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Financial Planning in “the 70s”: Things to Remember

For those in or reaching their 70s, there are some particular financial planning issues that ae important. Let’s look at a couple of them.

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What issues should i consider before i retire?

For a certain segment of the population—especially Boomers in or preparing for retirement—the phrase “the 70s” may summon images of long hair (or, at least more hair than at present!), bell bottoms, leisure suits, gasoline prices well below a dollar per gallon, and, of course, amazing music. In those days, it’s unlikely that many were thinking about Social Security, Medicare, or retirement income withdrawal strategies.

But these days, saying “the 70s” is more likely to cause those same folks to consider a range of very different matters. And especially for those in or reaching their 70s, there are some particular financial planning issues that bear careful consideration. Let’s take a look at a couple of them.

Required Minimum Distributions (RMDs)

For many successful retirees, tax-advantaged savings accounts like IRAs, 401(k)s, and 403(b)s are a cornerstone of financial planning. By systematically depositing funds that are then allowed to grow and compound without being taxed, these individuals have built a solid foundation of savings that can provide income when it’s time to begin enjoying the fruits of a successful career. For those with traditional IRA, 401(k), or 403(b) accounts, the maximum age for initiating annual RMDs used to be 70 ½, but the SECURE Act of 2019 raised that minimum age to 72 (for those turning 70 ½ in 2020 or later). Then, three years later, SECURE 2.0 raised the age for RMDs to 73 (for those turning 72 after December 31, 2022 and reaching age 73 before January 1, 2033—ten years from now). Those who reach age 74 after December 31, 2032 will have an RMD age of 75. But for those in the age range currently under discussion, the majority will begin taking RMDs at age 73, unless they’ve already begun doing so.

When distributions are taken from a traditional retirement account, they are taxed as ordinary income. For that reason, many persons try to leave their traditional retirement accounts untouched for as long as possible, to allow for the maximum amount of tax-advantaged growth, before they are tapped for income. This also means that it is important for retired persons in their 70s to know when they must begin taking RMDs from their traditional IRAs, 401(k)s, and 403(b)s, and also how much they are required to take from each account. Failing to withdraw the required minimum amount can result in a tax penalty of 25% of the amount not withdrawn (the penalty can be reduced to 10% by correcting the error in a timely way). Of course, some may wish to withdraw more than the required minimum amount, and that is fine. It all depends, of course, on what your other sources of retirement income are and what tax bracket you are in.

The bottom line is that if you have reached your RMD age, you should consult with your financial and tax advisors about how much you must withdraw and the effect of that withdrawal on your tax bracket, since the RMD is taxed as ordinary income (unlike some other sources of retirement income). By carefully coordinating your RMD with your other sources of income, you may be able to avoid paying an unnecessarily high amount of income taxes.

A final note: The above discussion is focused on traditional IRAs, 401(k)s, and 403(b)s. The alternative to a traditional account is a Roth account, and in most cases, Roth retirement accounts do not have RMDs. Also, because the funds were taxed when they were deposited in the account, withdrawals from Roth accounts are generally not taxable as ordinary income. If you have both types of retirement accounts, it’s even more important for you to consult with your advisors to determine the strategy for withdrawals that best balances your need for income with your tax situation.

Your “Drawdown” Strategy

And speaking of strategy, it’s also important for persons in their 70s to have in place a well-thought-out method for deciding which accounts to tap for retirement income, and in what order. Especially for those with several sources of retirement income—which could include Social Security benefits, pensions, taxable investment accounts, and tax-advantaged accounts—all income is not created equal.

For one thing, the amount of other income you receive in retirement directly affects how much of your Social Security benefit is taxable. For those with lesser means, up to 50% of their monthly Social Security benefit may be non-taxable. As your income level increases, the amount of Social Security benefit subject to tax increases, up to a maximum of 85%. By exercising control over your withdrawals from other accounts, you may be able to reduce the amount of tax taken out of your Social Security benefit.

But there are other reasons to consider your drawdown strategy. For example, some taxpayers may be well advised to run counter to the conventional advice of allowing their traditional retirement accounts to grow as long as possible before beginning withdrawals. For those with other sources of significant retirement income, the RMDs required from traditional accounts that have enjoyed years of non-taxed growth may actually launch them into a much higher marginal tax bracket. For these persons, it may make sense to begin drawing down their traditional accounts earlier, even before they are required to (as long as they are past age 59 ½, and out of the “early withdrawal penalty” period). By doing so, they may be able to draw down the balances sufficiently to reduce the amounts they will be required to take when reaching RMD age—possibly keeping them out of those higher marginal tax brackets.

As you can see, there’s a lot to consider for those in their 70s. At Milestone Money, we specialize in helping successful retirees design tax-efficient strategies for funding their retirement lifestyles. To learn more, visit our website to read our article, “It’s All in the Timing: What to Think about When Claiming Social Security.

What issues should i consider before i retire?

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Life is full of financial milestones. We pay for college, we get married, we start businesses. But the most important financial decision we will ever make is when and how to retire. Milestone Money helps you map success to and through retirement.

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