Key Financial Milestones in Retirement Video from Savant Wealth Management

Welcome to today’s Savant Live webinar.

Thank you for joining us. My name is Chris Rudy, and I’m a financial advisor in Bloomington, Illinois.

Today, we’re excited to discuss some key milestones in retirement.

There are a lot of dollar amounts, ages, and dates to think about, and we want to make sure you’re aware of all of these different deadlines as you step on the road towards retirement.

Joining me today is fellow financial advisor Libby Maldouni. Libby, good morning, thanks for joining me.

Libby Muldowney

00:01:26

Good morning, Chris. Thank you. Good afternoon, everyone. Thank you for being here. As Chris said, my name is Libby Moldowney. I’m a financial advisor in the Rockford office for Savant Wealth Management. I’ve worked for Savant since 2008, and I’ve been helping individual families and households plan for their retirement since about 2013.

And when most people think about retirement, they’re really thinking about just one big date. What’s that day gonna be when I retire? What age will I stop working?

But in reality, it doesn’t hinge on one date or one age. It’s shaped by a series of financial milestones. And this can create opportunity or costly mistakes, depending on whether or not you know they’re coming.

So for today’s agenda, we’re gonna go through these different milestones. One age may allow you to save more, another may let you access retirement funds earlier than you thought.

Another affects when you claim Social Security, when Medicare begins, when charitable gifting becomes more tax efficient, or when the IRS starts requiring withdrawals out of your accounts.

That’s why this conversation matters, because the biggest risk for most people isn’t just market volatility. It’s making an important financial decision at the wrong time or without understanding all the options, alternatives, and trade-offs.

So today, we’re going to walk through these key areas that can impact your retirement strategy, and more importantly, what those milestones may mean in real life.

So as we go on, I want you to think about one question. Which of these milestones will have the biggest impact on me or my family? Because by the end of today, my goal is that you will leave with more clarity, more confidence, and a better sense of where the real planning opportunities are.

So let’s start here at the age 50, the catch-up contributions.

I’m going to start with a fictional example of a woman named Marcy. She has four daughters. Her daughters are a little bit older. In fact, one of them’s getting married later this summer, one just graduated from college, and the other two are either starting college or well into their college schooling.

At this point, they don’t depend on her quite as much as they’ve become more independent. At the same time, Marcy’s been with her employer for over 10 years. She’s now advanced in her career, she’s been promoted several times, and is in her peak earning years. She has more discretionary income than she ever had before.

She no longer has to support the kids for all of their needs. Now, when she started her retirement planning years ago, it is at a time in her life when she had many competing financial priorities.

She wanted to save for her kids’ college. They wanted to build a home and a family and a life. They wanted to make sure there was enough money so that they could take the kids to dance lessons, and maybe even soccer on the weekends.

So when she sat down to do her retirement planning, she looked at her employer plan 401K, and she was able to calculate that if she put 8% of her income into her 401 , that only reduced her paycheck enough that she was able to put something in the 401 , but she still had enough cash flow.

Well, now, when we’re age 50, she’s looking at retiring at 65 and wants to get more intentional with her retirement planning. So she sits down with a financial advisor.

And the idea here now is to start to be more intentional about retirement savings, rather than just trying to fit it in her budget. So she and her advisor develop a plan of how much money she’s going to need to save between age 50 and 65 so she can retire on time.

Thankfully, the IRS acknowledges that this is a very critical time for retirement planning and allows for catch-up contributions.

I’m going to be talking about both qualified employer plans, such as 401K, 403 , and 457, as well as an IRA, which is an individual retirement account.

Both of these account types have special tax treatment that the IRS allows as an incentive for you to save for retirement.

If you’re saving in a traditional manner, in an IRA or in a 401 , that is tax-deferred, meaning if you earn $100,000 that year, and you put $20,000 into a 401 plan, you only have to pay income tax on $80,000. The $20,000 put into the plan is tax-deferred, and you will have to pay income tax later when you take a distribution.

The income, the earnings, any capital gains, all stays trapped right in that IRA. The only time it’s taxed is when you take a distribution and it is taxed at income tax rates. The idea of tax deferral is, for example, Marcy and her husband both have careers.

They have a dual-income household, are in a very high tax bracket at this point.

So getting a tax deduction is very meaningful for them at this stage, because they’re able to, instead of pay 30-something percent in tax, by both of them contributing to these retirement accounts on a deferred basis, they’re lowering their income, which can lower the rate they pay as well.

You can also contribute on a Roth basis to either one of these qualified plans or an individual retirement account. Not all qualified plans allow for Roth contributions, but it’s becoming more and more common.

A Roth contribution is just the opposite. If you earned $100,000 that year, you pay tax on $100,000 that year. But the money in the Roth, interest, the income, and any capital gains, is all trapped inside that Roth, and it grows completely tax-free, because when you take those distributions out of the Roth account, you pay zero income tax.

So, deciding between traditional and Roth is really, do I pay tax now, or do I pay tax later?

Roth is a really good tool as an example, for somebody early in their career.

They’re younger, entry-level wages, so they’re at a lower tax bracket, and they would want to volunteer to pay the tax now, and then over the decades of their career, let that growth compound tax-free. So both are appropriate, just depending on the timing for you.

Okay, back to Marcy. So her and her financial advisor have sat down, and he’s let her know that you can save up to $24,500 in a qualified plan. And that’s the case for everyone. But now that she’s age 50, she is eligible for this catch-up contribution. She can now add an additional $8,000 per year to her qualified employer plan for a total of $32,000

$1,500 in contributions.

