Rethinking Your Retirement Plan

When preparing for retirement, there is a natural tendency – enhanced no doubt by online retirement calculators and “magic number” marketing campaigns – to view it as an exercise in accumulating assets. As a result, most people focus their efforts on building a nest egg large enough to fund their imagined retirement.

For those with enough foresight to start planning early, stay disciplined, and fortunate enough to stay on track, building a comfortable retirement can be attainable. However, many find themselves approaching retirement with less than they need — and an overwhelming goal that can feel out of reach.

For a fifty-something couple who have accumulated a couple of hundred thousand dollars in their retirement accounts, learning that they will need $3 million to reach their retirement goals is about as helpful as being told they need to jump over the moon. Because even if they dramatically ramp up the percentage of their income they are saving each month or are fortunate enough to experience above-average investment returns, they still aren’t going to be able to come close to hitting that target.

Rethinking Your Retirement

So, what can you do at this stage of the game? You may be pleasantly surprised to learn there are a number of productive steps you can take. The first, of course, is to acknowledge the obvious – that your original goal – if you ever had one – is out of reach. The second is to understand that, in the real world, a financially successful retirement isn’t about some magic number of dollars as it is about the relationship of your income to your expenses. 

Once you understand and accept this concept, your perspective changes. You focus less on assets and more on income and expenses. This is an important change in mindset because there is much more that can be done late in the retirement planning process to maximize income and control expenses than there is that can be done to accelerate asset accumulation.

Maximizing Retirement Income

One way you may be able to increase your net income in retirement is by moving money from your traditional IRAs to Roth IRAs. It’s important to understand that this is likely to be a taxable transaction, but by paying taxes now, while you’re working and can better afford it, you can put yourself in a position to withdraw your money tax-free in retirement.

Another attractive way to increase your retirement income is delaying your Social Security claim. Many people file at age 62 because they’re unsure how long they’ll live. But if longevity runs in your family, waiting might pay off:

• 62: 70 percent of your Primary Insurance Amount (PIA).
• At your full retirement age (67 for those born after 1960): 100 percent of PIA—about 43 percent more than at 62.
• At age 70: you earn 8 percent per year in Delayed Retirement Credits (up to 24 percent), boosting your monthly check further.

Your PIA stays the same; delaying only changes when and how much you receive each month. Waiting longer not only increases an individual’s benefit but could potentially increase spousal or widow/widower benefits if the spouse had much lower wages or did not participate in a job that paid into Social Security.

It goes without saying that if you can’t afford to retire without Social Security, waiting to claim it will mean working longer than originally planned. That might not be such a bad thing, as it gives you more time to sock away money in a tax-advantaged TSP, 401(k) or IRA.

Reducing Expenses

One of the best and most obvious ways to reduce retirement expenses is by paying off your mortgage before you retire. What was once standard practice for many homeowners is now less common, with as many as 41 percent of retirees with outstanding mortgage debt. If you’re playing catch-up, eliminating a mortgage payment that likely eats up 25 or 30 percent of your monthly income is a helpful way to reduce expenses in retirement.

For anyone unconcerned with estate taxes, another way to lower expenses is by spending the money in your taxable investment accounts first. You don’t have to pay income tax on the funds in tax-qualified accounts like IRAs and 401(k)s until the money is withdrawn, but dividends and capital gains on non-retirement accounts are distributed as taxable income every year. By spending the money in your non-retirement accounts first, you can minimize your total tax bill while allowing the money in your retirement accounts to continue to compound on a tax-deferred basis.

Your Advisor Can Help

Starting to get the idea? There many viable strategies for rethinking your retirement plan. If you’re nearing retirement and don’t feel entirely confident that you’re on track, don’t spend a lot of time fretting over some online calculator. Sit down with your Financial Advisor and discuss what steps you can take to stretch your resources and get the most out of your retirement. 

Download our checklist of tips to help you keep track of new ways to rethink your retirement planning.

Frequently Asked Questions About Planning For Retirement

How Much Should I Have Saved by Retirement?

While benchmarks vary, a common rule of thumb is 8–12 times your annual income by age 67. Online calculators can provide more precise targets, and an experienced financial advisor can tailor advice to fit your unique situation.

When Should I Start Withdrawing from My Retirement Accounts?

You can begin withdrawing from tax-advantaged retirement accounts like IRAs, the TSP and 401(k)s without a tax penalty at age 59 ½ and you must begin making taxable required minimum distributions (RMDs) from traditional (non-Roth) retirement accounts at age 73. But the right time to begin making withdrawals depends, of course, on when you choose to retire and expect to need the income. Planning your withdrawal sequence early can reduce your tax burden and extend your savings.

What Is the Difference Between a Traditional IRA and a Roth IRA?

Traditional IRAs offer tax-deferred growth, meaning you get to deduct your initial contribution from your taxable income, but will have to pay ordinary income taxes when you begin making withdrawals. Roth IRAs are funded with after-tax dollars, so qualified withdrawals are tax-free, which can be particularly advantageous in retirement.

How Do I Coordinate Social Security with Other Retirement Income?

Delaying Social Security can increase your benefit by up to 8% annually until age 70. A coordinated plan can help balance this delay with income from other sources like military pensions or the TSP.

What Special Benefits are Available for Veterans in Retirement?

Veterans may qualify for a VA pension, healthcare, long-term care support, and education benefits for spouses and children. Be sure to explore your eligibility for programs like TRICARE For Life or Aid & Attendance.

TSP funds have very low administrative and investment expenses, and low expenses can have a positive effect on the rate of return of your investment.

First Command does not provide legal or tax advice, and this article does not contain any legal or tax advice. Any recommendations provided to you in this article are strictly for financial planning purposes only. Should you require legal or tax advice, you should consult with your attorney or tax advisor.