The Two Sides of Retirement: Financial and Non-Financial

 Earlier this year, I viewed two very different webinars about retirement. They were actually scheduled at the same time so I recorded one while I watched the other so I could view both.  One webinar sponsored by The American College of Financial Services covered financial topics such as income taxes, required minimum distributions (RMDs), qualified charitable distributions (QCDs), and income-related monthly adjusted amount (IRMAA) Medicare premium surcharges.

The second webinar by Retirement Researcher described six stages of retirement and a host of non-financial considerations. The remainder of this post will summarize key take-aways from each of the two webinars, many of which are also discussed in my book, Flipping a Switch.

Financial Planning Take-Aways

 

¨     Tax Deferral ≠ Tax-Free- RMDS must begin at age 72 and many people start withdrawing retirement savings at this time. However, taxpayers with tax-deferred retirement savings accounts (e.g., 401(k)s, 403(b)s, and traditional IRAs) can begin making penalty-free withdrawals starting at age 59½. The longer people delay RMDs, the more likely their balance will grow, resulting in larger RMD withdrawals in later life that are taxed as ordinary income.

 

¨     Tax Planning is Essential- A webinar speaker noted that taxpayers should always pay taxes at the lowest rate possible. For many taxpayers, that could be now as tax rates are set to increase on 1/1/26 as a result of a sunset provision in the Tax Cuts and Jobs Act. For example, under the TCJA, the 12% tax rate will go back up to 15%, the 22% tax rate up to 25%, and the 25% up to 28%. Many older adults could end up paying much more in taxes soon.

¨     IRMAA Planning Can Help- High-income Medicare beneficiaries with a 2020 modified adjusted gross income (MAGI) income over $91,000 (single) or $182,000 (mfj) pay IRMAA surcharges in 2022. This is because there is a two-year look-back period. The take-away is to try to avoid pushing MAGI above the IRMAA income thresholds. Even $1 of income over five IRMAA breakpoints can cost hundreds or thousands of dollars in extra Medicare costs.

¨     Controlling MAGI- MAGI is the trigger for many extra taxes including IRMA surcharges and taxes on Social Security benefits and net investment income tax (NIIT). Taxable traditional IRA distributions (such as those made for a Roth IRA conversion) and RMD withdrawals increase income and MAGI, which can increase taxes. A qualified charitable distribution (QCD) from a traditional IRA keeps income out of MAGI. Taxpayers must be age 70½ to qualify for a QCD. Planning ahead is key. For example, a taxable Roth IRA conversion at age 63 could increase MAGI enough to trigger IRMAA at age 65.

 

Non-Financial Take-Aways

 

¨     Life Planning is Essential- The webinar speaker, Dan Veto,  noted that many people “just show up” for their first day of retirement with very little advance planning on the non-financial side. Unlike meetings that last 1-2 hours, weddings (a day or weekend), vacations (1-2 weeks), and higher education (4-5 years), retirement can last decades and many people fail to plan. Planning helps reduce uncertainty and increases the likelihood of a desired outcome.

 

¨     Life Expectancy Realities- In 1935, someone who lived to age 65 had a life expectancy of six years. In 2018, a 65-year old’s life expectancy almost tripled to 17 years and, for some, could be 25 or 35 years. That is a lot of free time to fill and to keep busy and engaged. Some people thrive with new-found freedom in retirement while others struggle.

¨     Stages of Retirement- Just like there are nuances between tweens at age 11 and teens starting at age 13, there are differences among older adults as they progress through their 60s, 70s, 80s, and beyond. Seven stages were described:

o   Euphoria!- A short “Every day is Saturday” and “Freedom from…” phase that usually last months, not years.

o   What, That’s It?- When completely unstructured time becomes unfulfilling and boredom sets in.

o   Re-Engagement-Where people feel a sense of accomplishment through a portfolio of meaningful activities.

o   Grandparenthood- When older adults with grandchildren have a new center of attention for their family.

o   Care-Giving- When care-giving for a spouse or loved one becomes an increasing focus of one’s time.

o   Widowhood- The most stressful life-changing event where married older adults must “copilot” life alone.

o   Decline- Increasing physical or mental impairment that can last weeks, months, or years.

 

There are a lot of “moving parts” in planning your life “to retirement” and then “through retirement.” 

The key to success is planning for both areas of later life, the financial side and non-financials such as daily activities and physical health.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.