Not that long ago, the SECURE Act was passed, and this allows us to supercharge a couple years of retirement savings. Between the ages of 60 and 63, Marcy’s eligible for a catch-up contribution increase of $11,250, so now she has a total of $34,750 that she’s eligible to put into a 401 plan.

Keep in mind that $11,250 is not on top of $8,000. It is the new catch-up limit.

for those periods of 60 to 63, and then at age 64, it reverts back to that 8,000. These numbers will inflate over time.

If you don’t have an employer plan and you’re just contributing to an IRA, the limit is going to depend on income, and your eligibility to contribute either a traditional or Roth is also going to be hedged on some of the earnings of your household. But generally speaking, the limit is $7,500 per individual.

But once you reach age 50, you’re able to contribute an additional $1,100 for a total IRA contribution of $8,600. That’s either traditional or Roth. You can’t double it, but you can divide it. So you can put some in IRA, and you can put some in traditional. So now that Marcy has this intentional retirement plan and knows how much she needs to save, she’s going to take full advantage of these catch-up years.

But I have another example.

Once you reach age 55, you can take advantage of what’s called the Rule of 55. But this example is of David.

David has been an aggressive saver. He’s always known he wants to retire in his 50s, and he’s been targeting 55 for many years. He has been aggressively saving and maxing out his 401K and his IRA every year to make sure that he has built up enough of a retirement savings for him to retire early.

In fact, he even was able to start contributing to a non-retirement account, just a regular investment account that he was able to put money into that’s not associated with a retirement plan, and doesn’t have any age restrictions associated with it. And again, it’s taxed differently than the Roth or the IRA. He only has to pay capital gains tax or a portfolio income, which generally is a lot lower than IRA

traditional distributions.

He starts to meet with his employer plan sponsor to look at the steps he needs to take to take money out of his 401 plan and out of his IRA, and he is shocked when he learns that penalty-free distributions don’t start until age 59 and a half.

That’s the case for IRAs. However, with a 401, there can be, or any other employer-responsored plan, the rule of 55 may allow you to take distributions out of your most recent employer’s 401 plan and avoid the 10% penalty.

You can’t use a 401 plan from a former employer previous in your career. It can only be your most current employer. But the good news is, you’re able to take that money out at age 55 if your plan allows it.

So that’s what David decides to start doing, is he is going to use his 401 plan at age 55 to start creating cash flow. It’s his biggest bucket. Again, he was maxing it out every year, his employer was making contributions for him, and he’s gonna take some money out of that account to start his first retirement distribution phase.

So, always double check that your employer plan allows for 55… year 55 distributions. It is an IRS provision. However, all 401K, 403 , and 457 plans have their own unique rules, so you’ll want to confirm that with your current employer.

But that’s not all. David can also take some cash out of his non-IRA account, and that will be another source that is penalty-free, or taking money out of that 401 plan at age 55, and then once he reaches age 59 and a half, that penalty goes away.

Now, if you’re taking money out of a traditional IRA, it’s going to be 10% penalty on everything. If it’s a Roth and you’re taking it out prior to 59 and a half out of an IRA, it’s only going to be on the earnings or contributions do come back to you tax-free.

So lots of things to consider here, but at least we need to pay attention to these options that are available to us.

Now, we’re moving forward in the timeline, and we’re approaching age 59 and a half. We’re finally eligible for penalty-free IRA distributions and 401K distributions without having to look for a special rule.

Let’s go back to Marcy. She’s been very intentional working with her employer, or excuse me, her financial advisor, to know how much she needs to save.

And now she’s also focusing on a custom portfolio to make sure that she’s getting the right rate of return.

With 401K plans, you are limited to the investment options that are available to you in that plan.

Oftentimes, people will use a target date retirement fund. And what is a target date retirement fund? Well, if somebody wants to retire 40 years from today, they’re going to use a target date retirement fund that’s going to be targeted for the year 2066.

Your time horizon is very important in determining how those investments should be structured.

Generally speaking, the longer the time horizon you have, the more growth-oriented your portfolio could be.

That tends to mean you’re gonna have a lot of stocks in your portfolio, because while stocks are volatile, they tend to go forward more than they go backward, and over time, you can ride those ups and downs, and those wins will pile up, and even though it’s a rocky ride, you’ll get further growth if you continue to focus on equities, so long as you have enough time.

Once you start to approach your retirement timeframe, and you’re looking at taking money out of that account, rather than just trying to grow it.

This is when you’ll want to start to consider adding some more preservation, more and more balance, oftentimes in the form of bonds in a portfolio. So.

The target date retirement fund is going to automatically start to transition. Like I said, if my target date retirement fund is for 2066, and I’m looking at it today, it’s going to be all equities and all growth. As I move forward towards that date, it’s going to add more preservation assets.

But it’s limited, and it’s also not customized. And Marcie’s worked with her financial advisor, and they know precisely what rate of return they need to get in order to meet her goals.

They also understand that she has a different risk tolerance. It’s not just an arbitrary date of 2066 that needs to determine how her investments are structured. She has personal preference, personal choice as far as what type of growth she can

Afford to take, and what kind of volatility she can tolerate.

