Retiring in 2022? Don't Overlook These 10 Financial To-Dos

After years of hard work, you're finally ready to retire. You've accumulated a comfortable nest egg, but that's not all there is to it. You'll need to make some critical financial decisions as you make this transition. For example, you need to figure out exactly how to get the money from your portfolio you'll be spending during your 20+ years of retirement. 

Here are some of the major things to address that I review with my clients as they reach this next stage of their lives.

1. Make sure you don't risk running out of money.

Follow the adage "measure twice, cut once." As our clients approach retirement, we run annual financial independence analyses to make sure they are in a position to say goodbye to full-time practice. We model projected monthly spending in retirement, adding other one-off costs and anticipated expenses — such as periodic car purchases, a travel budget, annual healthcare costs, and a safety margin to cover unforeseen circumstances and events.

2. Replace your paychecks.

The most common question we get from clients who are on the cusp of retiring is, "How do I replace the paychecks I've been receiving for 30+ years?"

Method 1: Monthly checks. An estimation of your monthly spending is automatically transferred from your portfolio to your checking account each month. Periodic larger one-off expenses can be transferred separately. 

Method 2: Semi-annual cash refills. At their semi-annual meetings, clients let us know their anticipated spending over the next 6 months. This amount is transferred post-meeting from their investment accounts to their checking account. 

In our experience, either method works smoothly, with clients having little difficulty making the transition.

3. Don't be too aggressive with your portfolio — and diversify.

The portfolios of many of the doctors I've spoken with lately seem heavily weighted toward stocks — which is no surprise, given the extraordinary stock market gains over the last 12 years. They'll say something like, "I've lived through bear markets and didn't panic," such as in 2007-2009 when the S&P 500 declined 57%. That's fine during prime working years. However, relying so heavily on stocks as you near and enter retirement is another matter. 

Three recommendations as you approach retirement are:

• Make sure you are taking an appropriately conservative route, rather than risk a hit of a 30%, 40%, or 50% decline in your portfolio.

• Diversify your portfolio by including investments other than stocks to minimize losses if the stock market declines. 

• Avoid selling stocks when they are down, which can cause your portfolio value to suffer permanent damage. Such damage can be disastrous, especially early in retirement.

4. Consider your Social Security strategy.

Strategies for claiming your Social Security benefit can be complicated, particularly if you are coordinating your benefit with that of your spouse. One rule of thumb for healthy people who expect at least an average life expectancy is to delay Social Security until age 70, with an 8% increase in your benefit amount for every year you delay. This longer window, with little or no income, also allows more time for Roth conversions.

5. Look at the Roth conversion window.

Many late-career physicians are eager to move money to Roth IRA accounts by doing a Roth conversion. However, for high-income doctors, any money they convert from pre-tax accounts to Roth accounts can push them into even higher tax brackets. 

An ideal time for Roth conversions is when you are not earning an income — from retirement until age 72, when required minimum distributions begin. Remember that during this window, you'll still need money outside your retirement accounts for your living expenses as well as taxes on the Roth conversions.

6. Factor in your required minimum distribution (RMD).

Beginning at age 72, you must begin withdrawing from your IRA and employer retirement accounts — and now you'll need to pay taxes on it. (If you are actively employed, you may be able to delay taking payouts from your employer's 401(k)). For example, if you have $4,000,000 in an IRA account, at age 72 you'll be required to withdraw 3.9% of the balance, or $156,250. This required percentage withdrawal increases each year per the IRS Uniform Lifetime Table.

7. Look at any pensions you have.

If you or your spouse have a pension plan, you'll usually have options about what you can do with this money at retirement. Should you take the lump sum option and roll to an IRA? Or are you better off opting for the pension payout guaranteeing monthly income for life? This irrevocable decision deserves close analysis.

8. Accelerate 401(k) deferral to max out in your final year.

If you don't plan to work the entire calendar year of your last year in practice, aim to make the full deferral ($27,000 for those 50 and above) to the practice's retirement plan before you separate from service. Consider switching to a Roth deferral for this final year if your income, and therefore your tax bracket, will be low.

9. Document your retirement for Medicare.

If you're 65 or older at retirement and move from your employer's health insurance coverage to Medicare, consider the Income-Related Monthly Adjustment Amount (IRMAA). The cost of your Medicare coverage is based on your income from 2 years prior. This means that if you're married and had a combined 2020 income of over $750,000, each of you will pay a whopping $578.30 per month for Medicare in 2022 (nearly $14,000 per year per couple). 

Ah, but there's a remedy. Form SSA-44 applies to life-changing events, such as retirement. Simply document that your combined 2022 income is $182,000 or less — and your cost will drop way down to $170.10 per month for each of you, or around $4100 per year as a couple.

10. Understand your deferred compensation plan.

If you're employed by a not-for-profit entity, you may have been building up money in a deferred comp plan, most often a 457(b). Unlike 401(k) and 403(b) plans, which use a single standard set by ERISA (Employee Retirement Income Security Act), 457(b) plans vary from employer to employer — and these differences can make a significant difference to you. 

For example, some may require you to take the entire balance as a lump-sum payment the year following retirement, pushing you into a very high tax bracket. Another plan, however, might allow you to push out the initial 457(b) distribution as late as age 70.5 and spread the distributions out over as much as 10 years — decreasing your taxes.

Work with your benefits or HR department about the rules regarding separating from service. For example, how much notice do you need to give? How do you access the money you've saved in retirement plans? What are the specific tasks and timelines? 

Conclusion

Retirement is a positive life transition. You can make it even more positive by taking the right steps over the next few years, as you wind up your practice. With some sound financial planning, you'll get yourself set for the future you imagined.

The above article is intended for informational purposes only. Please consult a legal or tax professional regarding your situation.

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