Retirement planning involves more than reaching a savings goal. Once you begin turning those savings into income, decisions about Social Security, taxes, Medicare, and investments start working together. A choice that looks sensible on its own can create unexpected costs elsewhere in your plan.
Some decisions can be adjusted later. Others have deadlines, tax consequences or restrictions that make a second chance difficult. You do not need to get every detail perfect, but you do need to understand the tradeoffs before you act. Here are five decisions worth a closer look as you approach retirement or review your current plan.
1. When to claim Social Security
It can be tempting to claim Social Security as soon as you are eligible, especially when you are ready to leave work. But you don’t have to start claiming social security the day you retire.
Starting before full retirement age generally means a lower monthly benefit. Waiting beyond full retirement age increases your retirement benefit through age 70. A larger monthly check, however, does not automatically make waiting the right choice for every household. Your health, other income, cash needs and family circumstances all deserve attention. Social Security explains the claiming rules here.
You have limited options to withdraw an application or suspend benefits, but each has specific requirements and consequences. Make your claiming decision carefully, because you can’t easily reverse it.
2. How much to convert to a Roth IRA
A Roth conversion can be appealing when you are thinking about future taxes. The amount you convert and the year you choose matter as much as the idea itself.
When you convert money from a traditional IRA to a Roth IRA, previously untaxed amounts generally become taxable income for that year. Amounts representing after-tax basis are treated differently. Converting a large balance without reviewing the tax impact can create an unwelcome bill.
Under current rules, you can’t reverse a Roth IRA conversion through recharacterization. That is different from the rules for certain regular IRA contributions. The IRS outlines these distinctions in Publication 590-A.
Before converting, compare the current tax cost with possible future benefits. Include how you would pay the tax and whether the additional income could affect Medicare premiums. A smaller conversion, a conversion spread across years, or no conversion may each deserve consideration. None is automatically best.
3. How income affects your Medicare premiums
Your Medicare premiums can reflect financial decisions made before the bill arrives. Higher-income beneficiaries may pay an income-related monthly adjustment amount, commonly called IRMAA, on top of their regular Part B and Part D premiums.
Social Security generally uses income information from two years before the premium year. That means a taxable Roth conversion or other income increase can affect premiums later, even if your current income has fallen. SSA explains the lookback process here.
IRMAA is not necessarily permanent. If a qualifying life-changing event, such as stopping work or reducing work, lowers your income, you may be able to request a lower determination from Social Security.
The practical lesson is this: review projected income and Medicare costs together. A tax strategy may still make sense with higher premiums, but be sure to put that cost in the comparison before you move forward.
4. Choosing which accounts to spend first
Two withdrawals of the same dollar amount can leave you with different amounts to spend after taxes. Money from a traditional IRA, a brokerage account and a Roth IRA does not necessarily receive the same tax treatment.
Traditional IRA withdrawals generally create taxable income, except for any applicable after-tax basis. Qualified Roth IRA withdrawals are tax-free. With a brokerage account, selling an investment can generate a taxable gain rather than making the entire sale proceeds taxable.
Required minimum distributions also limit how long you can leave money untouched in certain retirement accounts. The IRS explains RMD requirements and tax treatment here.
There is no single withdrawal order that fits every retiree. The useful question is which combination of accounts supports your spending while accounting for current taxes, future distributions and other income. Review that combination regularly, especially when a large expense or change in household circumstances comes along.
5. Taking investment risk that does not fit your income needs
An investment approach that felt comfortable while you were earning a paycheck may feel different when the portfolio must help pay your bills.
If you need to sell investments during a market decline, you will have fewer assets available to participate in any later recovery. But becoming overly conservative brings another concern: inflation can reduce what your money buys over a retirement that may last decades.
Your investment mix should reflect both near-term spending needs and longer-term goals. Consider how much income comes from other sources, how flexible your spending is and how much market volatility your finances can accommodate. Diversification can help manage risk, but it does not guarantee a profit or prevent losses. FINRA discusses these retirement portfolio tradeoffs here.
Look at the decisions together
These choices overlap. A conversion can affect taxes and Medicare premiums. Your Social Security timing can change how much you need to withdraw. Those withdrawals can influence the investment risk your plan can support.
Before making your next retirement decision, take a step back and review the connections. If you would like to discuss your questions with our team at RGA, contact us to start a conversation.
This material is for general educational purposes and is not individualized investment, tax or legal advice. Consult qualified professionals about your circumstances. All investing involves risk, including possible loss of principal.