So, thankfully, at age 59 and a half, you are able to take money out of a retirement plan sponsored by your employer, and do what is called an in-service distribution to an individual retirement account. So you can put that money into an IRA with your investment advisor, and you’re no longer limited to those funds, and you’re no longer having to do it yourself.

So you don’t necessarily need a target retirement date fund, but you can get a very specific, custom, built-out portfolio designed for your unique preferences, your timeframe, and all of your goals with this in-service distribution.

So that gets us through our 50s, Chris, but this is just talking about what you can save and what you have control over, but there’s a whole other piece to get layered in to our retirement plan as we move forward.

Christopher Ruedi

00:16:16

Thanks, Libby. Yes, the 50s are certainly a time where we see people start to consider and looking at those options that are available to them, but really it builds into your age 60, so I’m going to take a few minutes and kind of talk about some of the key decisions, some of the key ages and inflection points that we see folks face in their 60s. And really, we’ll start with age 62, and

really want to look at two different things that we see people start to consider once they reach their age 60, and particularly age 62, and that’s early retirement.

and possibly starting Social Security. So, you know, maybe with the examples that you listed earlier of David, who was considering an early retirement, maybe in the mid-50s, looking at options from… drawing from accounts or their former 401K plan, and maybe just wasn’t quite ready yet in their mid-50s to late… to late-50s, but now.

At age 62, might feel confident with the ability to do in-service, either a rollover, as you just mentioned, or to start taking distributions from his plan.

We’re seeing so many people

these days, post-pandemic, really start to prioritize that work-life balance, and really start to think about the things outside of their career that brings them fulfillment and joy. And so, we are having a lot of conversations about what we would consider an early retirement, something in your early 60s, historically younger than what we’ve seen maybe in the previous few decades. And so, part of that

When we look at planning for early retirement.

is really just kind of what mindset do you have as you approach going into retirement? You know, we don’t want folks to feel so dependent on their paycheck that, well, I just work because I don’t know where that income is going to be coming from.

Or the flip side, maybe they just are so adamant about retiring, but are uncertain about their resources and how long that they can last.

That they’re not living up to their lifestyle, that potential ideal future that they may have had for themselves.

So one of the ways that we address early retirement, and would certainly recommend that anybody consider before electing retirement, is putting a plan in place to factor in those decisions that you make in your 50s with the decisions that you’ll face in your 60s and beyond into retirement, to really look and balance between your income and asset resources.

So what we’d really suggest is, is really start to ask yourselves 3 questions if you’re considering an early retirement.

One, what income sources do you have? Social Security, possibly a pension, if you own a rental property, farm-related income? What are those fixed sources that are going to contribute to your retirement after you stop working and earning that paycheck?

And then, importantly, how much do you need to draw from your invested assets, that retirement bucket, to supplement, to go on top of things like Social Security and pension, to reach that desired lifestyle?

Second question.

what rate of return do you need that retirement bucket to earn? And this is a very individual circumstance and individual choice. We think so much of rates of return, and I just want the highest, biggest rate of return that I can get. And while that sounds great, you have to understand what’s the risk that I’m taking to achieve that desired rate of return, and try to find a balance.

If you’re going to be drawing from your portfolio early in retirement, you want to make sure that a piece of it is there that is subject to possibly less volatility, so that you know you can pull investments out responsibly earlier in your retirement, and not take too much too quickly.

And lastly, you know, don’t forget about inflation. Inflation is something, certainly post-pandemic, that we’ve seen become a very big issue in today’s headlines and over the past few years.

Which portions of your retirement portfolio are going to be specifically invested to address inflation, and know that your purchasing power in those later decades of retirement will really be there to last you all the way through.

So Social Security is one of the biggest choices that we see folks make, at least at some point in their 60s, although you can delay as late as age 70 if it makes sense for your plan.

If you elect Social Security at age 62, which is the earliest that someone can choose to do that, know that there are some pros and cons to consider.

The drawback of starting early is that you lock in a discount or a reduction of what your full benefit would be, as the Social Security Administration deems that, at a later age. For most people, 66 or now 67.

But you certainly want to consider several factors as well.

your health and life expectancy. If we all know how long we were going to live, Social Security claiming decisions would certainly be a lot easier decision to make.

But overall, we’re seeing people live longer, so that longevity risk, that risk of outliving our assets, typically leads us to considering maybe delaying or starting Social Security at a little bit later age.

every year that you wait to begin Social Security once you’re eligible at age 62 and beyond.

you can actually lock in what amounts to be almost a 7% higher benefit. So every year that you wait, and you can make that decision month by month, so if you choose not to begin at age 62 and, you know, you wait until 63, or somewhere between 63 and 64, you’re going to get an incremental increase in what that benefit calculation is. So that’s why having an overall plan

makes it so important, so it can help you feel like you’re making a conscious decision of when to begin Social Security.

Another consideration is what types of assets do you have?

Libby mentioned Marcy and David having a mix of retirement assets, whether that be traditional or Roth IRA or 401 , or if you have outside brokerage assets, things that aren’t retirement-related that you can draw from that might not add to your tax situation in a significant way.

So that composition of your retirement assets, how much that they are.

when you can draw on them and what impact that they have on your taxes certainly factors into what age you might consider to start Social Security.

spending, and preserving your assets. That’s the biggest consideration with an early retirement or possibly an early Social Security election. You go from a period of time of possibly working longer and building up

your retirement assets to then starting to draw them down. And, you know, where we always use the example of

someone climbing a mountain. It’s a big accomplishment to get to the top of the mountain, but unfortunately, we see most of the accidents happen on the way down. And that’s where we think knowing what elections, what steps you might take as you begin to consider retirement, especially in early retirement, becomes so critical.

