Preparing for Retirement, Pt. 2

Preparing for Retirement Part 2

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# YOU NEED GUIDANCE, STRATEGIES TO USE, YEAH. I’M GONNA SHOW YOU HOW TO DO THIS. INVESTING AND TAX, ESTATE TIPS YOU NEED, YEAH. I'M GONNA GIVE YOU MY HELP. I'M GONNA GIVE YOU MY HELP. OH!

Welcome to Retired-ish. A podcast produced for those exploring retirement and those currently in retirement. Today we are continuing the discussion on things to consider before retirement and actionable ways to prepare.
In part one, we talked about figuring out how you will spend your time in retirement, the importance of building an emergency fund, where you will get your income from, and how that income may be taxed. If you haven't listened to part one yet, I encourage you to go back and listen to the episode before diving into part two, of course. You can access it via your podcast app or by visiting retiredishpodcast.com/four.

In part two, we're gonna discuss withholding for taxes in retirement, what to do with your employer-provided retirement accounts or employer-sponsored plans, in other words, and healthcare decisions leading up to retirement.
So, let's continue where we left off, starting with taxes. Now, most of us are used to getting our taxes done close to tax day, typically April 15th each year, and figuring out whether or not we owe money to or expect to receive a refund from the IRS, and maybe your state if you pay state income taxes. Regardless of whether we owe or expect to get money back, the amount is typically within a couple of thousand dollars for most people.

Now, I know you self-employed people out there are rolling your eyes. Trust me, I get it, I've been there. This is because most people are employees that receive what are called W2 wages and have taxes regularly taken out or withheld from their paychecks on an ongoing basis throughout the year. In this case, you are essentially prepaying your expected tax bill for the calendar year. When you retire, however, things typically change. You won't necessarily have an employer that has a payroll department withholding taxes for you anymore unless maybe you receive some sort of pension. Even in that case, you have to tell them to withhold taxes for you and how much.

For most retirement income sources, however, you will have to figure out how to pay your taxes yourself. Technically, you can collect your income all year and then wait until tax day to pay the big tax bill that will be due. But the IRS doesn't like that. In fact, they will penalize you for doing so even if you ultimately get a refund.

They want timely payments of taxes as you receive your income throughout the year, which is the ultimate reason why we have tax withholdings, to begin with. Now, there are a few ways to do this in retirement, and again, it depends on where your retirement income is coming from. The easiest way to withhold taxes is to fill out tax withholding forms, often called W4s, if available for a particular income source.

So, for example, you can withhold from social security payments by filling out a form W4V as in Victor, which currently allows you to withhold 7, 10, 12, or 22% from your Social Security benefits. Please keep in mind that the Social Security reps are not going to force you to withhold taxes when you sign up. They may not even mention the word taxes because it's not their job. So, don't forget. All too often, I see someone collect Social Security for an entire year only to find out that they owe a bunch of money come tax time. This causes issues, especially when you have no emergency fund like we talked about in part one.
Another example could be distributions from retirement accounts like IRAs and 401(k)s. When you make distributions from these accounts, you can have the investment custodian, which is the company where your account is held, withhold taxes for you. Typically, you can choose how much to withhold usually by dollar amount or percentage.

A huge caveat here is for employer plans like those 401(k)s, 457s, and maybe 403Bs, for example, where they typically will have a mandatory 20% Federal tax withholding. We will get back to this later, but I just wanted to mention that important caveat. If, however, a bulk of your retirement income comes from something like passive real estate income, you'll have to pay taxes on your own. There is no entity that can magically withhold those taxes for you. This is where something called estimated payments can come in.

