Retirement planning decisions are often accompanied by legitimate fears: running out of money; deciding when to pack it in; and deciphering the alphabet soup of IRS rules (RMDs, Social Security claiming; how to manage a nest-egg so money can last over several decades. How do we coordinate all that? anyone? … anyone? ….. Buehler? Buehler?……Buehler?
Retirement planning can be complicated – Let’s break it down into plain English. I’ll try to keep it light to help the medicine go down. By the time you finish this, you may have the framework to reduce worrying, hopefully start planning, and maybe even sleeping better at night. Stress comes from not having answers – or even a plan. So, it shouldn’t be hard to guess how to limit stress.
There are three basic fears many pre-retirees face:
Fear #1: Running Out of Money
This is the big one. According to a recent study, nearly three-quarters of pre-retirees worry about this and 60% feel overwhelmed by all the decisions. And, believe it or not, even those considered wealthy have the same concerns simply because their living standard consumes more of their liquid wealth.
If retirement were golf, this is a 200-yard water hazard smack in the middle of the fairway. Nobody wants to outlive their income. The good news? You don’t have to.
A smart retirement income plan isn’t about living on a strict budget that feels like you’re back in college eating ramen noodles. It’s about creating different streams of income that can last. The usual contributors:
- Social Security: Your base paycheck for life. The longer you wait to claim (up to age 70), the bigger the check. Those thinking of retiring earlier usually worry about whether they should claim early (to avoid tapping their retirement plan), or whether to wait on claiming and tap into their retirement plan early. And, there are issues many miss. Naturally, Uncle Sam’s take on al this becomes an issue, too.
- Pensions (if you’re one of the lucky ones still holding a golden ticket): Steady, predictable income. Few people have this option these days; but, outside of government pensions, I don’t know of a single private company plan that offers cost of living increases. That means that whatever the size of your pension income, it will buy 29% less in just ten years if inflation averages 3.5%. To put that into dollars, it means $5,000 will purchase only $3,544 worth of goods and services. And, of course, it’s taxable. Do you know what tax rates will be?
- Investment accounts: The flexible players. This is where your 401(k), IRA, and brokerage accounts come in. The problem, as I’ve discussed before, is the SECURE Act – which does more to secure the government than your heirs. Children or grandchildren inheriting any of these accounts will have to liquidate them in ten years. Do the math: what age will they likely be? Will they be in their highest earning years? Add these inheritances to their income and Uncle Sam might well have a big pay day!
The trick is having a strategy for the location of assets that combines these sources in a way that provides both stability and flexibility. Your golf bag has 14 clubs. One club won’t do the job. And, it helps to have a game plan. Same goes for retirement. A portfolio balanced for both growth and income gives you shots at the green while strategizing for taxes still keeping you out of the sand traps.
Fear #2: When to Retire (a.k.a. “Is Now a Bad Time?”)
Inflation is like that playing partner who talks during your backswing— always annoying, distracting, and showing up uninvited. Add in market volatility, and no wonder people are pushing off retirement. “Waiting until things settle down” never (NEVER) works. Recent surveys show nearly a quarter of pre-retirees are delaying retirement simply because they don’t feel confident. Problem is they’ll never feel confident.
Here’s the truth: there’s never a “perfect” time to retire. Waiting for the market to settle down is like waiting for Southern California rush hour traffic to magically disappear—it’s not happening. The stock market is always somewhere between slightly jittery and downright dramatic. If it was predictable, everyone would be wealthy and there would be nothing special about Warren Buffett.
Instead, the decision of when to retire comes down to one thing: does your plan work in bad times as well as good? Have you back-tested it against the crash of 1987, the melt-down of 2008-9? The Great Depression? Knowing your downside exposure can help you tweak your strategy and reduce anxiety when (not ‘if’) bad things happen.
“The only thing that surprises me is that we are surprised when surprise happens.”
– Donald Rumsfeld, former Secretary of Defense, Known and Unknown.
A retirement strategy that succeeds only if inflation drops or the market soars is like a golf swing that works only if the wind is blowing at exactly 7 mph from the west. Still waiting.