Cost of living adjustments. I mentioned if you start Social Security early, somewhere between 62 and, say, 67, there’s a reduction of that benefit, and that is a permanent reduction relative to what you would earn if you waited till your full retirement age.

However, you still would be eligible for annual cost of living adjustments.

These are based on the inflation from the previous year, and you would get that announced usually towards the end of the current year for what your benefit may increase by. For 2026, from 2025, that increase, for example, was about 2.6% this year.

Consider whether you will be eligible to claim not only on your own work record, but also as a spouse.

Same would be for… as a surviving spouse. We see some strategies and plannings involved around if one spouse maybe has a higher Social Security benefit, perhaps they would preserve that, if there’s a large difference in age.

You might consider having the older spouse wait, collect their benefit later, earn that higher amount, knowing that in a survivor capacity, there would be more going to the surviving spouse.

Last thing to consider about Social Security, especially if you’re going to claim before full retirement age, is understand that there is a limit to how much earned income that you can have prior to attaining full retirement age without it impacting your Social Security benefit.

So you see here, in 2026, before you reach your full retirement age, you can earn just over $24,000 this year and still be eligible to collect 100% of your Social Security benefit. Again, this is if you are collecting Social Security before hitting that full retirement age.

If you exceed that amount.

for every $3 above that limit, Social Security will withhold part of that benefit, and you will get that back at full retirement age, or beginning at full retirement age, excuse me, I should say, and your benefit will be adjusted up slightly, but you still would have that permanent reduction

from those early years, this is just a way to get some of that money back. But, you know, I think the general takeaway is, is that if you think you’re going to earn in any significant capacity before reaching full retirement age.

Typically, it does make sense to just delay that and not start Social Security, so you get that higher permanent benefit, and you’re not subject to these, what are relatively low amounts of earned income that you could be subject to.

Health insurance. Health insurance and where we would get healthcare if we weren’t retired.

is often the largest decision and sometimes impediment to someone retiring early, and in this case, prior to age 65 and being eligible for Medicare.

If you’re going to plan to retire before being fully eligible from Medicare.

We really would encourage folks to understand, where am I going to continue to get that health insurance piece from, if not from my current employer?

And you do have some options. You can go on what’s called COBRA, which is a continuation of that current employer plan, but you cover more of the cost, and typically that can get you about another year and a half or 18 months of coverage once you

And… and leave employment.

You could go on your spouse or partner’s health insurance plan. You could look to purchase a plan on the health exchange, but understand that there are some income limitations on what your premium costs would be if you make over a certain amount.

If you’ve been participant in a union plan, perhaps there’s union retiree benefits, or you could consider doing a part-time job to just get health insurance benefits. Maybe it’s a slowdown from your current career, but looking for something that would continue to provide that health benefit.

Whatever you do, understand that you need to have something in place

Before leaving that job, so you don’t have any interruption in coverage.

The last point I have on this slide is a health savings account. Understand if you’ve been contributing to a health savings account, or what’s called an HSA, to get a tax-free source to cover health expenses.

understand that there’s some limitations on how you can contribute to this plan once you’re retired, and what those things can be used for, particularly understanding that HSA accounts can’t be used to fund your premium for any of these other potential health insurance options discussed earlier.

And just to give you an illustration of the cost here, we’ve outlined what a potential cost per person might be if you do retire early and identify one of these pre-retirement options.

These are averages that we see. It certainly could be more or less in certain instances, but really want to highlight, knowing where that increased cost comes from before making that decision is a critical step.

I think most people might be shocked to learn that, you know, under your employee plan, typically we see the portion that we pay as employees is only about 22% of the total cost of insurance premium.

So understand, when you leave that coverage, when you leave that benefit to potentially retire early, you need a plan in place to know how you’re going to address, essentially, 100% of that coverage going forward.

So, at 65, that’s another trigger point where Medicare, something that will likely impact almost all of us, and the decisions that we have to make around our healthcare and switching those plan options come into play.

So, at age 65, you do become eligible for

Medicare, but let me first stop and describe what Medicare is, because I think so many of us here, there’s different parts, and don’t know really which ones it might apply to me, or in what capacity. So the first part of Medicare is Medicare Part A. Think of that as for your insurance for big events, hospital bills.

Part A covers inpatient care, hospital stays, skilled nursing facilities, and things like end-of-life and hospice care.

Most people qualify for Medicare Part A for free, based on their work record, if they’ve paid Medicare tax along the way as they’ve been working.

And so, most people can sign up for that at age 65 and still elect to stay on their employer plan, but more on that in just a moment.

Part B is Medicare that we think of to essentially replace the healthcare that we get from our current employer plans. Think of this as our day-to-day healthcare expenses. Covers things like doctors and outpatient care.

Lab tests, imaging, preventative care, those screenings and vaccinations, and any medical equipment that we might need.

Part D covers prescription drugs, pharmacy coverage. Think of that as the things that we buy, and we need our medicine, the prescriptions that we’re on.

And that is… goes along with the other parts of Medicare. And there is, just quickly, what’s sometimes referred to as Medicare Part C, or Medicare Advantage. It’s a private alternative that often bundles that Part A, B, and D, but it could include things like dental, vision, and hearing.

