Because of the pandemic, many companies are trying to rapidly reduce their workforces. Boeing recently offered their voluntary layoff (VLO) to encourage employees near retirement to do so. Other companies will resort to traditional layoffs.
What should you do when you find yourself unexpectedly retired—whether voluntarily or not?
Assess the Situation—Review Your Numbers
Retirement is a major life change for everyone—even more so when it happens unexpectedly. The first step financially is to get a clear picture of your assets. This includes investment accounts and savings. It also includes debts like credit cards and mortgages. In addition, you’ll want to identify current or future sources of income such as pensions or Social Security.
Next, you’ll want to be clear about how much you’re spending. Free or low-cost tools like mint or YNAB can help you easily track how much you’re spending as well as categorize your expenses. That may make it easier to see if there are ways to reduce costs, if needed.
Knowing your minimum monthly costs is a major part of determining if you have the resources to retire successfully or if you need to find another way to work and earn money before retirement.
If you’re unexpectedly retired, identify if you need to reduce your expenses. Some of those reductions may happen automatically—most families aren’t spending as much on travel right now—while other reductions may require more planning.
You’ll want to account for healthcare costs. For some, employers may continue to provide health coverage until Medicare begins at age 65. For others, health insurance will have to be purchased either through COBRA to maintain the current health insurance or through the individual markets. These policies can cost significantly more than when the employee was working, although by carefully structuring income, it may be possible to get subsidies to reduce this cost.
Identify if you need additional sources of income. This may come from part-time employment. It may also come from reviewing your Social Security strategy. Social Security benefits can begin as early as age 62, although doing so will permanently reduce your benefit. Take time to compare the tradeoffs of starting your Social Security benefit at different ages.
Finally, review your investment allocation. You’ll want to make sure you have an appropriate percentage providing stability (cash, CDs, short-term bonds) to protect you from the fluctuation of the market when you need the money. With a retirement period of 30 years or more, stocks will likely be an important part of your investment strategy, too.
Do Some Tax Planning
It’s important to identify what mix of accounts you have. IRA, Roth, and taxable accounts are all taxed differently. It’s often best to spend from the taxable account first, then the IRA, and save Roth accounts for last, although there may be times where it’s better to use a mix from different types of accounts each year.
Many early retirees temporarily find themselves in a lower tax bracket because they don’t have a salary and they haven’t yet started Social Security. This may be a time to take advantage of Roth conversions. Moving money from a traditional retirement account to a Roth account now, while you’re in a lower tax bracket, can significantly reduce taxes over your lifetime.
Planning Beyond Money
When a major change like this occurs, it’s important to take care of your finances. It’s also important to take care of your mental health. Retirees often have years to plan for this major life change. Because of the pandemic, many are making this change suddenly and unexpectedly.
It’s essential to take the time to set a new routine and identify new hobbies or other activities to incorporate into your life.
When retirement is unexpected, it doesn’t have to be scary. Building a financial plan to determine if you’re on track to meeting your goals, to discern what adjustments should be made to help you reach those goals, then to execute that plan can help provide the peace of mind brought about by a successful retirement—even when it comes sooner than expected. If you want help with this process, reach out to us.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.
Now we’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our first of six installments on charitable giving.
In my estate plan, I’m planning to leave some of my assets to charity. What should I be mindful of with the passage of the SECURE Act?
Perhaps the largest consideration is which assets the charitable donation should be made from. While IRAs and other traditional retirement accounts have always been a good choice, the SECURE Act increases the value of using these accounts for charitable giving.
For an individual with traditional retirement accounts, Roth accounts, and taxable assets outside a retirement account wanting to give to charity from their estate, the preference would be:
Traditional IRA: Make charitable donations from here. Even if only part of the account is gifted to charity, the decreased remaining balance will reduce the taxable income the beneficiary realizes each year.
Roth IRA: Leave these to individuals instead of charities. Even though Roth IRAs still have annual RMD, the income removed from a Roth account will not be taxable for the beneficiary.
Taxable Accounts: Individuals should be preferred over charities. There is no requirement to take income in a given year, and the beneficiary likely received a step-up in cost basis, minimizing the tax impact when used.
If your goal is to both leave money to charity and create an annual stream of income for a beneficiary that lasts longer than the 10-year rule for new inherited IRAs, a charitable remainder trust may accomplish these goals.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
Chris: I was initially hired as an associate advisor in 2014. I was still doing my CFP studies at the time, so being able to do advisory work concurrently with my studies really prepared me for the financial advisor role at Merriman. I completed the CFP course and became a financial advisor about two years ago and started to manage my own clients. Besides being a financial advisor, I also manage the associate advisors. It’s nice to see the initial group of advisors I first managed in this role are now wealth advisors or have moved on to different roles within Merriman. I’m currently managing a new group of associate advisors at Merriman. They’re still relatively new, and it’s a lot of fun to guide and mentor them.
Renske: What do you love about your job?
Chris: I love my coworkers, and I like the regular client interaction and the feeling I get knowing we’re making a big difference in people’s lives. I love that I never feel bad in the morning going to work. I’ve experienced that in previous jobs, but right now, when I wake up, it’s always a positive feeling. The thing I love the most about my job is figuring out how to solve complex problems for my clients through research, inquiring, and working with my co-workers. It’s really cool to learn more — especially about problems I don’t know the solutions to initially — and then go back to inform and implement the solutions for my clients.
Renske: Tell me a little bit more about your family life.
Chris: I am originally from the Kansas City area, and so is my wife, Katharina. We’ve been married for 12 years. She is a veterinarian. She used to work for the army as a vet, which had us living in South Korea for a few years. Once she quit working for the army, we moved to Washington. We are the proud parents of 2 daughters. Samantha is three and Evelyn just turned one. We’re very outdoorsy and love to go on hikes, take backpacking and camping trips, and go bike riding. My three-year-old is now able to cycle by herself and joins me when I go for a run, which is a ton of fun. We don’t have any pets at the moment. We always had cats and dogs, but since our last dog passed away, we promised each other to not get any more pets until the kids are a little older.
Renske: What’s your ideal date night?
Chris: Ooh my! I have not seen a single movie in 2018 from beginning to end! Before we had kids, we used to go to see plays and musicals fairly often. We’re hoping that soon we’ll have some more time and energy to go out on dates together again.
Tax documents are arriving and it’s time to get organized. This is the first year that incorporates changes from the Tax Cuts and Jobs Act passed in December 2017. These are some of the biggest changes to the tax code in 30 years. (more…)
As the parent of two young children, college planning is certainly on my mind, even at just 3-years and 6-months-old. While there are multiple options when saving for college, I’ve created 529 plans for my kids, which provide several benefits.
This post examines 529 plans and their benefits, followed by a description of how I’ve chosen to invest my 529 accounts. (more…)
An important part of helping clients achieve their financial goals is helping them navigate questions and decisions around Social Security and Medicare. Whether it’s deciding when to start Social Security or applying for supplemental Medicare coverage, these decisions have a big impact on your financial situation and wellbeing.
This book is broken up into two parts, as Social Security and Medicare are complex topics. The first covers Social Security and strategies. The second part covers the ins and outs of Medicare and all its various plans.
We hope you discover strategies and new things that will help you make the best decisions for your situation. As always, we’re here to help and answer any questions you may have.