What to Do in the Year Before Retirement Part 1

The decisions you make in the year before retirement regarding your retirement accounts, pensions, Social Security, and other retirement resources may impact you for the rest of your life. The following tips and considerations can help with those decisions.

Make certain you can afford to retire on your planned date.

Have you saved enough to afford the retirement you envision? It’s time to double check. Start by estimating how much you may spend annually in retirement. Then add up the predictable income you expect to receive annually in retirement. This typically includes income from Social Security, pensions, and annuities. Add that number to the amount you can withdraw from our savings and investments each year without taking too great a risk that you will deplete your savings prematurely. Is the resulting amount enough to cover your annual expenses?

Estimate how much money you can safely withdraw each year.

To help minimize the chance of depleting your savings prematurely, it is important to estimate how much money you may be able to withdraw each year and still stand a good chance of your savings lasting your lifetime.

One rule of thumb suggests that retirees who withdraw 4% of their savings in the first year of retirement and then increase the annual withdrawal amount by the inflation rate each year have a strong chance for their nest egg lasting 30 years. Keep in mind that 4% is simply a rough guideline. The percentage was determined a few decades ago based on historical data and generally using a 50/50 mix of stocks and bonds.

Depending on your investment mix, the number of years you expect to be in retirement, and other factors, it may be a good idea to use a slightly different withdrawal rate.

It can also help to stay flexible. If a steep drop in the market reduces the value of your portfolio significantly, decreasing your withdrawal amount for a year or two may help your retirement savings last your lifetime.

Develop a tax-minimizing withdrawal strategy.

By the time you retire, your retirement savings may be spread across a variety of financial accounts, such as taxable bank and brokerage accounts, tax-deferred retirement accounts, and tax-free Roth retirement accounts. Because taxable, tax-deferred, and tax-free accounts are subject to different tax treatments, withdrawals from each type of account will impact your taxes differently. So how should you tap your accounts to minimize your overall taxes in retirement?

Conventional wisdom suggests that withdrawals should be made from taxable accounts first, followed by tax-deferred accounts, and finally tax-free Roth accounts. The reasoning behind this sequence is that it allows tax-favored accounts to potentially compound for as long as possible.

However, your goals or situation may be different, and this sequence may not work for you. For assistance in developing a tax minimizing withdrawal strategy or planning in your last year before retirement, consult with us. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty, we look for facts. We call our approach evidence-based investing. Call us today at 877-974-5341 to schedule a strategy session and begin building your road map to financial success.

For more tips on what to do in the year before retirement, check out Part 2 and Part 3 of the series!  

Article published in January 2021 edition of Eye on Money. If you would like to be added to our mail list please email jennifer@dh-cpa.com.