Some quick brain dumps for some do and don’t that I learned as part of my recent retirement planning.
Do plan long term wants and major purchases and loans
Take the time to consider major purchases and spending to improve quality of life. Perhaps that major kitchen remodel or backyard upgrade? A new car every once in a while. Don’t focus on regular and expected expenses.
Do diversify sources of income and taxation characteristics
Single source of income is not ideal while working. It’s arguably even more risky during retirement. Don’t focus on social security and bonds.
Do make plans to reduce concentrated stock holding
As a tech person, a significant portion of my investment is in my company's stock. Along with my various ETF that hold the same company, I have an uncomfortably concentrated position in a few stocks. I have the opportunity to generate income with covered calls options while making plans to tax efficiently diversify.
Do plan for medical cost before 65 and after 65 with Medicare
Whether retirement is voluntary or forced, I need to make plans for retirement before Medicare is available. Even with Medicare, there are additional options and IRMAA (income-related monthly adjustment amount) for consideration.
Do plan for long term care cost
While the longevity age is only a guess, it’s quite possible that the last 2 to 5 years of one’s life would need more living assistance. I don’t want to burden my loved ones with that responsibility.
Do plan for legacy endowment and avoid the risk of 40% estate tax
I’m allergic to paying taxes that can be avoided with thoughtful planning. When I learned about 40% federal estate tax, I made plans to ensure that I don’t reach that level or ensure that I have tax-free means to pay the estate tax. It’s one less burden to impose on my loved ones.
Don’t optimize for the lower tax paid
Instead, optimize for tax efficiency with target tax bracket. Tax saving is an annual event, but selling investments that compound is a loss of future money. During retirement it is better to let my investment grow as much as possible for as long as possible.
Don’t aggressively perform Roth IRA conversion
Instead convert just enough to avoid future higher tax rate bracket. Don’t assume my future tax rate is lower than my current tax rate. If the tax rate is the same, there is NO reason to convert. I will never recover the lost money on the tax I paid for the conversion if my future tax rate is the same. I plan for early pre-tax retirement accounts withdrawal before 72 and avoid excessive requirement minimum distribution and impact to my tax bracket and Medicare cost.
Don’t do early Roth IRA conversion for inherited IRA
Instead use late stage conversion to enable 10 year withdrawal period. It’s probably safer for me to assume my adult kids will have the same tax rate as me. There is only a bit of tax benefit to allow inherited IRA to be withdrawn over 10 years instead of my RMD schedule. So at 92 years old, the mandatory distribution period of 10.8 years is about the break even point for Roth IRA conversion to increase distribution period.
What are your tips and lessons learned during your retirement planning?
Ricky
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