Some people consider it an all-in-one plan from an insurer.

We could do a whole separate webinar on Medicare Part C, and we’ll leave it there for today. Just know that it’s an option, but we’re going to discuss around someone following the path of, I would say, a more traditional Medicare Part A and B, and prescription drug Part D plan.

So when you become eligible.

for Medicare, you have an enrollment window. It’s not just the year or the month in which you turn 65. It’s actually the window initially is 3 months prior to your month of birth that you’re going to turn 65, and the 3 months after. So, in total, it’s about a 7-month window.

And there can be special enrollment periods if you’re continuing to work past age 65.

One of the things that you need to be aware of, I mentioned health savings accounts, HSAs.

If you’re using and contributing and wanting to maximize and build up that type of health savings benefit where you can use tax-free dollars to cover medical expenses.

then understand, once you join any parts of these Medicare, you become ineligible to make future contributions to HSA plans. And it can also be somewhat retroactive up to 6 months. So, you know, having an understanding of when that timing, when you’re going to enroll into Medicare.

And the impact it might have on your health savings account is… is a very important consideration to either discuss with your financial planner, or to do research on your own if you’re… if you’re moving forward that way.

There’s a note here about so-called Medigap plans, supplemental insurance. I mentioned the, you know, typically the three parts of Medicare, A, B, and D.

there’s usually a fourth option that we see folks select, and that’s to get what’s referred to as a Medigap plan, something that’s going to cover the roughly 20% or so that Medicare doesn’t cover for our expenses.

The last point here we have, watch out for Irma. And that’s not a hurricane that hit the east coast of Florida, although that was very devastating. This is a financial hurricane, if you will, to understand that depending on the types

of income that we have in retirement, it can impact what we have to pay for those Medicare Parts B and D.

So you can see I’ve got some figures listed here for 2026.

I’d like to point out that we have numbers for 2024 income listed here.

Keep in mind that what we pay for Medicare once we become eligible and we join is always based on our income from 2 years previously. So, as you can see listed here, as if you’re a single or joint filer.

as your income, your modified adjusted gross income, so think of everything that we earn, either through retirement distributions, dividends, interest, capital gains, Social Security, and even tax-exempt interest gets added back into these calculations.

Think of it as most of our income before any deductions.

As that gets higher, we pay more for those Medicare premiums, and you see it listed out here. It has an increase for both Parts B and Part D.

people get caught off guard by this very often, and so with proper planning, you can’t avoid sometimes paying these higher rates for Medicare, but you can certainly account for them if you know that they’re coming, and try to manage and smooth out that impact over the course of your retirement.

And kind of the last key point in our 60s is that full retirement age for Social Security.

Which, for many people, is age 67. You can see listed here, if you were born sometime before 1960, you might have an age 66, full retirement age. But for most people who are facing retirement today, born 1960 or later.

Age 67 is that full.

retirement age, when we fully qualify for what the benefits that are stated on those Social Security statements would be, and you can see

The difference illustrated here of if someone took it at age 62 versus age 66 or 67 can sometimes be 25-30% higher by weighting.

And as I mentioned earlier, you can delay beyond full retirement age and actually get an 8% increase each year up until age 70, but for most people, we see that claiming decision coming somewhere between age 65 when you go on Medicare, or waiting till full retirement age for age 67.

That earnings test that I mentioned earlier for someone who is considering retiring early, claiming before full reduction, or excuse me, full retirement age.

that earnings test goes away. If you want to continue to work after reaching age 66 or 67, whatever your full retirement age is, for Social Security, you can earn as much other income as you want, and your benefit will not be reduced.

It may be taxable, however.

the rules around Social Security point out that up to 85% of Social Security benefits can be included with other income for income tax purposes, and just know that the more income you make in retirement, the greater it is that you’ll be at the

top end of that threshold where most of your Social Security income would also be included in the taxable threshold.

You can have some withholding done from Social Security, and we do see that often as being a key consideration for someone. And you can see listed here, anywhere between 7% and 22% can be withheld from your Social Security payment.

The other thing to consider is, is that once you are on Social Security and also on Medicare.

your monthly Medicare Part B and D premiums will be reduced directly out of your Social Security payment, or, instead another way, netted out, so that your

out of, you know, if you were paying Medicare out-of-pocket, maybe you delayed until full retirement age, that is one out-of-pocket payment that you don’t have to make, and it will be taken directly from your Social Security.

So, Libby, there’s a lot of things to consider in our 60s with regard to Social Security and Medicare. 70s, there’s still some decisions to be made, certainly some things that we get into on trigger points with distributions that might be required, but there’s certainly ways that I think you want to touch on that folks can start to trigger in their 70s to maybe address

Those tax consequences, and using charity is one way to do that.

Libby Muldowney

00:38:21

Right, Chris, thank you. 70 and a half is another milestone to consider if

charitable gifting is already a part of your financial plan. It’s hard to say that you should make charitable gifting a part of your plan for the benefit of a tax deduction, but if you’re already doing it, we absolutely want to look at the different options of making charitable gifts.

to make sure we’re doing so in the most tax-efficient way possible. And the qualified charitable distribution is a very effective way for many people to get a tax advantage without really having to do a whole lot of planning or strategy.

Once you reach age 70 and a half, you are able to make a gift directly to a charity from your IRA, and that money comes out of the IRA tax-free, and of course, charities are tax-exempt, so it keeps the IRS out of that transaction entirely.

