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  • Writer's pictureRyan A. Dunn, CFP®

Your (Really) Golden Years Between Retirement and RMDs

Updated: Jun 13, 2022

“It’s paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesn’t appeal to anyone.” -- Andy Rooney

Key Takeaways

  • Without having to take Social Security or Required Minimum Distributions (RMDs) in your 60s, you have lots of options when it comes to maximizing tax benefits.

  • With income lower, now can be an ideal time to harvest gains, convert to a Roth IRA and live well on the cash you have accumulated through years of hard work.

  • Take advantage of your newfound free time, lower tax rates and unlimited horizons for travel and passions.

Retirement can be a scary transition for many people. After spending the past 30 to 50 years of your life earning a paycheck and building up your nest egg, it’s tough to go from accumulator to de-cumulator overnight.

The New Golden Years

You may not relish the idea of getting older, but that 62-72 age bracket is a sweet spot for maximizing tax benefits if you play your cards right. You don’t have to start taking Social Security (age 70) or required minimum distributions from your retirement accounts (age 72) if you don’t need them.

For decades you’ve most likely had one primary source of income—your paycheck or the profits from your business. Now you have a plethora of potential income sources that you haven’t utilized before—Social Security, 401(k)s, IRAs, perhaps a pension, as well as taxable investment accounts, etc. It’s a dramatic shift.

The most frequently asked question we get from new clients is: “What’s the best way to structure my income streams in retirement and where is that money going to come from?”

My answer: “The answer is different for everyone and a drawdown strategy for one client might not make sense for another. Think of your retirement income as a diversified portfolio of income streams. Each stream has unique tax implications, drawdown rules and timing considerations.” Another frequently asked question we get is: “Do I have enough to retire?” Clients want to live comfortably in retirement, but they aren’t sure how much of their nest egg they can afford to spend each year, or what their life expectancy will be. No one wants to outlive their money; no one wants to go back to work when they are 85 or 90 years old just to make ends meet. Yes, the answer to this question can be complicated, but looking at the big picture makes it manageable.

If you or someone close to you is between the ages of 62 and 72, congrats! You have maximum “income flexibility.” For instance, the longer you can delay Social Security until it’s mandatory at age 70, the greater your benefits will be--about 8% higher each year you can wait. You also have choices about how you want to raise cash from on your taxable accounts so you can keep capital gains low. You can choose when you want to start your pension. Depending on your objectives and circumstances, you can decide how to structure those distributions to take advantage of this income flexibility.

A Roth conversion is one of the most common techniques we recommend for successful early retirees. You can take your money held in a traditional IRA, pay the tax now (since you’re probably in a lower tax bracket) and then convert a portion to a Roth IRA. That way the money continues to grow tax-deferred--and you can take the money out tax-free whenever you’d like since Roth IRAs are not subject to RMDs. With substantially lower taxable income in retirement, many of our clients can do a Roth conversion at a 10% to 12% tax rate—much lower than the 24% to 35% rate they would have paid during their prime working years. That’s a massive tax savings!

Real World Examples Now is also a great time to do some capital gain harvesting. One successful couple we work with had been heavily invested in Coca Cola stock since the 1970s. After 50 years, the value of their Coke shares had grown tremendously and now accounted for a significant portion of their wealth.

The couple feared they would be looking at a huge capital gain tax bill when it finally came time to cash out their large Coke position. During their peak earning years, they would have been paying 15% to 20% tax on their long-term gains. But since their income in early retirement was less than $80,000 a year, their capital gains rate was now zero. That’s right, zero, even though they have a sizeable net worth. Thus, they were able to sell a chunk of stock every year (federal) tax-free. This not only amounted to a huge tax savings but allowed them to rebalance their portfolio more efficiently since they wouldn’t be so “overconcentrated” in Coke stock.

Another couple we work with are both high income earners in their early 60s. After long and successful careers, they've decided that they are ready to retire. A significant portion of their wealth is held in retirement accounts and other liquid assets. Because of the structure of their assets, we worked with them to develop a cashflow plan that will help them meet their goals, maximize Social Security benefits and maximize tax benefits over the next decade. Based on our analysis, this couple will be able to convert close to $1 million to Roth IRAs over the next half dozen years. This will benefit them by reducing their tax bill in later years, lower their RMDs that they'll need to start taking at age 72, provide them tax flexibility in their later years and provide tax-free benefits to their children.

Conclusion These are just a few of the many solutions we have helped our clients utilize to get the most out of their early retirement years. If you or someone close to you has concerns about their retirement readiness, please don’t hesitate to reach out.

“You don’t stop laughing when you grow old, you grow old when you stop laughing.” -- George Bernard Shaw

RYAN A. DUNN, CFP® is an Associate Wealth Manager at Novi Wealth


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