So estimated payments are a method used to pay tax on income that is not subject to withholding. This can be self-employment income, such as your 1099 consulting gig you may have in the first few years of retirement, it can be rents that you receive from renters for your investment properties, it could be dividends you receive, or even alimony that is subject to taxation. Now, not all alimony is subject to taxation, it just depends on when your divorce decree was finalized that included that alimony. You only need to make estimated payments if your other withholdings won't cover enough of your estimated taxes that will be due. In general, you don't need to make estimated payments if you don't have a tax liability for the year. Check with your tax professional and other advisors before retirement to get an idea of whether or not you will need to make some estimated payments in retirement.
There are also calculations to determine what we call a safe harbor amount of tax to pay in case you are ultimately unsure how much your tax liability will be. So that safe harbor, it's like an amount that as long as you pay that amount, you'll be okay, and they won't penalize you.
If you do need to make estimated payments, they will need to also be made timely over four payment periods throughout the year. If you don't make the estimated payments in a timely manner, you can still be penalized for not paying on time. So, recognize that difference there. You can be penalized for not making the payments at all or not paying enough, but you can also be penalized for not paying them throughout the year on a regular basis.
There are several ways to pay estimated taxes, but the most common are to mail in a payment voucher or pay electronically on the electronic federal tax payment system. You can even pay by credit card if needed. I know some like to do this for the points that they get. However, there's typically a surcharge for using a credit card. Electronic is by far the easiest and likely the safest method to pay.
If you mail a voucher, it could get lost in the mail or even mishandled by Uncle Sam himself. A pro tip for those of you who might mail in vouchers, what you can do is add a 1, 2, 3, and 4 to the end of each of your estimated payment checks. That way, if a payment is ever unaccounted for, you'll be able to look at a bank statement and see which one is missing. For example, if your estimated payments are, let's say, a thousand dollars each, you could pay $1,001, then $1,002, 1003, and 1004.
I've indicated guidelines to help explain whether or not you'll need to make
estimated payments and how to pay online in this episode's show notes. So be sure to check that out if you think you may be paying estimated payments.

One more important note is that the IRS doesn't care what income sources you withhold from as long as they get the proper and timely tax payments. So, for example, you can have three income sources but withhold from only one of them to cover the taxes for all three. Doesn't necessarily matter. It's up to you, and your tax professional.
Okay. Now let's talk about the nest egg that you've likely amassed while working over the past few decades. One of the biggest concerns heading into retirement is the decision of what in the world to do with your retirement accounts.
Now, most of you will have a 401(k) or some other type of retirement plan that your employer offered. Your concerns are completely valid because saving for retirement is a completely different process than spending in retirement. So how do you manage this money, and where should you keep it?

Now let's start with managing the nest egg. So again, saving was relatively straightforward. You had money taken from your paycheck, typically on a pre-tax basis, meaning that you haven't paid income taxes on that money yet, and maybe you received money from your employer too via a match or profit sharing, for example, and you invested likely in some allocation of mutual funds, and you let your portfolio do its thing.
Now spending is far more complicated, not just technically but mentally and
emotionally. Most people will go straight from saving to distributing or
spending and completely skip over the preparation phase that should be in
between. Doing this will leave you completely open, in my opinion, to the
single greatest threat to your savings, called sequence of returns risk.
This is a risk that you are not subject to while you are saving. So, while you were working and putting money away. Essentially, this is the risk of your
investments and markets falling around the exact same time of your retirement or the exact same time as when you start to take withdrawals out of your portfolio.

If not prepared for in advance, this causes you to make portfolio withdrawals from assets in a portfolio that could be suffering due to the investment performance or lack thereof, I should say. This means you have to sell those assets to get the cash for your withdrawals. So, if you are selling stock mutual funds, for example, in your 401(k) to get your retirement paycheck, you are likely going to be selling low if the market is going down, right? That's the opposite of what an investor is supposed to do, which is to buy low and sell high.
Now, over time, this destroys the longevity of your nest egg, ultimately causing you to run out of money too soon, which is definitely not good. If I were to ask you if you'd rather wake up tomorrow completely broke or dead, you'd likely say, why are we waiting until tomorrow?
Now let me provide you with a brief example of a sequence of returns risk. So, if you had a hundred thousand dollars at the start of retirement and began taking out $6,000 a year over five years, and you enjoyed fantastic returns with that portfolio out of the gate of, let's say, 40% in year one, 20% in year two, then 0% in year three, then negative 15% in year four and negative 20% in year five. You would have an ending account balance of around $90,000.

