In today's episode Nicholas Olesen, CFP®, CPWA® covers a very important question for those a year or two away from retirement, "What issues do I need to consider before retiring?"
As retirement is something many dream about and countdown the days to, many have not taken the time to think through how much will change financially when they retire. A few key areas covered are:
- Cash flow changes and potential issues
- Health insurance considerations and issues
- Tax planning issues
- Long-term care needs
- Charitable giving strategy
Flowchart referenced during the show: What Issues Should I Consider Before I Retire?
You can find a transcript of today’s show below.
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Transcript from today’s show:
Hi, thanks for joining us on A Wealth Of Advice. My name is Nicholas Olesen, Director of Private Wealth at Kathmere Capital.
What issues do you need to consider before you retire? And what I mean is both on a cashflow health insurance assets, long-term care tax planning side of things.
And then we're going to do a second episode that's really the, the psychological shift into retirement. I know it sounds very interesting or kind of funny, but if you think of it for your entire life, you've been told, Hey, save, save, save, work really hard. And then you can reach retirement. But that transition into retirement is actually much harder for a lot of our clients on a psychological side, not a cashflow side.
It's going from having something that they do every single day to then saying, Hey, what am I going to do with my time? So I'm going to hold that off for a second. Kind of part two of this podcast, but part one, what I want to talk about is really those, those four, five big items that you really should think about.
Make sure you have buttoned up before you. We're going to start on the cashflow side of things. And how is that going to change when you retire? You know, are there new incomes that are coming in? I E a pension, social security, things like that. What about expenses? How is that going to change? You know, I, the joy of talking with the client just.
And they are so looking forward to being able to retire, because one of the things that they've been waiting on is, is taking trips to go visit their grandkids have kind of had to not be as often as they want it. You know, one, it was COVID related. You know, we're recording this in July of 2021. So I think of the past 18 months or so they haven't been able.
As many of the trips that they originally had planned on for health reasons, but now they can go and travel and see things and see people that they have missed out on. So their travel expenses are going to go up drastically, but is that going to continue forever? You need to kind of start planning that.
When you look at receiving a pension, if you have that option really before you retire or as you're kind of doing this plan, and hopefully you've done this years in advance and along the way, which is what is the payout option? You know, we talked about this in a previous conversation or previous podcast on the lump sum versus the monthly distribution side of things.
You need to consider, do I have a payout option that is, you know, for my own life, for, with a spouse, do I have the lump sum option? How does that all work? And then coordinate that strategy with existing social security, life insurance, and a pension, other pensions that you have when you look at it from previous employers, go back through and look at all your retirement.
It's really funny. We had a client who a few years ago had retired. We went through all of their, and I actually just had a conversation with them about all the places they'd worked before. And we found out that they worked at a company that had a pension. They were only there for three years. So they thought, Hey, there's probably nothing there.
Then we actually looked into it. [00:03:00] They had a very small pension, you know, every dollar helps. So why not think of all the places you worked and look back through to see if that pension is still out? Now, if you're retiring early, things you really need to consider is your social security benefits may be reduced if you earn more than around $19,000 and start collecting that before your full retirement age.
And if you earn more than 50,000 in a year, Once you reach your full retirement age, they can still tax that. So you need to consider, you know, where and how you're taking income. Social security benefits are going to be reduced. If you collect it prior to taking it at your full retirement age, it's about 8% per year.
So you can lose 25% of value of taken a few years. Now you can access your 401k penalty free. If you leave your employer in the year, you turn 55 or later, kind of one of the funny caveats of the 401k plan that traditionally you would not be able to touch your retirement plan until 59 and a half. But if you can access your 401k penalty free, which is that 10% penalty for taking it early.
One of the things for government employees are those that have kind of worked at a pension or an employer that did not withhold social security taxes. You need to consider the impact of social security, windfall elimination provision, or the government pension offset. Again, just something to think about if you're in that boat.
Now, if you're married, you should talk it to your spouse and your advisor about differences of taking social security at different strategies. You know, do you both take at the same time, do you take one, do you file and then defer so that somebody else can, you know, you can kind of piggyback on your, in your spouse's social security benefit without touching your own.
If you were previously married and you had been married for 10 years, you actually have the eligibility to benefit from your ex spouse's record. So you just need to look into that, see if it was an option for you so that you can make sure you get the biggest benefit that is there. That's kind of the cashflow side of things.
Again, most of it has to do with what income is coming. When should you take that income or how should you take that income? And then a really good plan around your expense side of things. What is going to change or increase your expense side on the health insurance side? That's really the other one that I think most people think about the most, which is I'm leaving an employer and here in the United States, most health insurance is tied to an employer unless you're going with the kind of marketplace health insurance marketplace.
