Key Takeaways
Many clients have trouble letting go of their work personas as it can mean a loss of identity and purpose.
Freelance and consulting work can help fill the void for those not ready to retire.
Everyone’s “glide path” into retirement is different. Focus on what’s most important to you and don’t stress about things you can’t control.
When reviewing sources of income to support your early retirement years, always have tax efficiency in mind.
When it comes to reaching our financial and life goals, we rarely follow a straight-line trajectory. Between the markets, our health, job changes, and relationships with spouses and family members, there are many ups and downs along the way. Since we can’t predict when most of these speed bumps (and triumphs) will occur, it’s best to keep the big picture in mind and focus on controlling what we can control.
For instance, we can't control the market, but we can control other aspects of our financial and life plans. Couples frequently come to us asking: "How can we save money on taxes?" Although we are not tax professionals, this is an appropriate question for your financial professional. There are many strategies that can be used to reduce income tax from your investment portfolio and distribution planning when you need to replace your paycheck in semi or full retirement. We pride ourselves on our knowledge and ability to provide tax planning recommendations that align with our clients’ big-picture objectives to help them save money at all stages of life. We also help them redeploy those savings optimally into other “buckets” of their plan.
Big Picture
This is the time of year when many folks are not only thinking about tax planning but cash flow planning and large-ticket summer travel itineraries. We can help with each of these areas, and we’ve found it’s useful to consult us about the big picture first, before reaching out to your CPA, bookkeeper, and travel agent for specific advice.
Take Roth conversions, which ideally are executed when clients retire and presumably have lower incomes. A Roth conversion can also be beneficial if you have an unusually low-income year during your working years. I recently worked with a couple to execute a conversion of their traditional IRA to a Roth IRA during the first year that their income was lower. This move will save them over $500,000 in taxes over their lifetime. The large tax savings will then be used to improve other areas of their plan and they are thrilled with the potential.
Another couple came to us recently after the husband, the primary income earner, had just retired. It was a transition period for them, and we helped them construct a cash flow and spending plan to support them in this new stage of life. While reviewing different sources of income, we learned the husband was doing creative freelance work that he enjoyed. It didn’t pay the same as his stressful executive position, but it was not a trivial amount of income. More importantly, he found the work very fulfilling. Like many early retirees who came from high-powered professional jobs, he wasn’t ready to exit the workforce entirely, primarily for psychological reasons. In many cases, consulting or freelance work can be a smart transition phase if you’re in good health. The extra income is nice, your brain stays sharp, you stay connected to colleagues, and your system won’t be shocked by suddenly going from a sixty-hour work week to a zero hour work week.
As part of the couple’s income replacement plan, we advised them first to take withdrawals from cash savings and checking accounts (where the husband’s freelance income also went), which would have minimal tax consequences. Then we advised them to draw down taxable investments since their income/tax bracket was lower than during their working years. Like many successful couples in their 50s and early 60s, the couple was too young for Medicare and wasn’t yet required to take minimum distributions from their retirement accounts. We also encouraged them to avoid taking Social Security early since each year they delayed until age 70 would give them an effective 8% raise on their benefits.
In addition to executing a Roth conversion for the couple, we also reviewed their life insurance and other coverages that weren’t as necessary at this stage of life and we helped them reduce their spending on premiums. Again, it’s all about seeing the big picture and redeploying those savings into other tax-advantaged areas of their post-working lives which a wealth advisor is best equipped to see.
We have many clients from the academic world, in which working into one’s late 60s or early 70s is not uncommon. If they’re in good health, still find the work stimulating, and get energized from being around bright young people, we strongly encourage them to keep working. We have a lot of experience putting together financial and life plans for clients who wish to keep working well past the traditional retirement age. But in other cases, we can see the stress some clients face from their demanding careers or businesses they run. We help them see the wisdom of exiting from the workforce while they’re still healthy enough to enjoy life. Several factors, including cash flow, taxes, and emotional aspects, influence the situation, not solely investment consideration.
No Cookie-Cutter Approach
Everyone’s on a different “glide path” to retirement. Some folks can’t wait to sit on a hammock, play a little golf, and catch up on their reading. Others know they’ll go crazy unless they’re sitting on multiple boards, traveling around the world, and working out at the gym or tennis court every day.
Another client has put her retirement date on hold half a dozen times since we started working with her. Something about the word “retirement” terrifies her. Although we have looked over her finances multiple times, hoping to reassure her that she has more than enough money to live a fulfilling life without fear of running out of money, the numbers on a page are not a compelling enough reason for her to retire. She doesn't want to leave the department she worked so hard to build at her employer. She feels that if she retired, she’d be abandoning her team and her organization. Knowing she’ll never be comfortable leaving the workforce cold turkey, we’ve helped her put a plan together so she can cut back her work hours and still teach and consult in her field. I think she’s starting to gravitate toward that option, but we’ll see how it goes.
Conclusion
If you or someone close to you has concerns about the right time to retire, reach out any time. I’m happy to assist. It’s all part of our holistic, comprehensive planning process.
BRENDEN LEESE, CFP® is an Associate Wealth Advisor at Novi Wealth Partners