However, let's reverse the order of those returns or what we would call the sequence of those returns. If you experience the bad years first, so, the negative 20%, then negative 15%, then 0%, then positive 20%, and then positive 40%, your ending account balance would be roughly $71,000. Now, that's nearly a $20,000 difference on a $100,000 portfolio. Not to mention in year three, your account balance would've been about $50,000. So, let me ask you, how would you be feeling if that was you and your account was basically cut in half in the first three years of retirement? Not too good, I'd imagine.

Now I give examples of this phenomenon in our blog that I will attach to the episode's show notes. There we dove a little bit deeper on what to do and how to mitigate this risk. And you can actually see the example that I just gave visually, so it can help with your understanding of the concept.
Now let's look at where you should keep your money. One of the biggest concerns here is whether or not you should leave your nest egg in your former employer's plan, whether you should cash it out or move it to a new employer's plan, if applicable, if there is a new employer, or move it to an IRA or what we call an individual retirement arrangement.

You can also do any combination of those options if you see fit for your financial plan. If you are, say, semi-retiring and will be getting a new job or starting your own business, you can usually do a rollover of your previous employer's retirement account money into a new plan if there is one. Some plans do not allow this, but most do.

So, please reference the new plan's summary plan document to determine if this is possible. This is something that would be available, you know, via the new employer's HR, or if you're self-employed and you start your own retirement plan, when you initially do all of your plan documents, that summary plan document will be part of your package. This rollover would not be considered a taxable distribution if it's done properly.

Now, if you cash out a pre-tax account like a traditional 401(k), either
partially or in its entirety, you will pay taxes on whatever money you
distribute out of the plan. This will be subject to federal and state income
taxes if your state imposes an income tax.
In addition, if you're under 59 and a half, you'll incur a 10% early withdrawal
penalty on top of the income taxes. The rules for cashing out a Roth 401(k) can be a little more nuanced, so I would suggest that you speak with your trusted professional on this and stay tuned for a later episode where I will dive deeper on the Roth 401(k)s and other after-tax distributions.

Typically, the option of cashing out is less desirable than others unless you have a real immediate need for some of that money. If you don't have an immediate need, there are better ways to handle your nest egg that won't cause any immediate tax issues.

Now, let's talk about taking control of your money with an IRA. The first thing to know is that if done properly, you can move your money into one or multiple IRAs without facing tax consequences on the transfer. The way to do this is by executing what is called a direct rollover from your employer plan to your IRA once you've opened one. You can also do this with Roth money like a Roth 401(k) by doing a direct rollover of your Roth 401(k) to a Roth IRA.
Please note there are many, many pros and cons to leaving your money in an employer plan versus moving it out. In fact, so many I can easily do a whole podcast episode on it. So, let's just go over a few of the biggest reasons.

One common reason why you may want to take control over your pretax money by doing a direct rollover to an IRA versus leaving the money in your employer plan is to take advantage of other planning opportunities. Again, I'll use Roth conversions as an easy example. While some employer plans allow you to convert the pre-tax dollars into the Roth employer plan, some do not. In addition, the Roth 401(k), for example, is still currently subject to required minimum distributions or RMDs at age 72, even though the money will likely be tax-free.
So, in Roth IRAs, however, this is not the case. There is no RMD. That's still this thing, some people would call it a loophole that's out there. People have different opinions of why that is. Really, the thing to remember is a Roth 401(k) has those RMDs, and a Roth IRA does not. And again, that's currently, therefore, when many people want to fund these Roth accounts, they typically want it in a Roth IRA versus a Roth 401(k), for example. In an IRA, you'll also get many more investment options compared to your 401(k), which is likely all mutual funds and maybe some index funds.

