[So] you may want to increase yourtaxable income, in some cases, to fillup a lower tax bracket, with the ideathat in the future, you’ll be able to avoidgoing into a higher tax bracket. Thenyou spend [a blend] from taxable andtax-deferred accounts in the early yearsto get up to the target. And then laterwhen the taxable account runs out, youcan spend a blend of tax-deferred andtax-free Roth accounts.
You can even do Roth conversionsas part of that. It’s called theSocial Security tax torpedo. Ifyour income falls in the rangewhere if you have just $1 oftaxable income [more], thatcan also cause you to have topay tax on another 85 centsof a Social Security dollar. Soyou might be in the 22% taxbracket, but really your marginal tax rate is over 40%.That’s what you really want tobe focused on.
Also focus on Medicare:If you have $1 too much,depending on which threshold you’re at, you might have to payanother $800 in Medicare premiums asa single person just because you’ve hitthat one extra dollar around $87,000,somewhere in that ballpark, this year.
Try to avoid that. That’s where youdon’t want to waste tax space. If you’reonly in the 10% tax bracket, you mightwant to, at the very least, potentiallyfill up 12%. That just gets you betterpositioned later in life when you haveSocial Security. And then when you haveRMDs, you don’t have as much in yourIRA by that time. You’re better able tomanage avoiding taxes.
We just spoke with (York Universityprofessor) Moshe Milevsky, whodiscussed why decumulation advisingshould cost more. That is, it is moreexpensive going down than going up?
That’s absolutely right. Traditionallywe’ve had wealth management, which isfocused on growing wealth, and it’s onlybeen in the last 10 or 15 years that there’sreally this appreciation that retirementis different. And that mountain climbinganalogy is used commonly, that it’s easier to climb up to the top of the mountainthan it is to climb back down. Like withMount Everest, most of the accidentshappen when people are going down,not when they’re going up.
And it applies to retirement, wherebefore we thought, just like people thinkthe goal of climbing the mountain is tomake it to the top, well, the goal of retirement planning is to get to that numberwhere you have enough assets to retire.But no, the reality is it’s getting down themountain. It’s not outliving your assetsand meeting your retirement goals.That’s more complicated than just hitting that wealth target at the beginning.
Like at The American College,for example, we started the RICP[Retirement Income CertifiedProfessional] designation for advisorsin 2012. It started from this recognition.They had a conference to just discusswhat’s different about retirement. Andwhat should a retirement advisor know?What do they do post-retirement, notpre-retirement.
What about Social Security — do you
see changes in the future?
I’ve been waiting for the new SocialSecurity Trustees’ report to come out[as of mid-May]. So we haven’t beenable to see what the Social SecurityAdministration believes the impact ofCOVID will be. But as of the 2020report, they were expecting the trustfund to last till 2035. There’s reports[that] probably is going to [run outeven earlier].
And a big factor is lowerinterest rates. We’re going tohave less interest on the trustfund assets. That’s going tobe the most important factor,not so much unemployment,which kind of has a mixedimpact, but mainly the lowinterest rates.
How should a near-retiree
deal with that?
For one thing, Social Securitywon’t disappear. If nothing’sdone [by Congress], benefitsmay have to be cut across theboard by 20% to 25% to be aligned withthe incoming payroll taxes. So I don’tthink people should change their claiming strategies.
Social Security is a reliable incomeasset where you’re not having to relyon the stock market to support yourspending. If you have a particularspending goal that you want to support reliably without market risk,and feel that if the Social Securitybenefit goes down, you’d like to fillthat gap [it could be] an annuityor the 10-year payment option on areverse mortgage — something nothaving additional stock market exposure necessarily.
Ginger Szala is managing editor ofInvestment Advisor Group. She can bereached at email@example.com.
I like the idea of tax-efficient
spending strategies. The
basic starting point is about
spending taxable assets,
then tax-deferred, then tax-
free. But what you’re really
trying to do is tax bracket