Use the Ten Years Prior to Retirement to Position Yourself for Success - Rodgers & Associates
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Use the Ten Years Prior to Retirement to Position Yourself for Success

The 10-year period before you retire can matter more to your retirement success than any other. With proper planning, there is still time to accumulate a small fortune for those who started saving later in life. By making adjust­ments to your spending and savings, you will be able to take advantage of compounded growth. During this time, you will also determine both how much you can spend in your retirement and the likelihood your funds will last through the rest of your life.

The top priority is creating a short-term plan for the ten years leading up to retirement and a long-term plan that stretches through life expectancy. This plan should include:

  • Current Inventory – What are the current balances of accounts identified for retirement? You should include individual retirement accounts (IRAs) — both tradi­tional and Roth IRAs — and employer sponsored plans, such as a 401(k) or 403(b), as well as taxable account balances. However, any funds earmarked for emergencies or larger purchases should be omitted.
  • Income Sources in Retirement – Are you eligible to receive a pension? If so, verify eligi­bility and terms of payment. Most retirees will be eligible for Social Security benefits. Be sure to review your latest statement online at SSA​.gov and verify the Social Security taxes you have been paying are being credited properly.
  • Spending Goal – There are many factors to consider when final­izing your retirement spending plan. However, it is not necessary to fine tune this budget when you are still ten years out. Use your current spendable income as the goal for now. To calculate spendable income, use your current take home pay and subtract any long-term savings.
  • Are You on Track? – Personal savings will need to make up the difference between your spending goal and pension and Social Security income. Projecting the growth of your retirement savings and deter­mining a prudent withdrawal rate on those savings at retirement is the next step. You want to know now if you are on target or need to adjust savings and spending.

Retirement planning is a complex area that involves many circum­stances that are unique to each person. Online calcu­lators can help you determine if you’re in the right ballpark for retirement, but consulting a financial adviser or planner who specializes in retirement is typically a wise course of action. An adviser who focuses on retirement planning and works with retirees will have a deep under­standing of the strategies and issues that are unique to retirement planning for this stage of life.

The focus during this critical ten-year period should not only be saving enough money to retire but also devel­oping a plan for tax-efficient savings. People often overlook the impor­tance of tax efficiency when planning their retirement. The primary focus is usually on saving enough money and maximizing investment perfor­mance. These issues are important, but you should not discount the impact tax efficiency can have on how long your money can last. A person retiring with 100% of their savings in a tax-deferred account like a tradi­tional IRA or employer sponsored plan will need to have a third more in savings to have the same spendable income as someone with 100% saved after-tax. Another retiree with 100% saved in a Roth IRA can get by with even less because withdrawals from Roth IRAs are tax-free when done properly.

Our tax-efficient approach to retirement planning is called the New Three-Legged Stool™ strategy. The second priority for this ten-year period should be to save in a tax-efficient way. These are strategies that need to be used properly if they want to retire in a lower tax bracket.

  • Tax-Deferred Savings Strategies
  • After-Tax Savings Strategies
  • Tax-Free Savings Strategies

The New Three-Legged Stool™ strategy explains the impor­tance of diver­si­fying where money is saved for retirement. A recent study1 evaluated the impact of tax efficient distri­b­u­tions on the sustain­ability of withdrawals. The study looked at a retiree with savings in a taxable account, Roth IRA, and tax-deferred 401(k). Was there a sequence of withdrawing funds from all three sources that would extend the life of the funds by minimizing taxes? The study found the most tax efficient sequence could extend the portfolio by seven and a half years when compared to the least tax efficient sequence.

The conclu­sions reached in this study should open your eyes to the signif­i­cance of tax efficiency. However, this is only the beginning. Studies like this assume some constants when comparing results. They don’t take into consid­er­ation the efficiencies that can be achieved when planning when to draw Social Security benefits, minimizing Medicare premiums (which are now means tested), or planning withdrawals around the ups and downs of the financial markets.

Creating a comfortable retirement is a big financial challenge. However, ten years can still be enough time to build a solid financial position. The key is building a solid financial plan and then putting that plan into action.

Rick’s Insights

  • The ten years before retirement can have more impact on retirement readiness than any other ten-year period.
  • Retirement planning is complex because many of the critical decisions you need to make will be based on your unique circum­stances.
  • A study has found that saving tax efficiently could extend the life of retirement savings by seven and a half years.

1 “Retire Right: The Critical Impor­tance of Tax Efficient Withdrawal Strategies to Portfolio Longevity” Whitepaper by William Reichen­stein, Ph.D