Retirement Stage Two: The Go-Go Stage
by Stan Corey
You’re now ready to explore the next stage: The Go-Go Years. This stage is “go-go” because it’s when you’re most likely your healthiest and most mobile, so you’ll be go-going forward! Or maybe one of your goals is to get into shape so that your Go-Go Years are as vibrant as possible. In either case, during this stage, always focus on what you can do versus what you can’t. After all, life is action, so just keep moving!
The following are client questions and comments I’ve heard that relate to the Go-Go Years:
- Can we really afford to travel and help out the grandkids?
- Do we need to cut back on luxuries?
- Days can be long, and they need to be structured in order for me to feel my best.
- I have more time for reflection and want to spend my days with family and friends.
- Our biggest concern is maintaining our health. Our parents are both in care facilities, and we don’t want to end up like them.
- I do not know how we got anything done before; we’re so busy that I’m more tired now than when I was working!
- Getting involved and having a feeling of purpose can make a big difference in enjoying your retirement life.
- Never stop being passionate and never stop learning.
Do some of these questions and comments reflect how you’re feeling at this stage of your life?
During the Go-Go Years, one of the biggest concerns is running out of money. There are three primary reasons why this anxiety arises. First, retirement may turn out to be more expensive than you had anticipated. Second, you may find you’re in great health and anticipate living longer than you had projected. Third, the income from your retirement investments may be lower than the amounts retirement calculators previously projected.
The best way to reduce the anxiety over the fear of running out of money is to develop a solid distribution plan. Contrary to popular beliefs, the solution is not to focus on receiving the maximum return on your investments, rather, it is to maximize the amount of income from those investments on a net after-tax basis.
While most tax preparers will recommend you withhold taxes from retirement plan distributions to avoid incurring IRS penalties and possible interest, let me suggest an alternative. When taking distributions from your IRAs, whether RMDs or not, consider taking only the net amount needed (in other words, no tax withholding) and paying the taxes from the after-tax accounts. The taxable amount of the distribution will be less, and therefore you’ll reduce the income-tax liability.
Unfortunately, there’s no one-size-fits-all formula because everyone has different needs. With that said, the foundation of a distribution plan is the same for everyone: You must balance income from all sources in such a way that you are able to maximize sustainable income by having a thorough understanding of your income tax and cash flow needs. Skillfully tapping into various income sources is challenging because it requires you to evaluate each different type of income source. Once you’ve taken this step, you then need to determine the income tax liability of your particular pre-tax and after-tax balancing strategy. Last, you must figure out how to maintain the income level you’ll need for your family’s long-term financial security, including the big future unknown, which is our nation’s healthcare system.
For the most part, I believe it’s imperative to build up after-tax accounts in order for the retiree not to be solely dependent upon taxable accounts or taxable distributions. By doing so, you’ll be prepared to make withdrawals from after-tax investment accounts to supplement your other income sources and maintain reserves for unexpected expenses or emergencies. Otherwise, you’ll always be driving through the tax tollbooth in order to access money.
I also recommend maintaining enough of a balance in the cash portion of your liquid portfolio to support the withdrawals for at least twelve to eighteen months, so you can ride out market storms without being forced to sell in a down market.
Timing of Social Security and Distributions from IRAs and Other Income-Producing Assets
I often tell my clients, “If you would only give me your date of death, planning would be much easier!” No doubt, the timing of Social Security and distributions is one of the most important and difficult decisions you’ll make during the Go-Go Years. Proper timing is a critical step to maximize income and minimize taxes. You have multiple variables to con- sider, and the impact of your decisions will have long-term consequences.
In some situations, you may benefit from withdrawing from IRA accounts before reaching age 70-½. This is often the case under several situations: when deferring the start of Social Security, when retiring prior to becoming eligible for full Social Security benefits, or when personal investment accounts are relatively small compared to your pre-tax accounts.
The distribution or withdrawal amount taken at an early age may only be an amount needed to meet your current cash flow needs, and it may not be your RMD amount. Once you have reached age 59-½, you can make withdrawals from IRA accounts without a penalty. There is no required withdrawal minimum or a maximum between ages 59-½ and 70-½. You must weigh this information against the benefit of deferring Social Security or needing income if you have retired earlier.
The bottom line is to find a balance of distributions between pre-tax and after-tax accounts that will give you the best net income and preserve assets for the long term.
Photo credits by military.com and diyhcg.com
Stan Corey has been a Certified Financial Planner Professional (CFP), Chartered Financial Consultant (ChFC), and Certified Private Wealth Advisor (CPWA) for almost 40 years. Though retired from the day-to-day activity of providing financial advisory services, he continues to consult in specialized areas as a financial fiduciary. Stan is a sought-after expert who regularly provides financial commentary at national conferences, in print and online publications, and on TV. He has a reputation for taking complex financial issues and making them understandable to the average person. He likes to say he is a “financial translator.” He has published two books: a novel, “The Divorce Dance,” in 2016, and a non-fiction work, “When Work Becomes Optional,” in 2018. Web site: www.stancorey.com.