Another good reason most people don't realize is that by distributing money from an IRA instead of an employer plan, for example, it may allow you more tax planning flexibility. In an IRA, you can decide with your professional advisors exactly how much to withhold for taxes when taking distributions. So, if you remember what I said before, typically, wherever your IRA is held at the custodian, you can tell them, you know, a flat dollar amount or a percentage to withhold from your distributions. And you can even change that multiple times with different distributions if needed.
And again, with most employer plans, they will require you to withhold 20%, even if you only pay 12% in taxes at the end of the day. This can cause you to withdraw more than you need to from your account, further diminishing its ability to last a lifetime, and it causes you to loan the IRS money all year. Yuck. Nobody wants to do that.
One reason you may not want to roll your money out to an IRA just yet might be because you left your employer after age 55. For most employer plans, if you separate from service after age 55, you can access your funds without paying the 10% early withdrawal penalty, even if you're still under 59 and a half. So, I know this might be confusing, but this is just one of those weird rules out there. And this may be a very good reason to leave your money there in the employer plan, depending on your needs and your age when you retire, or simply leave the employer. Of course, there are more reasons here as well, but this would be one of the biggest reasons, in my opinion.
Again, there are many more things to consider, but we'll save that for a later episode. The point is to consult with your professional advisors and plan well ahead of time. Don't wait until the 11th hour before retirement to start thinking about this stuff.

Now, let's discuss the 10,000-pound gorilla that is healthcare. The two main concerns you should have are, what coverage do I want and need, and how much will it cost? Healthcare is likely to be one of your top three expenses in retirement, next to taxes. And how much you pay for healthcare will depend largely on your timing. As you may or may not know, in general, you won't become eligible for Medicare until you reach age 65 or once you retire and leave an employer's plan if you're older than age 65.
Therefore, if you retire before age 65, you will have to get your coverage from either your spouse's potential employer coverage if they're employed and they offer coverage, the National Health Insurance Marketplace, or, if you're fortunate enough, your former employer may have a retiree health insurance plan. Now, most employers don't offer something like this. It's mainly for government or state employees.
Even if you retire after age 65, these public organizations typically offer some sort of Medicare supplement or Medicare Advantage plan that works along with Medicare parts A and B. Now, be aware that if you have one of these employer-provided retiree plans and you're 65 or older, you will still need to sign up for Medicare parts A and B. If you don't sign up when eligible, you could face permanent lifetime penalties on your part B premiums.
If you have to get the coverage through the Marketplace, you may be eligible for partially subsidized premiums. Now, this is a good thing. So, for those of you whose income will drop substantially in retirement and you're retiring before age 65, you could become eligible for what is called the premium tax credit, or PTC for short.
This is essentially a tax credit that is paid to you in advance via lower healthcare insurance premiums. This is opposed to receiving a larger tax credit to offset your tax bill come tax time, which is how most tax credits work. Again, this helps alleviate regular monthly cash flow. So, when you sign up on your State's Health Marketplace website, they will ask you questions about your coverage needs and your income to help you determine whether or not you will get the lower premiums. Basically, they essentially do this for you. They apply the credit for you if you qualify. Then once you become Medicare eligible, you can switch to Medicare after that, the PTC doesn't apply.

There is often another option when you leave your employer that you may have heard of called Cobra. So, Cobra is essentially a way to continue your same health plan you had while you were employed, but now you have to foot the entire bill, which can be really big compared to what you used to pay. In addition, Cobra can and often does charge an additional 2% on top of the regular premium. So, the health insurance plan that you have, you will begin to pay 102% of that premium. Now, this may be necessary if you haven't planned ahead and don't know what you're going to do yet, but just know it generally only lasts about 18 months when you leave your employer.
So, now that you know where to get coverage, you'll need to know what you can expect to pay throughout retirement. That way, you know what your retirement expenses will be. In general, a health plan from the Health Insurance Marketplace or Cobra will be more costly, sometimes much more costly, depending on how old you are when you retire and again if your former employer was subsidizing or sharing with you some of the payments for your healthcare premiums.

For example, if you had a platinum-level plan with low or no deductibles for years while you worked, you likely will want that same level of coverage that you're used to when you retire. However, now you will have to pay the entire premium versus sharing that cost with the employer. Many are shocked to find out how much health insurance is nowadays and now that they're older, so be prepared for sticker shock if this is you. This typically ranges from around $500 to $1,200 a month or more.
If you retire at 50, let's say with no spouse's plan to get on, be prepared to pay those kind of premiums for 15 years. Many people then reduce their coverage so that it is more affordable, if this is them, at the true cost of heavy out-of-pocket damage should something catastrophic occur. So, plan early.

