Washington DC Retirement and Wealth Transfer Strategies

Let’s say you plan to retire in the next two to five years. As you near the end of your prime earning years, this is a crucial time for several critical reasons. Not only do you want to maximize your savings efforts as much as possible, but you also need to understand what your planned (and unplanned) expenses may look like so you can begin to transition from a net savings mode to a net spending mode.

There are six major components to create a comprehensive pre-retirement checklist:

1. Understanding Retirement Spending 

As you near retirement, you must shift your mindset from saving to spending your retirement savings to fund your cost of living. Creating a realistic budget is one way to help you plan for this transition that impacts all of us: 

• Start by analyzing your current expenses and projecting future expenditures.
•  Consider how your spending habits might change once you retire.  ○ Will you travel more, take up new hobbies, or reduce costs by  downsizing?
• Account for all possible expenses, including housing, utilities, food, healthcare, entertainment, transportation, and the unexpected.  
• Understanding your spending will help you gauge how much you’ll have to deduct from your monthly savings to cover your costs. 

2. Assessing Retirement Income Sustainability 

Once you have a clear picture of your retirement budget, it’s time to inventory your primary sources of income. This may include: 

• Social Security 
• Pension plan distributions (Defined Benefit) 
• Additional retirement accounts (401(k), traditional IRA, or Roth IRA)
• Personal savings accounts (taxable)
• Other income-producing investments (for example, real estate) 

Compare your projected income against your anticipated expenses to assess sustainability. Remember that retirement can last 30 years or more for one or both spouses. Are there gaps that need to be filled? If your sources of income are less than your expenses, consider strategies to boost your retirement income, such as part-time work, delaying retirement dates, or adjusting your investment strategy for additional  growth and income.

3. Develop a Tax-Efficient Distribution Plan  

Taxes can significantly impact retirement income, so developing a tax-efficient wealth management strategy is an important element of retirement planning. 

This can involve timing your withdrawals to minimize tax liability, considering Roth conversions, or utilizing various tax-advantaged accounts. Be sure to account for all of the layers of taxes in your state. 

Consulting with a Washington DC CFP® professional specializing in retirement planning can help you create a plan that maximizes your after-tax income.

4. Social Security Timing 

Another important retirement plan strategy is deciding when to start taking Social Security benefits. While you can begin receiving benefits at age 62, delaying until full retirement age or even 70 can significantly increase your monthly payments.

When making this decision, consider your current health, genetics, life expectancy, and financial needs. A detailed analysis of your situation can help determine the optimal time to file for Social Security to maximize your lifetime benefits (both spouses).

5. Evaluating Healthcare Costs in Retirement 

Healthcare costs can be a major concern once you retire. Even with Medicare, out-of pocket expenses can add up quickly. 

Evaluate potential healthcare costs, including premiums, deductibles, copays, and long term care. Look into supplemental insurance policies and consider setting aside funds in Health Savings Accounts for unexpected healthcare expenses. 

Being proactive about healthcare planning can help avoid unexpected financial strain during retirement. 

6. Aligning Investments with Cash Flow Needs and Risk/Return Profile 

Reviewing and adjusting your investment strategy is crucial as you approach retirement. Your focus should shift from capital appreciation to capital preservation and income generation. This should include reviewing your portfolio to ensure it’s well-diversified and is consistent with your risk tolerance.  

Consider how your investments will produce the dividends and interest covering your living costs. 

Another important goal should be to avoid spending principal. Otherwise, it’s no longer available to produce income.

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help you save for medical expenses. As you approach retirement, an HSA can be a valuable tool for managing healthcare costs. Read on to learn how you can make the most of it: 

• Take advantage of the higher contribution limits, especially the catch-up provision if you’re 55 or older. This allows you to save more tax-free money, specifically for healthcare expenses. 
• If your HSA provider offers these options, consider investing your funds in mutual funds, stocks, or bonds. This can help grow your savings faster, providing a larger pool of money for healthcare costs during retirement. 
• Use HSA funds to pay for out-of-pocket medical expenses in retirement, such as Medicare premiums, dental care, vision care, and hearing aids. These withdrawals remain tax-free, making it a cost-effective way to manage healthcare expenses that are your responsibility. 
• If you can afford to pay out-of-pocket medical expenses now, you can let your HSA funds grow to cover future expenses. You can then use these funds (tax free) to cover higher costs in the future. Unlike Flexible Spending Accounts (FSAs), HSA funds roll over from year to year and are not subject to a “use-it-or lose-it” rule.
• After turning 65, you can use HSA funds to pay for Medicare Part B, Part D, and Medicare Advantage premiums. However, you cannot use HSA funds to pay for  Medigap premiums. 
• If you withdraw HSA funds for non-medical expenses before age 65, you’ll pay taxes and a 20% penalty. After age 65, non-medical withdrawals are subject to regular income tax, but there is no penalty, similar to a traditional IRA. 

