When building a retirement plan, consider implementing a five-pillar approach that includes taxes, investments, income, health care and estate planning.
1. Tax planning
Taxes, in my opinion, are the most significant expense for most retirees who have saved up a lot of money in tax-deferred investments (401(k)s and IRAs) over their working years. It is also the least talked about by financial planners. This is an area of focus our firm does not take lightly. Often, we can find ways to save our clients thousands of dollars by being tax-smart and understanding how the tax code can work for you.
What should you do to help ensure you’ve planned appropriately for taxes?
- Take steps to reduce lifetime taxes. That is simply the goal with tax planning. How do you do this? By understanding the opportunities you have at your fingertips. Our firm has a list of 50-plus tax-saving strategies we review with our clients every year.
- Review your tax return. Make sure a financial planner who specializes in tax planning reviews your tax return each year. This allows them to see what you could be missing. It also allows you to better understand how to plan for your remaining years.
- Prepare for required minimum distributions (RMDs). Is it ever good when the government forces you to do something? Well, that’s what happens with RMDs — the government forces you to take money out of your tax-deferred investments. This can be a big issue for people with more significant amounts in their IRAs or 401(k)s. Suppose you have $1 million or more in your tax-deferred investment. In that case, you will want to start planning for RMDs as early as you can. Otherwise, you will face the possibility of increasing your income significantly in retirement, which could cause you to be in higher tax brackets, cause your Social Security to be taxable and increase your Medicare premiums.
- Consider Roth conversions. This is one of the more popular tax planning strategies that many people should be doing right now to take advantage of lower tax rates before they increase in 2026 due to the expiration of the Tax Cuts and Job Act. This is simply the act of moving your tax-deferred investments (IRA, 401(k), etc.) to a tax-free investment (Roth IRA). Just be aware that there are special planning considerations, so ensure you are doing it correctly and not forcing yourself to pay penalties or more taxes than you should.
- Explore charitable giving options. Are you charitable? If so, then do not leave your tax benefits behind. You will want to look at specific strategies, like qualified charitable distributions (QCDs), if you are 70½ or older or a donor-advised fund if you are not yet 70½.
- Lean on tax software, reports and calculators. Building a solid tax plan requires advanced software and expertise to implement these strategies correctly. We always use our tools to run multiple analyses and reports for our clients before making final decisions.
2. Investment planning
With this pillar, the main question we ask people in or near retirement is, “Are you taking on more risk than you need to?” The majority of the time, the answer is yes. Remember, you are now in a different phase of life and do not have the time to make up for a major market downturn.
What should you do to help ensure you’ve planned your investments adequately?
- Seek protection and growth with your hard-earned life savings. To my point above, make sure you have a “plan,” not a “portfolio.” Have a plan to meet your risk tolerance and goals. You do not have the time to risk everything you have worked hard for. And if you have done your work and saved enough money, you also do not need massive returns at this point in your life. In retirement, the idea is to be the turtle, not the hare.
- Eliminate unnecessary fees. Many people who come in to see us are paying way more than they should for advice and investments managed by others. Be aware of larger expense ratios on the funds you invest in. For our clients, we look to invest in things like exchange-traded funds (ETFs), which have lower costs, and individual stocks, which have no cost, so clients pay only us to manage these accounts, rather than paying two fees — one to us and one to the investment company charging the larger internal expenses.
- Consider professional management of your investments. The average investor underperforms the market and may not have the expertise to make smart investment decisions. Work with an expert who can help you maximize returns and minimize risks. As we say, work with the “investment nerds” who do this daily and specialize in it.
3. Income planning
You no longer have a paycheck coming when you’re in retirement — you must create your own.
What should you do to help ensure you’ve planned your income and its use wisely?
- Get a paycheck for life and avoid running out of money. The biggest fear among most retirees is running out of money. The other concern we often hear is how to take the big bag of money you have saved and turn it into a paycheck that will last the rest of your life while considering risks like market volatility, taxes, longevity and inflation.
- Understand your best Social Security options. When should you take it? What is the impact on your taxes and the amount that will stay in your pocket? How do you ensure you and your spouse get the most out of Social Security and maximize what you have worked hard for? A complete Social Security analysis from a professional will allow you to best understand your options and strategies.
- Prepare for inflation. If you need $5,000 per month to live on today, then you will need $10,000 per month to live on in 20 years, if we assume 3% inflation, which is close to the historical average. Ensuring your income plan is set up to give you more as time goes on without the risk of running out of money is extremely important.
4. Health care planning
Health care is one of the bigger concerns in retirement, especially considering the increasing cost and increasing need as retirees live longer without necessarily being healthier.
What should you do to help ensure you’ve planned for your unpredictable health care needs and expenses?
- Understand your Medicare options, Parts A, B, C and D. What does the alphabet soup of Medicare mean to you? You must determine which is the best coverage for you once you reach 65. Most of our clients take Part B, and then we help ensure they get the right supplemental coverage in place.
- Prepare for long-term care expenses. If you have family members who have gone through this, you understand the concern and need for planning. According to Genworth’s Cost of Care Survey, you could pay $100,000 or more a year if you are in need of a nursing home, or more than $50,000 for a nurse to take care of you at home. Considering that 70% of those over age 65 will need long-term care assistance at some point in their lives, are you prepared to pay for this? There are many ways to plan for this possibility, but the key is to have a plan.
- Expect out-of-pocket health care expenses. According to data from Fidelity, the average couple age 65 or older will pay more than $300,000 in health care costs during their retirement. Do you have a plan to have money readily available when you need it most while still enabling growth to keep up with inflation and rising health care costs?
5. Estate planning
Having an estate plan is something everyone says they need but not everyone has. I say this often to express the situation for most people we see. Sadly, only 34% of Americans have an estate plan in place, according to a 2023 Caring.com survey. That means 66% die without an estate plan.
What should you do to help ensure you’ve planned for the disposition of your estate when you’re gone?
- Complete your estate planning documents. In my opinion, everyone 18 and up should have at least the basic estate planning documents in place — things like a will, financial and health care powers of attorney, etc. You should also consider whether you need a trust. Not everyone needs one, but it can be important to have in place for some.
- Prepare for widowhood. It is likely that one spouse will pass away before the other, so we want to ensure you are prepared for that event. Consider this question: Does your spouse have a trusted adviser team to go to if you are no longer here to help make the right decisions? Consolidation is another key point to ensure things are organized in an event like this, so it may be wise to make sure your investments are under one roof for easy access and understanding. Lastly, plan for the widow’s penalty, which occurs when you go from married filing jointly tax status to single status. This change can cause the surviving spouse to pay nearly double the amount in taxes.
- Reduce taxes to beneficiaries. This goes hand-in-hand with the tax planning pillar we have already discussed. Tax planning is important when it comes to estate planning and trying to save money on taxes when transferring wealth to a spouse, children or charities.
Do you have all five pillars in place? If not, request a chat with our team at Peak Retirement Planning, Inc., to make sure you are set up for success.