Normally, if you were to, say, take a distribution from your IRA into your checking account.

pay income tax on it, and then turn around and write a check to the charity, you may or may not be eligible to take advantage of a deduction, depending on whether or not you’re itemizing. So let’s take Marcy, for example. Marcy has always gone to church and put $100 in the basket every Sunday.

Instead of putting that money in the basket every Sunday, she’s working with that financial advisor who has introduced her to the idea of qualified charitable distributions, and Marcy calls her church treasurer and says, hey, instead of every week me putting $100 in the envelope, in January, my IRA is going to send you a check

For $5,200 to cover the whole year.

And again, that comes out tax-free. What this does is it lowers the amount of her IRA, which can be very helpful when we’re talking about future required minimum distributions, which I will get to in the next section.

But this can also help make sure that her income doesn’t spike by managing the balance of that IRA, and she doesn’t have to itemize her taxes. So overall, less taxes is going to be paid, and it’s a tax-free distribution from your IRA, which can be very effective for you.

But let’s talk about those RMDs. So, in your 70s, this is another milestone. What is an RMD?

Well, when I was describing some of the tax treatments of either traditional or Roth, you’re getting tax advantages to save in those account types. Tax-deferred growth or tax-free growth, depending on which bucket you’ve saved into.

But the idea with that tax advantage is the government was incentivizing you to save for retirement. And now that you’re in your 70s, the government says.

You’re retired now, and all that deferred income tax that we’ve patiently been waiting for, we are now going to force you to take a certain amount out of your traditional IRA so that we can collect our income tax.

Now, depending on your birth year, the age is tiered moving forward. For some people, it’s going to be age 73, and some people, age 75.

Thankfully, the IRS has backed off on the 50% penalty for any RMD that was not satisfied. That was the most aggressive penalty in the IRS tax code. Now it’s at 25%, which is still a fairly high penalty, so making sure you satisfy your RMD is very important so you don’t get hit with that.

Now, how the RMD is calculated, it’s a formula, and there’s two variables that go into the formula every year, so every year, your RMD amount will change.

The two numbers you want to put into this formula are

the account balance at the beginning of the year, and your age, or life expectancy, at the end of the year. There’s an RMD table that ties your age to a life expectancy factor, and you divide the account balance by the life expectancy factor to come up with the RMD for that year.

So the higher the account balance, the higher the RMD. And it’s intended to accelerate.

Theoretically, the IRS wants you to deplete that account by age 100, so each year that factor increases.

The problem this can create is that it can force you to take more money out of your IRA than you may otherwise need for lifestyle expenses, just to make sure you’re avoiding that 25% penalty. So let’s go back to David, for example.

David was having a great time throughout his 50s and 60s, because he had built up a taxable bucket, meaning a non-IRA, non-Roth account, and

he was only having to pay capital gains taxes and portfolio income, which was much lower than any income. In fact, he didn’t have any sources that qualified his income. So his tax rate was extremely low.

let’s say it’s 10% or so in the first decade of retirement, and he loves that he’s in this low, low bracket. But he’s not spending his IRA at all now for a couple of decades, and it will grow and compound. And again, the larger the IRA gets.

the higher the RMD amount can be.

So, by not touching his IRA for the first period of retirement, and keeping himself in a 10% tax bracket, his IRA has grown significantly. And now he’s reached RMD age, the formula forces him to take money out of that IRA, and it is a shock.

Because it spikes him up to the 30-something percent tax bracket, because he has to take that money out, whether he needs it or not, and whether or not he’s going to spend it.

Chris mentioned IRMA limits, making sure that you keep your income in a certain threshold so that you don’t lose the subsidy for Medicare payments. A big RMD can increase your income and phase you out of Medicare subsidies.

It can also impact the taxation of your Social Security and how much of Social Security is going to be taxed depending on your income.

So while it seems like a really great idea to be at a low tax bracket for the first period of retirement, what you might want to consider in anticipation of these RMDs is a Roth conversion.

What a Roth conversion does is it is a strategy that takes money out of an IRA,

and it moves it to a Roth. You pay the income tax that year, but once the money’s in the Roth, it’s gonna grow completely tax-free.

Which can be very powerful. And you can control your income tax bracket throughout this period of retirement, keeping an eye on those IRMA limits, keeping an eye on the taxation of Social Security, and keeping an eye on any other deductions that you might want to be taking to manage what your RMD will be in the future. And over a period of 10 or 15 years, you can do a series of Roth conversions.

That will lower the amount of your IRA balance, and lower the amount of the RMD

Thereby, throughout your lifetime, instead of moving from a 10% to a 30% bracket, we might be able to get an average closer to 20% over a long period of time. And if we quantify those dollars, what we want to look at is which strategy is going to result in you paying less tax over your lifetime, even if it means, say, paying some tax ahead of time. It can smooth things out and prevent

Surprises in the future when you spike your income.

But there’s more. On the next slide, we talk a little bit about inherited IRAs. The rules for inherited IRAs changed a couple of years ago. Individuals who inherited IRA used to be able to take the distributions from an IRA based on their life expectancy that they inherited.

The rules changed, and now those inherited traditional IRAs have to be depleted within 10 years.

Hey, for example, you have a million-dollar IRA. It gets left to your heirs.

They’re 50 or 60 years old, which is a very common age for people to inherit when they are losing their parents.