Now, since you're retiring before age 65, and you need to have health insurance, you are going to be applying through the health insurance marketplace. You might actually qualify, even if you have great assets and everything, you might actually qualify for some tax credits because they limit the amount you can spend on premiums to eight and a half percent of your household income.
So if you know, your household income is only going to show up as you know, $30,000, you might actually get a tax credit pretty substantial. For your premium for the health insurance that you get through the marketplace. Now, for most people retiring, they are going to have to get off of there in supplier sponsored health insurance.
So they are going to go to the marketplace. Some we've had some clients that have actually switched us to covert, to kind of bridge them to 65. Cause they retired right before they turned 65. [00:06:00] And if you're over 65 though, you actually immediately can sign up for Medicare. So just something to keep in mind for most individuals though, they do lose when they retire.
Quote, unquote lose. And it's up to you. If you want to go get it privately vision and dental coverage. For most individuals that we have, that they don't end up getting the insurance coverage for that, because through their employer, it was less expensive than that. On a private side, it's quite expensive to do it.
One thing that we have had some clients do is contribute to an HSA while have on Medicare. And so you need to consider that set up kind of a checklist flow chart, if you will. That, that helps us walk through how you can consider contributing to an HSA while not you know, hurting your Medicare. So this kind of coordination issue that we find some individuals run into.
So I'll throw that in the show notes for you guys to take a look at now. What if your modified adjusted gross income is greater than 180,000 as a marriage? You actually might be subject to Medicare. I R M a surcharges. I was worth working with a client recently, and we were going through their tax return from 2020 and found that they were just a few dollars under having to pay a very large jump in their premium.
It was going to go up. Each individual was going to pay a hundred dollars more in premium. If they had earned a few more dollars in 2020, and. Made us look a lot into detail. This is a client that we are just starting to work with. So we're looking at details of their 20, 21 taxes so far, and we realized that they might have to pay Medicare surcharges in the tune of $2,000 more a year.
If they generate X dollars above where they were previously. And it's literally about a thousand dollars more than what they were previously, just that extra income while it's only going to cost them, you know, call it $200 in taxes. It's going to cost them $2,000 in surcharge premiums. So your Medicare, you know, as some people may not know your Medicare premium.
Is decided or determined, or your surcharge is determined by how much your modified adjusted gross income was for the previous year. So it is really important to keep track of that. You really want to make sure that you, as best of your abilities can try and keep your modified, adjusted, gross income under those numbers.
So you don't hit these, you know, large surcharges and it can go from paying $0 in premium for Medicare to, you know, paying $400 a month in premium, depending on where you fall in your modified, adjusted, gross income. Do keep that in mind when you're looking at health insurance and you're thinking about it, the other side of it, that, that we look a lot.
So that's all the healthcare side. The other side of it on an insurance side is really life insurance. You know, do you need to continue having life insurance like you did when you were employed? You know, a lot of our clients have six or seven times their annual salary on as a life insurance policy when they're working.
And then once they retire, you know, we have the option of buying life insurance privately converting the policy that they had through an employer to a personal. And a lot of times we look at Hey, now that you're no longer working, do we need life insurance for either a replacement of a pension? If you take a single life side [00:09:00] of it or do you need it for estate planning reasons, those are really the only two times that we recommend it.
Or if there's a health reason that we don't, that we believe that, you know, life insurance is going to quote unquote, pay out or be used in a handful of years from now, then it might be another option. So do consider that, you know, have your needs for life insurance changed upon right. The other insurance that we talk about a lot with clients as they are heading into retirement or are retired, which is long-term care.
No. Do you need long-term care insurance, traditional insurance for long-term care? Or are you going to go with the quote unquote self-insurance strategy where you are funding it yourself, just through your own assets and cashflow. And are you going to look into kind of some assisted living communities?
What are the costs involved with that? And if you have life or long-term care insurance already, do you need to review it to make sure it actually meets your needs now that you are walking into. You know, retirement. So things to consider when you're looking at retirement on the healthcare side of things, right?
So the other side that we look at before clients end up retiring, or, or the kind of years leading up to it is making sure they kind of have all their ducks in a row for their assets and their debt issues and not really issues, but just kind of where are you right now? So for some of our retirees, the biggest thing that we are walking away from is stock options, grants, restricted stock.
And, you know, fortunately you got to look at all the plan data. We are fortunate to work with a client right now that is working into a retirement at the end of this year. And because of some situations of the way that their documentation through their employer works is they actually don't lose their RSUs, their options and their.
Because they are entering retirement. So they will still vest over the next three years. They're not going to walk away completely from them. So again, look at your documentation, read your summary plan, document on each of your grants. Make sure that you're not going to be hurt that way. And alternatively, the benefit of that is you're going to have this income.
The downside of that is then you need to be mindful of what is the impact for taxes and cashflow planning in the years where those actually are going to vest or where you're going to sell them. When you also look at it, you need to take a consideration on your investment side. Has your risk tolerance changed?
