuities grow tax-free, and any increase in value beyond the amount you invested is taxable as ordinary income when distributed.
- Individually owned savings and investment accounts, certificates of deposit, etc. – These are funded with after-tax dollars, and whatever you earn is taxable. Some of these investments produce capital gains, which are generally taxed more favorably than interest and other sorts of ordinary income.
- Employment – For some people, “retirement” means continuing to work a bit longer, albeit on a part-time basis. Similarly, working full time for an extra year or two can make additional assets available for use in connection with one or more of the options above.
- Social Security benefits – Despite concerns about the long-run health of the Social Security system and the size of benefits one can count on, this extremely common form of retirement cash flow should always be considered.
- Nonfinancial assets – Things that save you money can be just as valuable as a stream of payments. Examples include good health, smart purchasing and having loved ones nearby who are available to help when needed.
- Don’t overlook ways to support Robin Hood that result in retirement cash flow. Especially if you are precluded from making additional contributions to your IRA or qualified retirement plan, a charitable life income plan can be an attractive supplement to existing arrangements. Here are some of your choices:
- A charitable remainder trust is similar to a gift annuity in some respects, since both can provide income for life, but offers greater flexibility. This can be very appealing if you don’t need additional income now but would like to secure a source of payments in retirement, and also provides an immediate income tax charitable deduction.
- If you are age 70½ or older, you can make a qualified charitable distribution (QCD), also known as a charitable IRA rollover, to Robin Hood directly from your traditional or Roth IRA of up to $105,000 in 2024, and the gift will not be counted in your income. Once you are 73 or older a QCD will satisfy your annual minimum required distribution and permit a tax-free gift of up to $105,000 to Robin Hood. Separately, drawing on assets in an IRA or a qualified retirement plan to make current gifts to Robin Hood can sometimes make sense for anyone over age 59½, although careful planning is required.
Finally, because retirement planning vehicles such as defined-contribution plans, tax-deferred annuities and many IRAs contain income that has never been taxed, you’ll want to devote attention to your beneficiary designations. Previously untaxed amounts left to family members and other individuals will be taxed when received by them but are not subject to tax when received by Robin Hood. When certain retirement plan assets are used for a gift annuity or a charitable remainder trust at the end of your life, you can combine tax savings with provisions for your heirs.
If you have any questions or concerns about your options, please reach out to our team if we can be of any assistance to you and your advisers.