They’re in their peak earning years. And now, if they want to deplete a million-dollar IRA over 10 years, they’ve determined they have to take $100,000 out every year, and that $100,000 comes out as income tax on top of their already high wages.

There… therefore, the IRS is going to collect more tax dollars Even at a higher rate.

So, if you’re considering doing Roth conversions, this can be a huge advantage for heirs, because they’re not going to pay income tax on those Roth distributions in the future, and their income won’t spike into a higher tax bracket.

So, by looking at a multi-generational wealth transfer, and looking at your RMD as well as the future of your inheritors.

You can be very strategic in managing the lifetime tax both you and your heirs are going to pay.

Now, that’s a lot, Chris. We’ve talked about a couple of different decades and strategies, and even multi-generational. Hopefully, we’ve covered it all.

Christopher Ruedi

00:47:34

Well, I think we’ve certainly given it a good start, and really appreciate you walking through those key considerations.

that we have in our 70s, but I really like the way that we’ve presented this here, because whether you’re just starting to consider retirement, maybe kind of hitting that age 50 and starting to understand, well, what can I do now that I couldn’t do when I was in my 40s? Or you’re flicking through, and I’m getting closer to that required minimum distribution, and, you know, what are the steps that I could possibly take

To address and mitigate my taxes.

You know, as we wrap up today, I do, you know, I hope that this one thing is clear, that retirement isn’t defined by just one decision.

is shaped by a series of financial milestones, again, from catch-up contributions, Social Security timing, Medicare, whether you gift charitably, and you start those required minimum distributions.

The key is not just knowing that these milestones exist, but understanding which ones matter the most for you, and when to act on them.

So that, you know, that’s why we think that the most important question isn’t simply, am I retirement ready? It’s, am I making the most of the opportunities available to me right now?

Today, we tried to highlight several planning opportunities, and the next step would be figuring out which of those strategies you should prioritize based on your own goals, timeline, and financial picture.

If you’d like a second opinion, or you just want help identifying the areas that deserve the most attention, I’d encourage you to take the next step.

Our Ideal Futures Financial Health Assessment is designed to help you to know where you are today across those key areas of financial planning, and maybe highlight where a conversation could add some value.

Appreciate your time today. Libby, I think we’ve had a lot of questions come through here. I know we won’t be able to certainly get to all of them, but, you know, maybe if we could just take a few. There’s been so many good ones coming in. I’m gonna…

stop my presentation here so that everybody can see us, and if I can, I’ll ask you. Someone came in…

I’m 42 years old and I want to retire early, in my 50s. How do I know if I’m on track and have saved enough

In the right types of retirement accounts.

Libby Muldowney

00:49:55

That is a loaded and layered question, certainly. And a good place to start would be working with a financial advisor for some guidance.

When I look at building a retirement plan, I like to look at it in kind of a reverse-engineered type of way. When I was describing when Marcy sat down with her financial advisor to come up with what she needed to save, ultimately what you want to do is come up with a nest egg or a portfolio size that’s going to be capable of producing enough cash flow to replace your current lifestyle.

You don’t have to replace 100% of your wages, because if you were saving 20% in retirement accounts, or 10% in 529 plans, you don’t need to earn that much anymore. So it doesn’t have to be tied to your earnings so much as what it is that you want to live off of.

And then you come up with the goal of, this is the amount of money I need in a portfolio in order to produce that amount of cash flow throughout my retirement.

And you want to work with an advisor because you don’t want to overlook things like inflation, things like taxes, and variable rates of return.

If you go online and run this calculation on your own, it is most certainly going to use an assumed rate of return that is going to be a straight line, compounded flat rate of return over 30 years.

The markets don’t work that way. There’s going to be periods of years when things are up in the market and things are down. So you want to make sure that you’ve built out a plan that can tolerate those ups and downs. The good news is, as far as which account type.

There’s gonna be different times when one or the other is gonna be appropriate, but the number one priority would be focusing on the dollar amount that you want to save.

the tax decisions that you want to add on are more of an optimization decision rather than a make-or-break decision for retirement. But it does get pretty complicated. So…

Chris.

This question looks like it goes back to Social Security, so that would be the section you covered. Can my spouse start Social Security at 62 and wait for me to claim at full retirement age and then switch to a spousal benefit?

Christopher Ruedi

00:52:06

You know, it’s a great, great question. One, you know, I think, Libby, we get a lot of times,

Social Security used to have a lot more, I’ll just call them loopholes or different eccentricities in the Social Security law that made

some of these claiming decisions, especially in two-person households, a little bit more involved, where you could, you know, in a sense, kind of game the system a little bit, try to maximize one benefit while claiming and delaying the other. Many years ago now, those kind of thresholds and loopholes had been eliminated, so Social Security has what they referred to as deemed filing.

and whether you are claiming as a spouse, for a spousal benefit, or someone claiming on their own record, you’re only going to get one, and it’s always going to be the highest of what you’re eligible for. So, understanding that if you start on your own benefit at age 62 or age 63 early, and you take that permanent hit, that permanent reduction, you could

At some point, if your spouse hadn’t filed yet, they waited till full retirement age, and you would potentially be entitled to a spousal benefit, which is usually about half of what the spouse’s full benefit is.

You can switch to that, but in many cases, with the reduction that you’re already going to take, because that permanent early election, whether you started on your own record or as a spouse, follows you throughout life.

