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3-2-1 Retirement Newsletter (1-23-2020) Thumbnail

3-2-1 Retirement Newsletter (1-23-2020)

3 insights, 2 findings, 1 action (January 23, 2020)

5-minute read

Happy Thursday!

Let's get right to it. Here are three insights, two findings, and one action to ponder this week...


 I. Tax planning before retirement

The late Diane Carroll once said that preparation was instrumental to her lifelong success as an actress. It’s no different when it comes to your retirement. Solid preparation, sound decision-making, and timely action will go a long way to ensuring a secure and successful retirement. Here are five tax strategies to consider before retirement.

Roth Contributions: Increasing tax-free income sources can hedge against future tax increases, reduce the taxability of Social Security benefits, and control increases to Medicare Part B and Part D premiums. 

Roth Conversions: Repositioning tax-deferred and taxable savings to Roth IRA tax-exempt savings can reduce future taxes, especially if retirement income is projected to be higher than pre-retirement income.

Portfolio Efficiency: Locating assets in the most tax-efficient accounts can reduce the cost of ongoing taxes. Prioritize placing dividends, interest, and capital gains-generating assets in tax-deferred/tax-exempt accounts. 

Tax-Free Income: Increasing tax-free retirement income sources such as cash-value life insurance, reverse mortgage, and Health Saving Accounts (HSA) can cut your tax bill, preserve income and extend other retirement assets.

Retirement Location: Where you retire can have a huge impact on taxes. Retiring to a location that doesn’t tax income at the state and local level could be a boon to your retirement. Your income will go further in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, as these states don’t tax personal income.  

II. Tax planning in retirement

There are several tax-saving strategies to use before retirement. However, here are five that are best done while in retirement. 

Delay Social Security: Claiming benefits at 70 instead of 62 increases the benefit amount and allows the consumption of other assets like 401(k)/IRAs. This is important because if these assets are not spent down, this will create a situation known as the Tax Torpedo, where each dollar coming out of the 401(k)/IRA is taxed and results in more Social Security being subject to tax.

Maximize Deductions: Identify changes in income and deductions for the current year that offer opportunities to offset income with deductions. Accelerate and bunch deductions in high-income years to reduce income subject to tax.

The sequence of Withdrawals: Withdrawing income from taxable, tax-deferred, and tax-exempt sources, in this order, is superior to a pro-rata strategy that withdraws income in no specific order.

Required Minimum Distribution (RMD): Identify any RMDs, as there is no discretion around timing and amount, and a 50% penalty on any shortfall is assessed if not taken. 

Qualified Charitable Deduction: You can cut your tax bill significantly by donating assets to charity. Donating assets directly to charity will remove them from your taxable assets, thereby reducing the tax. Qualified Charitable Distributions (QCD) can be made directly from an IRA to a public charity.

III. Identifying the costs of retirement 

A clear understanding of retirement costs is key to retirement security and peace of mind before and during retirement. The three factors impacting retirement costs the most are income replacement rate, inflation, and retirement period. Focusing on these factors will help pinpoint overall retirement costs. 

Income Replacement Rate: Aim for a replacement rate of 70-85 percent of pre-retirement income, at least in the early years. Planning Point: The income needed by those who end up in a nursing home will be significantly higher than for those who do not end up in a nursing home.

Inflation: Spending rates through retirement generally do not keep pace with inflation. Real spending tends to decrease over retirement. Assuming inflation-adjusted spending each year overestimates retirement costs. The CPI-E (inflation factor for the elderly) is a reputable source to use as a baseline inflation increase amount.

Retirement Period: Plan to live, not to die. People want income for life, not a specific time. Most research assumes retirement will last for 30 years. For best estimates, base the retirement period on health, heredity, and lifestyle. Focus on the probability of outliving wealth, not just the probability wealth will last for 30 years.


I. Retirement Income Literacy Survey

The American College New York Life Center for Retirement Income Literacy Survey was commissioned to determine whether retirees and pre-retirees have the knowledge they need to successfully plan for a financially secure retirement. The study focuses on those aged 60-75, where issues such as how best to withdraw income from assets come into play, and knowledge of how to make optimal decisions about managing finances in retirement is critical.

Key Results

  • Seventy-four percent failed (fail = less than 60 percent correct)!

  • 5 percent of respondents scored a B or higher (80 percent correct or higher)

  • 47 percent correct was the average score 

  • respondents were overconfident in their knowledge about retirement income planning—61 percent of respondents reported they were very or extremely knowledgeable about retirement income planning, but only 33 percent of them could pass the literacy quiz

  • men had a median score of 20/38 correct, and women had a median score of 16/38 correct 

  • only 18 percent of women passed as opposed to 35 percent of men

  • individuals with $1 million+ of savings performed better than all other asset levels

  • those who work with a financial adviser have lower levels of financial literacy

Maybe that is not surprising, as do-it-yourselfers would need to gain more knowledge to make good decisions, while those who work with advisers may be doing so because of an awareness of a lack of knowledge or interest.

    Survey results by subject area


Source: American College of Financial Planning Retirement Income Literacy Survey

II. Retirement Income Literacy Quiz

Now that you know how your peers performed, see how much you know about retirement income planning by taking the RICP® Retirement Income Literacy Quiz.

Take the Quiz


I. One task you must complete to successfully transition into retirement.

Well-established research indicates there are 15 developmental tasks you need to complete while still working to transition into retirement. 

We’ll look at one of these tasks for our action item this week and reveal a new one each week.

The completion of these tasks does not suggest a person should retire. However, failing to complete the tasks will put a successful transition into retirement at risk.

This week’s task is related to relationships: You need to consider the importance of coworkers when deciding to retire.

Why it’s important

  • coworkers are a significant part of the social landscape, and maintaining these connections is a huge driver in retirement happiness

  • identifying new avenues to remain socially connected after the loss of coworkers is important to prevent boredom and the feeling of obsolescence in retirement

  • retirement happiness is not all about the “numbers”; often, the intangibles, like connections with family, friends, and personal pursuits, are just as important


Have a Question? Want to chat about it?

Get In Touch

Until next week,

Mark Sharp, CFP® RICP® EA

Mark Sharp Retirement