You know, now that you are living off your assets versus adding to your assets, has your risk tolerance changed? Do you need to change your strategy of how you're going to invest your time? For a lot of our business owners, you know, it's this discussion and this is a, this is a decade before they actually retire.
But what is your exit strategy or succession plan for it? You're obviously not. You're just going to wake up one day and say I'm retiring and not have a strategy or a plan of how that's going. The other side of it that we look at it very rarely does this ever happen, but we've had this happen with a client in the past, which is they had a loan from an employer retirement plan that they had used.
And you just want to make sure that, you know, that make sure you're ready to pay it off. Be mindful that you can't roll that account out to an IRA or start using it until you pay off that loan against your plan. The other side of it, when cashflow related and also asset related that we look at a lot is [00:12:00] deferred comp.
You know, we are fortunate to work with a lot of clients who have these deferred comp plans and it has a certain payout schedule to it that they've elected when they elected to put money into the deferred compensation plan. And. Coordination has to be looked at as far as what other income is coming in that year.
How is that going to impact any pension or social security or anything else that we have, that's outstanding. Make sure that you are taking all of these things into consideration. Again, that's an asset, but it's also an income. So keep that in mind when you're looking at these deferred compensation plans.
And then, you know, hopefully you chose the right things when you put the dollars into the plan years and years ago. We also then want to look at residency. You know, this is actually one that we do a lot of work on with clients. When they talk about, Hey, I'm going to move to a more tax preferred state, or we're working with a client right now who is debating about moving to a state solely for tax reasons.
And so we did a lot of work for them and actually found that the cost of moving, even though it's going to be a much higher income state than where they reside right now, the cost of moving the upkeep, the two residences, the whole thing actually costs more than just paying the. So then it comes down to a lifestyle choice.
Like, are you actually wanting to move it or is this just, you know, because you're trying to save some money on taxes when you look at changing your residency so that we do have a lot of clients who do it now. In retirement, whether to be closer to family, to be better, whether you lower cost of living, you name it, you need to take in consideration that tax side of things, you know, cashflow I E living expenses
And then also the Medicare advantage plan might move you out of where you are. So you might need to change your plan because you've changed your residency. So that, that takes care of kind of some asset that items. As far as taxes go, you know, one of the other things that you gotta be mindful of, and, and this is for those that are in retirement or a little bit later in retirement, which is your required minimum distributions.
I got a lot of clients are, are fortunate to be retiring in their late fifties, early sixties. And so they don't really need to think about this until they're in their young seventies. It's 72, as of. However, what you do want to consider and what a lot of our analysis is around, which is you are going to have this very large required distribution required, minimum distribution.
Once you turn 72, so why not start taking it a little bit earlier to therefore reduce that amount, therefore reduce your tax. So a lot of the considerations for strategies are doing a Roth conversion ahead of an RMD or, or once you reach 70 and a half taking a qualified charitable distribution using your IRA to fund your charities versus using your capitalism big advantages there.
So just something to consider when you're looking at it on the tax side. Then longterm planning goes hand in hand with all of this, which is, you know, do you expect, you know, to have your estate exceed the unused Federalist state and gift tax exclusion way of saying is your state going to be worth more than 11.7 million as an individual or a 23.4 million as a married couple today?
That's actually the [00:15:00] law. Or that is the regulation of what the numbers are. We don't know what that could be in the future. So we have a lot of clients who are taking advantage of the fact that right now it is such a high amount that you can give and not have federal estate or gift taxes do. So we're actually going to start using our lifetime exemptions today for some estate planning.
When you look at it though, do consider, Hey, do I need to update my estate plan? Have things changed. Do I need to change beneficiaries? Make sure those are updated as you're changing your retirement plans or consolidating or moving life insurance or. And then the last one would just kind of some, some fun little ones.
I did. You use all your vacation days, you know, do you want to make sure that you're going to get paid out on that? If you're going to get paid out your vacation days have not used them just to, Hey, why not? And then also just consider, are there any state specific issues, you know, such as unique tax situations you know, or benefits.
So, you know, here in Pennsylvania, retirement benefits Your pension, your 401k distributions, your IRA distributions. They're not taxed as income. You save a whopping 3%, but you do save. So think about those things, you know, when you consider those tax side of things, hopefully this was a good kind of walkthrough of a checklist.
Again, we have a a flow chart checklist for you to go through. I'll, I'll link that in the show notes for a lot of what I talked about today the next podcast we're going to do on this, you know, as you're preparing for retirement conversation is going to be kind of on the psychological side.
For that, but hopefully this took care of kind of some of the big kind of financial issues or thoughts that we have that we want clients to consider before. Right. Hope you found this beneficial. I would love any feedback or thoughts that you have on it or any other topics you'd love us to talk about.
Thanks so much. Have a great day. Take care.
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