- Retirement planning moves at pivotal milestones could boost your future income.
- Tax diversification can be crucial to preserving more of your retirement savings.
- Social Security planning may increase your overall lifetime benefit.
Making certain strategic retirement planning moves can help you achieve the retirement lifestyle you envision for the years ahead.
“To maximize your retirement income, it can be beneficial — at specific milestones — to take a deeper look at your tax diversification, Social Security options and expenses,” says Marcy Keckler, vice president of Financial Advice Strategy at Ameriprise Financial.
At this stage of planning, it’s probably becoming easier to envision your life in retirement. This is a good time to ask your advisor how you could allocate your savings across three tax-related categories to help manage your tax burden in retirement:
“Tax-deferred vehicles like 401(k) plans are important, and by taking advantage of strategies that help spread out tax obligations—such as a Roth IRA or Roth 401(k) — you may be able to diversify your investment portfolio and gain real benefits to income in retirement,” Keckler says.
Leveraging all three tax categories can deliver these benefits:
- Savings: When you carefully choose the assets you will use to generate retirement income, you could pay less in taxes and as a result, keep more of your savings. This may help your savings last longer.
- Control: Tax-deferred investments, as well as the Roth 401(k), enable you to choose how much you withdraw to fund your lifestyle–before you begin to take required minimum distributions beginning at age 70 1/2 (Roth IRAs are not subject to the required minimum distribution rule, however).
- Flexibility: You may be able to adapt to unexpected life events. For example, to pay for unexpected medical costs you could adjust the timing or amount of withdrawals from taxable investments.
Social Security is a source of income you can’t outlive, so deciding when to file for it is a critical step in retirement planning.
Although you can start collecting benefits at age 62, waiting to collect can pay off. “With each year you delay, your overall benefit increases until reaching the maximum amount at age 70,” Keckler says.
Your advisor can help you time your Social Security benefits as part of an overall cash-flow strategy, which includes selecting investments with specific maturity dates.
After choosing a start date to collect benefits, you’ll need to apply online or in-person at a local Social Security office.
In the 12-month countdown to retirement, monitor your expenses to understand your monthly costs. Keckler recommends running two sets of books — either conceptually or literally with separate credit cards and checking accounts — to quantify two types of expenses:
- Essential needs that continue in retirement, such as housing, groceries, utilities and health care
- Lifestyle spending, such as travel, hobbies and dining out
After a year, Keckler says “you should have a good idea of how much income you’ll need for necessities, with extra money reserved for leisure and other lifestyle expenses.”
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Your financial advisor can help you determine which income sources to draw on and when, based on your expenses and the current tax climate. Your advisor can also help track your progress, update your retirement plan as your goals and circumstances change over time.