Read our recent blog on HSAs

As Benjamin Franklin once said, “Failing to plan is planning to fail.” This adage is especially true when planning for several decades of retirement.  

It can’t be overstated how important it is to start your retirement planning process early and set clear, realistic, actionable goals. At Brown|Miller, our team of retirement planning CFP® professionals can assist in defining, developing, and pursuing your financial objectives through strategic planning and regular reviews. Some of the more  common pitfalls our clients have experienced include: 

• Too little or too much investment risk
• Concentrated investments (lack of diversification; excess risk)
• Insufficient insurance coverages (risk exposure)
• Excessive amounts of expensive debt

As you near retirement, you are more likely in your prime earning years, children have finished college, and your house is paid for, so you want to maximize your retirement savings opportunities as much as possible. Your 401(k) plan (or similar retirement plan) can be pivotal in this process.

Understanding and implementing effective contribution strategies can significantly boost your retirement assets. For 2024, the IRS has set the following 401(k) contribution limits:

• The maximum amount you can contribute to your 401(k) is $23,000 
• If you are age 50 or older, you can contribute an additional $7,500, bringing your total possible contribution to $30,500
• Combined with possible employer contributions, the total contribution limit (employee + employer) is $69,000, or $76,500 if you include catch-up contributions 
• Be sure to capitalize on employer-match contributions that may be available to you

Emotion-based investing is never recommended, especially during volatile periods like election years when markets can be increasingly unpredictable.

Making emotionally driven decisions can lead to impulsive actions, such as panic selling during market dips or irrational buying during market surges, which can undermine the pursuit of long-term financial goals. 

Election years often bring heightened market volatility due to uncertainty about future policies and their potential economic impact on businesses and families. News headlines, political debates, and polling results can all influence investor sentiment, causing rapid market swings. Feeling anxious during these times is natural, but it’s crucial to remember that short-term fluctuations are a normal part of securities market  behavior. 

Trying to time the market based on political events or predictions is exceptionally challenging and often unsuccessful.

Whether you’re planning to transfer your wealth to heirs or receive an inheritance, careful planning is essential.  

If you’re transferring wealth, focus on creating a tax-efficient estate plan while maintaining open communication with your heirs. 

For those receiving a wealth transfer, here are five important takeaways if you will be the recipient of a transfer of wealth or if you have already received an inheritance: 

1. Understanding the tax consequences of your windfall is crucial. Different types of wealth transfers, such as inheritances or gifts, can have varied tax implications. Consult with a tax advisor to explore strategies to minimize your tax burden, such as trusts or charitable donations. 
2. Develop a comprehensive financial plan that aligns with your goals and values. This plan should address immediate needs and long-term objectives, including retirement planning, education funding, and major purchases. Working with a financial advisor can help you create a balanced strategy that maximizes your new wealth’s potential. 
3. If you have an existing estate plan, update it to reflect your new financial situation. If  you don’t have an estate plan, now is the time to create one to ensure your and your family’s financial well-being. This includes creating or updating: 

• A will
• Establishing or updating trusts
• Identifying or updating designated beneficiaries

4. Reevaluate your investment portfolio to ensure it aligns with your new financial status and risk tolerance. Diversification is key to protecting your wealth against market volatility. A financial advisor can help you develop an investment strategy that balances growth with capital preservation. 
5. Review your insurance coverage to ensure it protects your new assets adequately. This might include increasing liability coverage, purchasing umbrella insurance, or considering life insurance policies. Adequate insurance can safeguard your wealth against unforeseen events and liabilities. 

Consulting with a Washington DC CFP® professional can provide valuable insights into how to make decisions that will help you pursue your financial objectives.