Medicare, on the other hand, is actually a really good deal, especially when compared to these other coverages. I want to take a moment to preface it that Medicare is a giant bowl of alphabet soup with tons of options, rules, costs, et cetera, that warrants, again, a whole series of podcast episodes, honestly. Therefore, I'm just going to keep it simple for today and give you some of the current real-world uses and numbers.
Medicare has a few main components. The main two are Medicare Parts A and B. Medicare Part A is for inpatient hospital insurance for things like skilled nursing facilities, hospice, and mainly inpatient rehabilitation. And it's premium free for most since you have already paid into the system, likely for decades while you were working. It came out of your paychecks as part of a payroll tax along with Social Security. Then it also has an annual deductible of about $1,600 in 2023.

Now Part B is for outpatient services like physician services and visits, X-rays, certain home health services, durable medical equipment, and certain other medical and health services not covered by Part A. Part B has a monthly premium, and in 2023 the new numbers just came out. They are $164.90 a month, and it has an annual deductible for 2023 of $226. Please note that the premium amount I just gave you, the $164.90, that is the base premium. If you are what Medicare considers a high earner, you could be subject to what are called IRMAA surcharges that tack on to your Part B and Part D premiums.
The key to know is that A and B only cover 80% of your care. You are responsible for the other 20% of costs after your deductibles are met. Parts A and B also don't include prescription drugs or dental and vision insurance. So, if you just have Parts A and B, you do have a cost-sharing component, which is 20%.

This obviously leaves some gaps in coverage. So how do you fix that? Well, you have a couple options, and you've likely already heard about some of them. One is to get what is called a Medicare Advantage Plan, or some people might call this Medicare Part C. Or the other route is a supplement to Parts A and B, which is called a Medicare Supplement Plan, or a lot of people also call this Medigap.

These two types of plans are offered by various health insurance companies, and there are tons of options for each type. Medicare Advantage Plans, what they do is they essentially bundle up everything, so Parts A, B, drug coverage, most of them offer dental and vision insurance, and they bundle these up into one plan. The plan, however, is usually an HMO plan where there's some sort of network.

Now there are some that aren't HMOs, but more often than not, you're gonna see these plans with very specific networks. The key to remember with these plans is you have to go to whatever providers are in their network, and if you don't, you can face hefty excess charges. This is crucial to remember if you plan to say travel a lot in retirement because if you're gonna travel, you know, to a different state and go out of your network and something happens, well, then you could have a very catastrophic loss and be paying a lot out of pocket.
Now, you'll also need referrals to see specialists, and providers such as your primary doctor may not be in the network you have or often drop in and out at a moment's notice. We see that happen a lot where someone's doctor is in the plan, and then all of a sudden they're not, and then they're surprised when all of a sudden they have to go get their surgery, and it's not their doctor. I know it sounds crazy, but that kind of stuff happens.
If you get an Advantage Plan, you'll still pay a Part B premium, even though it's bundled in the plan, as well as the plan's own premium, which varies
substantially. Now, these Medicare Advantage Plans are very popular because many advertise having $0 premiums. Most of the advertisements you see about Medicare that you'll get in the mail and on TV they have to do with these Medicare Advantage Plans, and they advertise the crap out of them.

Now, be aware. That if this is the case where you are looking at a $0 premium plan, you will typically pay through the nose if something serious happens. Be careful when assessing these plans. Look at the fine print. I like to say for every gimme, there's a gotcha. So, if it looks too good to be true, it usually is.

Now, the other option are Medicare Supplements, and they do just that. They supplement Medicare Parts A and B. Now, these plans essentially help pay for the 20% gap that you're responsible for under original Medicare. However, there are small quirks to each supplement plan offered. The most common nowadays are supplement Plans, G and N.
These plans have higher monthly premiums than some of the other Medigap plans or Medicare Supplement Plans. Although for a lot of people, they're still affordable, and they give you a better sense of the coverage that you will have. Most help pay the Part A deductible. Like I said, I think for 2023, it's $1,600, and some of them have some foreign travel insurance as well.

