Six Components of Retirement Planning You Must Have

Six Components of Retirement Planning You Must Have
(Philippe Huguen/AFP/Getty Images)
Mike Valles

In preparing for your retirement years, you will need to consider more than your will and possibly a trust. While these things will enable you to pass your assets to your beneficiaries, you likely still have many years left before those documents are needed. Your retirement plans also need to be prepared for several other things you may encounter once you retire.

Here are some things your retirement planning should include to prepare for life as a senior.

Reduce Taxes

Depending on the size of your retirement savings, you may need to pay a lot of taxes on those savings when you take a required minimum distribution (RMD) from, say, an individual retirement account (IRA). The amount of taxes you will owe depends on your overall income tax rate. RMDs can sometimes be quite large, and you may lose a good portion of your retirement income to taxes.

There are several things you can do to keep your taxes much lower. One thing is to roll over your money in a traditional IRA or 401(k) into a Roth account. When you roll over money into a Roth account—either a Roth IRA or a Roth 401(k)—you must pay taxes on the amount moved into the new account. Any further rollovers or contributions will be after-tax.

Once the money is in the Roth account, it grows tax-free. All withdrawals are also tax-free. Another advantage of a Roth account is that you are not required to take any RMDs. You can let the money grow as long as you want and make withdrawals when you want.

Another way to reduce your taxes, especially if you have large amounts in retirement accounts, is to start reducing the amount in those accounts by making withdrawals before you retire. You must be at least 59½ to make withdrawals without penalties. Roth accounts require money to be in them for five years before withdrawals in order to avoid penalties.

You can also reduce taxes by donating to charity. Charitable donations to qualified charities are tax-deductible. RMDs, stocks, and other cash can be donated directly from your account. Investopedia says you cannot donate directly from a 401(k), but the money can be rolled over into an IRA first.

Prepare for Hospital Bills

As you get older, one or both spouses are likely going to need nursing home or home aid help. The costs of such care are high. A nursing home for one year will cost more than $100,000. Fidelity says the average retired couple over 65 can expect to spend $315,000 for medical care.
One way to prepare to meet those costs is to get a health savings account (HSA). HSACentral says these accounts give you triple tax savings because all your contributions are tax-deductible, the money grows tax-deferred, and it is tax-free when used for qualified medical expenses. Getting an HSA requires that you first have a high-deductible health policy (HDHP).

An HSA can reduce your medical bills and taxes through the years as your medical bills grow. An account of this nature can also be handy in long-term care or home nursing care if necessary. Medicare does not cover long-term care, and private insurance does not either unless you buy a separate rider.

It is also important to have medical powers of attorney and financial powers of attorney in place in the event you become incapacitated. You must name these trustworthy individuals in the documents, and alternative names must also be listed. They cover medical and financial decisions that must be made when you can no longer make them.

A Will

Your will directs your assets into the hands of the people you want to have them. You should know, though, that ElderLawAnswers says a will only directs the assets that go through probate.
You can also give other types of property to your beneficiaries without going through probate if identified in the account documents. Alternative beneficiaries should also be listed. The following assets are some that go directly to your beneficiaries:
  • property held in a trust
  • property that is jointly owned
  • proceeds from life insurance
  • payable-on-death accounts
  • retirement accounts (IRAs and 401(k) plans, etc.)

Plan Your Retirement Income

During your retirement years, you will need so much to live on. Determine how much you will need each year, and do not forget to anticipate inflation, which, on average, is about 3 percent per year.
Social Security should be part of the equation, but you must also decide the best time to start taking it. The longer you wait, the more you will get each month—until you turn 70. If a higher amount will put you into the next tax bracket, when combined with other retirement income, you may want to take it earlier. Remember that too much income will also raise your Medicare and Social Security costs.

Create a Trust

Another way to ensure that your assets are given to your beneficiaries fast is to put them into a trust. Assets in a trust are distributed quickly and do not go through probate. A trust can also hold funds for minor children or special needs children.
There are two kinds of trusts: revocable (also called living or inter vivos) and irrevocable. The grantor retains control over the assets in a living trust and can add or remove items. Once the assets are in an irrevocable trust, the trust cannot be changed.

Prepare for Widowhood

One spouse will likely die before the other. When this happens, the surviving spouse’s income becomes reduced to two-thirds, and taxes nearly double. The spouse will need to be financially prepared for your passing so that a drastic lifestyle change does not become necessary.

Taking the above items into account for your planning will help you be better prepared for retirement. Getting the most benefit requires that you talk to a tax advisor or estate planner to help you be better prepared, reduce taxable income, and take advantage of the current laws.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
Mike Valles has been a freelance writer for many years and focuses on personal finance articles. He writes articles and blog posts for companies and lenders of all sizes and seeks to provide quality information that is up-to-date and easy to understand.
Related Topics