And with the… with the reduction in benefit, just by comparison as a spouse, again, as I said, it’s… it’s no more than half.

many times we don’t see that being a real ideal step, and you know, certainly there may be cases or instances where that could be appropriate, but really where we see the decision-making is more around when I touched on, that survivor benefit. So, understanding that

once one spouse passes away, whoever had the higher Social Security of the two, that’s what’s going to continue on to the survivor. So there could be some thought to possibly delaying, again, the spouse that’s eligible for the largest retirement benefit, especially if there’s a gap in age, that, you know, maybe as a plan for longevity, knowing that you’re not only delaying the benefit and locking in a higher

amount of Social Security for yourself, but potentially for future years for your spouse as a survivor. You know, that’s where I think some of that calculation on who starts when could come into play, but trying to, you know.

start one early and then jump to a higher benefit later on. That’s pretty difficult to do in practice, and so, you know, wouldn’t really encourage somebody to necessarily pursue it for that reason alone.

Let me give you one more here, that’s coming in.

says, I’ve never saved in a Roth. My tax preparer told me that I earned too much money to fund a Roth IRA, and that because of that, I needed to look for every tax deduction possible. Is it too late for me to start a Roth account? And I’m sorry, I don’t have any context of age here, Libby, for you, but, you know, the idea of

of using Roth at some point on this spectrum. Your thoughts on that?

Libby Muldowney

00:55:21

Absolutely. I think it’s important to comment on your tax preparer’s comment.

saying that, you earn too much money to fund a Roth IRA. The good news is, high-income earners who would otherwise be phased out of eligibility for Roth IRA contributions, if their 401 plan allows.

they can contribute to Roth regardless of what their income is, and that goes for traditional as well. There’s no phase-out for making those contributions in your 401 plan like there are in your IRA. So if you’re a high-income earner, if you’re wanting to build a Roth bucket.

you will want to consider funding your 401K on a Roth basis. Now, that tax preparer said you should look for every tax deduction available to you, so they’re encouraging a deferred contribution to lower that income and lower your tax bracket.

Which may be a great strategy for today, but we want to look forward into the future and what your brackets are going to be in retirement as well.

Most tax planners are looking backwards 12 months.

and saying, what happened? What do we need to do? And then, hey, for the next 12 months, you might want to consider making this contribution or taking advantage of this strategy. But they’re not looking much longer than that time frame. When you’re in retirement, tax planning becomes very different than what it looks like during your working years, and building up a Roth bucket now

Can…

mean that you’re paying more tax today, but over your lifetime, you could pay less tax overall. And actually, this kind of ties together with this other question, Chris. Is there a strategy to address Medicare income brackets?

Christopher Ruedi

00:57:04

Yes, so that IRMA, that income-related monthly adjustment that we were describing, again, as you have higher amounts of income in retirement, so think about maybe if you’ve got a large qualified plan, 401K, or pre-tax IRA, you reach those

higher required minimum distribution years, you know, somebody has, you know, a million, million and a half dollars built up into their 401 plan, not only maybe with what they’ve put away, but now that

you know, growth can be deferred for, you know, to our mid-70s. It wouldn’t be uncommon to see a first-year required distribution of

60, 80, you know, maybe even $100,000 at some point. Well, when you start to think about that additional amount of income, on top of Social Security, because you may have begun that, on top of any other rental incomes or sources that you might have.

it puts us into these really high income categories where now we’re not only going to pay a high rate of tax, but we’re going to pay a lot for Medicare. And so, I loved your example earlier when you were kind of going through saying, well, yeah, it’d be great to be in a 10% tax bracket for the early part of my retirement, but

The flip side is, is if you don’t take some of those steps, maybe take and absorb some of that tax hit at what are, you know, under current today’s standards, the 12% and 22%, even 24% rate of tax bracket.

Historically speaking, are lower than what we’ve seen, so we’re in a relatively tax-friendly environment.

I often make the argument, or can try to illustrate.

even if it means that we go up into paying some IRMA, some higher amount for our Medicare, maybe in, just say, the second or third tier.

earlier, it could help us being in the highest 5th, 6th, and 7th tiers later, where we have no control. And so, again, it’s all about what somebody might choose to prioritize, but we certainly look to coordinate and plan for, hey, if our goal is to stay

in that maybe just first step up in Medicare bracket, or maybe even go as high as the second.

to try to plan for someone’s annual capital gains budget, or how much that they can convert to Roth IRA and still stay under that number, is certainly something that can be accounted for. And, you know, I think a lot of people walk away going, hey, I’m consciously choosing to pay this because it’s helping me in other parts of my plan and in my portfolio. And the blended impact, yes, you pay a little bit more for Medicare.

But you might save a lot on the tax side from Roth conversions, from realized capital gains, maybe reducing your risk in concentrated positions. So, it’s certainly something that… that can be planned for and, you know, would encourage folks to, you know, know and address that that mindset can be approached.

Libby, it’s hard to believe we’ve gone almost an hour, and really appreciate you joining me on this. I think we won’t be able to get, I know, to everyone’s questions. If we haven’t gotten to your question today, please know that someone will follow up with you after our webinar. We want… we know everybody’s questions are very important to us. We appreciate you joining us, and Libby, I appreciate you presenting this with me.

But, we’ll probably have to leave it at that this afternoon, and thanks again.

Libby Muldowney

01:00:28

Thank you! Have a good day, everyone!

Christopher Ruedi

01:00:31

Buh-bye.