Now the main benefit to these plans is that they are basically accepted everywhere in the United States as long as the doctor accepts Medicare, which most do. If they do, you can see them. Doesn't matter where they are. You also don't need referrals, and you're not tied to a network.

Now, prescription drugs are not included in these Medicare Supplement Plans, and you'll have to go get those separately by getting a Part D prescription drug plan. Now, Part D plans, they typically average around $30 to $40 a month. You know some are less, some are a little more, but that's the average. And dental and vision would also have to be purchased separately, usually directly from the insurance companies that offer dental and vision insurance. This typically isn't a deal breaker, however, when compared to something like Medicare Advantage.
Now monthly premiums for Medicare Supplements usually depends on your age and or your zip code when enrolling. So, for the higher quality plans like those Plan G’s and N’s, at age 65, you're typically looking at a range of $150 to $170 a month.
So, if we piece this all together, in an example, you can expect to pay about $165 a month for Part B. Again, that's the base premium, plus, say, around $170 a month for a G supplement plan, plus a $35 a month Part D plan, which equals about $370 a month in total. Now, keep in mind that this example would get you excellent coverage with predictable costs.
Your possible surprise out-of-pocket expenses would be very low should you get very sick or anything catastrophic happens. You want to think about potential health issues in the future, not just your health right now or when you're applying. You wanna make sure you ensure the things that can devastate you financially in retirement. Keep that in mind when considering whether or not you want dental and vision coverage as well. Is that cost worth the benefit?

I've attached a flow chart to help you decide whether or not you'll be eligible for Medicare, or you'll have to look to the Marketplace as well as some other helpful information on this Medicare discussion in the episode show notes. So, check that out.
Now, if you are planning on leaving the workforce soon, I have one final tip for you, and that is to make sure you understand any benefits you may have accumulated with your employer, such as sick or vacation pay or possibly a bonus that's been earned but not paid yet. Figure out how and when you can or need to take these payments. Oftentimes you can even have some of the benefits put into your retirement accounts up to the annual limits, of course, thereby deferring taxes to a later year in retirement when you may be in a lower tax bracket.
So, for example, if you're gonna get a bonus, there are some employers where you can just tell them, hey, instead of getting the bonus in cash and paying taxes on it now on top of all this other income I've earned all year, can you put it in my 401(k)? And that way, I can control when I take that money out later and have a little bit more control as far as taxes go.
So that's it for today's show. If you found this information actionable and insightful, you bet that it can help so many other people, including those closest to you. If you have a minute, please rate and review the podcast, as it helps us reach more people just like you that need this information.
You can also share the podcast with others you think may benefit. If you would like to learn more about the rules and strategies discussed in the show and want to find more information to help you retire on your terms, you can find links to the resources we've provided in the show notes on your favorite podcast app, or you can visit us at retiredishpodcast.com/five.

You can also sign up for the monthly Retired-ish newsletter there as well, where each month we discuss money and emotions investing, tax and estate tips, Medicare and Social Security, and a brief discussion about current markets in layman's terms. Now, we always put something actionable in our newsletters that you can implement right away, such as how-to guides and other simplified strategies.
Again, this can all be found at retireddishpodcast.com/five. Thank you for tuning in and following along. As always, see you next time on Retired-ish.
[Fun, Upbeat Rock Music]
# YOU NEED GUIDANCE, STRATEGIES TO USE, YEAH. I’M GONNA SHOW YOU HOW TO DO THIS. INVESTING AND TAX, ESTATE TIPS YOU NEED, YEAH. I'M GONNA GIVE YOU MY HELP. I'M GONNA GIVE YOU MY HELP. OH!

Securities and advisory services are offered through LPL Financial, a registered investment advisor, member FINRA, SIPC. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take an RMD, a required minimum distribution, in the year you convert, you must do so before converting to a Roth IRA.