You’ve spent years studying how to “save” for retirement. First, save, and then spend. Averaging of Dollar Costs, rebalancing, and asset allocation.
In the United States, you have contributed to your IRA or employer-sponsored plans, as well as to Social Security. You have increased the value of your home or your business.
This is not a column about my beliefs about how the retirement narrative is changing and how we need to prepare for a world we won’t recognize.
However, as your life season changes, you will need to shift from “saving” to “spending.” When it comes to retirement savings, you must shift from a “pile” to a “payment” mindset.
Two-Pronged Strategy
Moving forward, you must devise an income strategy that addresses liquidity requirements, lifestyle desires, longevity uncertainty, and legacy efficiencies. While we are still in a Covid haze, taking a simple, small step to consider an income strategy for 2022 will empower you.
How Much Is It?
A good way to think about income planning in your retirement years is to ask yourself how much you need for a paycheck and how much you need for a “playcheck?”
Paycheck
You must distinguish between financial needs and desires, and you must address each separately. What are your fixed costs? You have a roof over your head, food on the table, and clothes on your back. Out-of-pocket medical expenses, insurance premiums, and other costs are unavoidable.
Playcheck
There’s also the “playcheck.” What desires do you want to incorporate into your life? Again, some have more than others.
Aligning my clients’ spending choices with their core values is an exercise I take them through. You want to be deliberate with your spending, which is becoming increasingly difficult. Once you’ve determined how much money you’ll need for next year, you’ll want to consider where it will come from.
Where From?
Consider asset buckets containing both financial and human capital. If you are retired (fully or partially) in 2021 and have identified your fixed and variable expenses, the next step is to maximize what you can get out of each bucket.
Financial Capital
Financial capital refers to the assets you have amassed over the course of your life. To name a few, there are retirement accounts, brokerage accounts, home equity, rental real estate, business assets, life insurance cash value, annuities, Social Security, and pensions.
Human Capital
Human capital would include the ability to earn a living in some way. This could include working part-time or participating in the “gig” economy.
How Are They Taxed?
These buckets aren’t all the same! Turning on a spigot from any of these has tax implications.
Income earned from an IRA is taxed as ordinary income. A Roth IRA is a tax-free investment vehicle. Insurance policy cash values can be accessed tax-efficiently. If you sell your primary residence, you can deduct up to $500,000 in gain if you file jointly, or $250,000 if you file separately.
You should think about the tax environment we’re in. We currently have low tax rates. The taxation of these buckets may change as a result of Covid and possible administration changes.
Your Retirement Savings’ Future
What you take and where you get it has an impact on the long-term viability of your assets. It is no longer enough to simply have them; you must also understand how to maximize the income you can derive from them.
Continue to be strategic and intentional, as well as educated and empowered. This gives you the freedom to pursue your passions and fulfill your purpose as you live out this fulfilling time in your life.
