From Retirement Now Newsletter November 4th, 2021

I came across a short and sweet article that listed out some common mistakes people make in their retirement finances. I thought you’d find it helpful for your own retirement to try and avoid these. And I include some of my thoughts on these below.

The article is from Kiplinger titled “You Are Probably Making at Least 1 of These 4 Retirement Mistakes

1 Deferring Taxes – Contributing to a traditional IRA or 401k allows you to defer taxes, which reduces the tax bill you pay in the present. But those taxes eventually come due. That’s why you may want to consider Roth IRA or Roth 401k options. You don’t defer the tax in the present, but they are tax free in the future.

[For those already retired you can’t make contributions to a Roth IRA or traditional IRA unless you have earned wages for the year. That’s why the Roth IRA can be utilized for retirees by converting existing traditional IRA’s to Roth. You pay the tax when you convert, but whatever your Roth grows to will be tax free.]

2 Neglecting year-end planning – Taxes filing is due on April 15th. But a lot of tax moves need to be done before 12/31. The article mentions lumping charitable donations as one strategy. Since the standard deduction is so large now, most people don’t get to itemize their charitable donations. But if you give enough to charity you may could deduct it if it exceeds the standard deduction. One way to help do this is by lumping them into one year. You could give on January 1st of the year, and then give again on December 31st for example. Those donations may be a year apart, but they both count in the same tax year. And if they are large enough it may be greater than the standard deduction, allowing you to deduct more from your taxable income.

Another strategy mentioned is tax-loss harvesting. This is done on non-qualified accounts (i.e. not your IRA or Roth IRA). You sell some positions that are currently at a loss in order to offset some gains you made from sale of other positions you sold at a profit.

3 Ignoring long-term care and health care costs – Healthcare costs may be higher than people realize. One study estimated over $300k over a retirement. The article mentions Medicare Advantage Plans to help with this cost. Also, long-term care may be available from annuities that include LTC benefits, or even some life insurance policies that will cover LTC.

4 Failing to plan your free time – Eventually you get tired of golfing and watching TV. Be sure to find ways to add meaning to your retirement. Your life still needs purpose.

My thoughts…

Deferring taxes may be a good or bad thing depending on the situation. Typically, when working it is good to get tax deferral because you are probably in a higher marginal tax bracket. And when you retire your tax bracket typically goes down.

So tax deferral is not necessarily a bad thing.

It does need to be balance out with how you feel future tax rates will go. Will they be higher or lower? And having some tax diversification (having some Roth IRAs and some traditional IRA) can also be a good thing.

As for number 2 above, year end planning is super important. Especially for retirees in lower tax brackets with IRA’s. They may could take advantage of filling up their lower tax brackets through Roth conversions, for example.

Concerning healthcare costs, the article mentioned Medicare Advantage Plans. These can be very helpful. You do have to make sure your doctors are in network. And the networks can change each year as some doctors may decide not to accept certain plans in the following year. This may cause you to shop around your Medicare Advantage Plan every year.

If you’re ok with that then they can be a good option.

With a Medicare Supplement they don’t have networks, so you have much more availability on which providers to see. You will have to pay a monthly premium for a Supplement, but it may be worth it to you.

Something to think about.

And the last point above about failing to plan for your free time…

Really important. I’d recommend Fritz Gilbert’s book “Keys to a Successful Retirement” especially Chapter 5 titled “Embracing Passion to Create Your Ideal Retirement” to get some ideas on how to achieve this.

If you need help with your retirement you are invited to click here and pick a time to chat with me.