So how do you retire in uncertain times? By building resilience and a small measure of predictability into your retirement planning. You want your plan to address concerns and help reduce downside surprises:
- Inflation protection: Investments for long-term growth so your income keeps pace with rising costs over time.
- Cash reserves: Keeping a cushion so you don’t have to sell investments at a bad time.
- Flexibility: Knowing what expenses are fixed and what can be adjusted if needed.
- Tax optimization: Locating assets in a way that preserve value for you and your family, instead of Uncle Sam – see below.
To put it simply: you don’t retire when the economy looks calm—you retire when your plan is sturdy enough to laugh at the economy’s mood swings.
Fear #3: The IRS Rulebook (a.k.a. “I Need a Decoder Ring”)
Required Minimum Distributions (RMDs) and tax rules around withdrawals make most people’s heads spin. It’s like being handed the rulebook to cricket—like that helps.
Here’s the cheat sheet:
- RMDs: The IRS requires you to start pulling money out of tax-deferred accounts (like traditional IRAs and 401(k)s) starting in your early 70s. Required minimum distributions are required because they want their tax revenue, whether you need the money or not.
- Taxes: Withdrawals from these accounts count as income, which can bump you into higher tax brackets. It can also affect how much of your Social Security is taxable and even increase Medicare premiums. And, as noted earlier, children and grandchildren inheriting have to liquidate their inherited IRAs in ten years. Anyone want to guess what tax rates will be ten years after they inherit? Anyone? Buehler? Buehler? ….. Buehler? Hmmm.
- Strategy matters: Without planning, you could end up paying more in taxes during retirement than when you were working. I would spend time explaining this, but you’ve endured enough.
Roth conversions, careful timing of withdrawals, and smart tax planning can turn a potential disaster into an opportunity. It’s good to have a caddie – experience and guidance can often make a difference. Be the ball.
Why These Three Fears Are Connected
Running out of money, knowing when to retire, and understanding withdrawals aren’t separate issues. They’re three sides of the same triangle (I say that because a coin has only two sides).
Your income plan, your retirement date, and your tax strategy all influence one another. For example:
- Retire too early without inflation protection, and you risk outliving your money. I’ve never seen anyone list this as a goal.
- Delay Social Security too long without a solid income bridge, and you stress cash flow. It’s good to run alternate scenarios.
- Ignore tax planning, and you hand over too much to Uncle Sam, draining your nest egg faster. He’s a partner in your retirement – and some partner: he writes the rules unilaterally and you have to live with his decisions.
Good retirement planning doesn’t treat these in silos—it brings them together. Done right, your retirement income lasts longer, your timing feels less like a gamble, and you pay fewer taxes over your lifetime. Hmmm. Tough decision.
The Bottom Line
Retirement doesn’t have to be a constant panic attack. The antidote to fear is a plan: one that blends dependable income, cushions against inflation, and choreographs withdrawals in a tax-smart way. With that in place, you can spend less time stressing over IRS acronyms and market headlines, and more time focusing on what really matters—like lowering your golf handicap, spoiling the grandkids, or finally learning how to make sourdough bread.
Ready to Retire? Ask Yourself These 5 Questions
Here’s your quick checklist. If you can answer “yes” to these, you’re on solid footing:
- Do I know how much I need each month? How about ten or fifteen years from now —and will I have reliable income sources to cover it?
- Have I stress-tested my plan for inflation and market downturns? How about under a different tax regime after ten or fifteen years of inflation?
- Do I know the best time for me to claim Social Security?
- Do I have a tax strategy for my withdrawals and RMDs? Do I have a strategy for transferring these assets to my children and/or grandchildren without the ten-year RMD requirement and with little or no tax issues?
- Have I thought about the non-financial side of retirement—what I’ll do with my time? What will you do and is this factored into your current plan?
If you don’t feel fully confident about your answers, it’s not the end of the world. You’ve already made progress just identifying some key issues! How do you eat an elephant? One bite at a time. Here’s how to get started: get started.
Enjoy!
Jim
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