In Retirement, Crucial Questions Start With the Word ‘When’

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People approaching retirement ponder numerous questions, but I’ve found that many of the most important questions revolve around the word “when.”

Financial Freedom in Retirement Is All About Cash Flow

When do you plan to retire? When will you take Social Security? When must you start withdrawing money from your retirement savings?

Frankly, in retirement, “when” is everything. That’s because so many financial decisions related to retirement are much more reliant on timing than on the long-term performance of an investment.

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Unfortunately, too many people who are approaching retirement — or are already there — don’t adjust how they think about investing to account for timing’s critical role. In their younger days, they had a strategy for accumulating money based, at least in part, on their tolerance for risk. That seemed to work, so they stuck with it. But in retirement, the game changes, and your approach to handling money needs to change, too.

“When” plays a large role in the new strategy. Let’s look at a few reasons for why that is:

What Will You Do When Required Minimum Distributions (RMDs) Hit?

Many people use traditional IRAs or 401(k) accounts to save for retirement. These are tax-deferred accounts, meaning you don’t pay taxes on the income you put into the accounts each year. But you will pay income tax when you begin withdrawing money in retirement. And when (there’s that word again) you reach age 73, the federal government requires you to withdraw a certain percentage each year whether you need the money or not.

One way to avoid the required minimum distribution is to begin converting your tax-deferred accounts to a Roth account long before you reach 73. You pay taxes when you make the conversion, but then your money grows tax-free, and there is no requirement about how much you withdraw or when.

When Should You Tap Your Different Types of Assets?

In retirement, your focus needs to be on how to best use your assets, not just how they are invested — once again, long-term performance is not the main concern anymore. For example, you may have accounts with different tax implications — taxable, tax-deferred and tax-free (such as a Roth). You need to draw on these accounts to live on, but when should each account come into play?

Doing Your Retirement Income Planning in the Right Order Matters

One option might be to save the Roth for last so that it has more time to grow tax-free money for you. But in determining what order you should tap your retirement funds, much of your decision depends on your personal situation. A financial professional can help you devise a strategy that fits your needs and tax status.

Social Security plays a significant role in retirement for most Americans. On average, Social Security makes up 30% of a retiree's income. When you claim your Social Security affects how big those monthly checks are.

You can start drawing Social Security as early as age 62, but you do so at a rate that is reduced for the rest of your life. Also, if you want to continue working, there is a limit to how much you can make each year before penalties set in.

If you wait until your full retirement age (66 to 67 for most people), there’s no limit to how much you can make. Finally, if you postpone claiming your benefit past your full retirement age, the amount of your benefit will continue to grow until you reach age 70.

For example, the Social Security benefit of someone born in 1959 might be: $1,237 at age 62, $2,000 at full retirement age or $2,582 at age 70. (The year of birth can change the full retirement age, and the amount earned in someone’s life can also change the amount expected.)

When Should You Start Passing Your Wealth on to Your Heirs?

If you plan to leave something to your heirs and want to limit the taxes they pay on that inheritance as much as possible, then “when” can come into play again. For example, you could begin giving your beneficiaries some of their inheritance before you die by using the annual gift tax exclusion. For 2023, you can give up to $17,000 to each individual without the gift being taxable. A married couple can give $17,000 each.

When it comes to retirement planning, there are plenty of things you can’t control, such as inflation and market downturns. The trick is to focus on the things you can control, such as when you withdraw money from which account or when you choose to claim Social Security.

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Certainly, all this can get complicated, so it's a good idea to find a financial professional who can help you determine which strategies are best for you — and when to put them into play.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Bradley Geddes is the San Francisco financial planner for Decker Retirement Planning. He is a CERTIFIED FINANCIAL PLANNER™ professional and has over 13 years of experience in financial advisory, capital markets and corporate finance. He also co-founded a SaaS company in San Francisco and worked as the firm’s CFO before moving into this financial advisory role. Geddes graduated from the University of Washington, where he earned his bachelor of science degree with an emphasis in finance.