5 Long-Term Strategies for a Better Retirement

Key Points – 5 Long-Term Strategies for a Better Retirement

Understanding How Retirement Planning Is Forward-Looking
What Is Tax Diversification?
Building YOUR Financial Plan Around YOUR Needs, Wants, and Wishes
Stress Testing Your Financial Plan
7 Minutes to Read | 24 Minutes to Watch

5 Long-Term Strategies for a Better Retirement

This is the time of year where a lot of people are making or at least thinking about new year’s resolutions. Having a forward-looking approach is also key with retirement planning, but we don’t just have our eyes set on 2024. We’re also looking ahead even further to 2025, 2026, and beyond. Make sure to take note of these five long-term strategies for a better retirement from Dean Barber and Bud Kasper, CFP®, AIF®.

The Creation of a Long-Term Tax Plan
Creating Tax Diversification in Pre-Retirement Savings
Coordinating Claiming of Social Security Strategies with Other Sources of Income
The Creation of a Distribution Strategy
Create the Plan, See If It’s Reality, Then Live It

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1. The Creation of a Long-Term Tax Plan

Number one on our list of long-term strategies for a better retirement is always critical, but it’s even more important this year. That’s because there are some significant changes in the tax code slated for 2026 if Congress does nothing between now and December 31, 2025. That’s when the Tax Cuts and Jobs Act is scheduled to sunset. At that time, tax rates would revert to the higher rates of 2017.

Let’s say that tax rates do in fact go up in 2026 and you have all your assets in a tax-deferred traditional 401(k) or IRAs. Do you understand the tax ramifications that you would be facing if you take that money out after December 31, 2025?

“The objective with a long-term tax plan is to pay as little tax as possible—not in a given year, but over your lifetime.” – Dean Barber

2. Creating Tax Diversification in Pre-Retirement Savings

Number one and two on our list of long-term strategies for a better retirement go hand-in-hand with each other. We’ve worked with several people who have had that a-ha moment and have realized that having all their money in tax-deferred assets might not be a great idea. This is where creating tax diversification in pre-retirement savings comes in. Having tax diversification means that your assets are spread across the three tax buckets: tax-deferred, taxable, and tax-free.

We’ve touched on the tax-deferred bucket. Those are your IRAs, pensions, and 401(k)s that are taxable when accessed. But what about the taxable and tax-free buckets? Your taxable bucket consists of your savings and brokerage accounts. What we really want to focus on here as far as long-term strategies for a better retirement in the tax-free bucket. That’s your Roth money.

Roth vs. Traditional

When you contribute to a Roth 401(k), you’re required to pay the tax up front but all the growth from that point on is tax-free. The same goes for when you convert a traditional IRA to a Roth IRA (you pay the tax on the conversion). Can there be some pain with pay that extra tax? Of course. But remember the goal is to pay as little tax as possible over your lifetime, not just in one year.

“Are you doing it on a traditional or on a Roth? Does it make any sense to put money into your 401(k) on an after-tax basis rather than a pre-tax basis? The answer is probably, but we need to put it in the plan to find out which is the best outcome.” – Bud Kasper, CFP®, AIF®

Let’s circle back to the Tax Cuts and Jobs Act sunsetting. By converting a traditional IRA to a Roth IRA today, you must pay tax on the Roth conversion, but then the Roth IRA won’t be taxed when rates are scheduled to go up in 2026. Essentially, you can do Roth conversions at a discount between now and December 31, 2025.

Tax-free income in retirement can be quite a blessing. But that doesn’t mean you should have all your money in the tax-free bucket. You still need to leave some money in the tax-deferred bucket to pay the tax on any Roth conversions.

“If you have good tax diversification, you have some in traditional, Roth, and taxable. What that allows you to create a distribution strategy. That is a combination of those three buckets to keep your taxable income as low as possible in retirement.” – Dean Barber

QCDs and RMDs

Also, keep in mind that if you’re 70½ or older and charitably inclined, you can take advantage of Qualified Charitable Distributions. With QCDs, you can give up to $100,000 a year directly to charity from traditional IRAs without it showing up on your tax return. QCDs can also help satisfy your Required Minimum Distributions. Once you turn 73, you’re required to begin withdrawing funds from your IRAs. Planning around RMDs is an important component when it comes to long-term strategies for a better retirement.

3. Coordinating Claiming of Social Security Strategies with Other Sources of Income

Number three on our list of long-term strategies for a better retirement is coordinating when you claim Social Security as a part of your income planning. Most people think that the day that they claim their Social Security is synonymous with their retirement date. That’s an all-too-common retirement misconception, though. The difference between the best and worse claiming strategy can be a substantial amount of retirement income for you and your spouse.

That “and for your spouse” part is critical. It can be tempting to claim Social Security when first eligible at 62. And there are some unique circumstances in which it makes sense to do so. The goal, though, is to maximize your benefit, which is done by delaying when you claim it. Remember that when one spouse dies, the larger of the two benefits stays while the other goes away.

It’s also important to understand that Social Security as an income source by itself isn’t taxable. But when you factor in other sources of income, it becomes taxable. It’s part of our team’s job at Modern Wealth to determine how to align each client’s sources of income, including Social Security, to maximize the result over the course of their lifetime. Hence when this is on our list for long-term strategies for a better retirement.

“If you have too much provisional income, you start to disqualify Social Security from becoming tax-free. Up to 85% of the benefit that you receive becomes taxable above certain income limits.” – Dean Barber

Social Security Isn’t an Entitlement Program

People tend to think of Social Security as an entitlement program. The reality is that from the day you start working, you’re putting money into that system. Your employer has also been forced to make a dollar-for-dollar match to that same system. The money that’s coming out of there is your money and that of your employers that you worked for in the past. Therefore, it warrants some discussion and strategy on how you’re going to claim that Social Security.

4. The Creation of a Distribution Strategy

This leads us right into our fourth long-term strategy for a better retirement: the creation of a distribution strategy. Again, Social Security is one part of it. Which buckets of money will you be pulling from at what time and in what amount, in combination with Social Security, possible rental income, royalty income, etc. Put that all together. How you take from which account, the order in which you take from which account, and the amount you take from which account will have largely factor into your overall success of how much money can you spend.

“You don’t want to try to figure this out without having an expert to help you. That’s why inside our firm, we have CPAs working with our CFP® Professionals to coordinate the best net outcome that we can possibly conceive.: – Bud Kasper, CFP®, AIF®

Do You Have Enough?

There’s a question that’s constantly on everyone’s mind as they’re creating their distribution strategy: Do I have enough? A lot of people think if they had $2 million or $2.5 million that they’d be rich, but it’s not about a dollar amount.

When you put your retirement plan together, it’s about how much money you need to have coming into your checking account month after month to keep up with inflation. What’s that dollar amount? How much do you need to live the life you want?

Then, you circle back to all the resources to coordinate the Social Security claiming strategy and help with tax diversification. Can you see how these long-term strategies for a better retirement tend to tie in with each other?

After that, you create the distribution strategy. To do that, you need to have that number of what it’s going to take each month for you to do all that you want to do. Health care is a big piece of that, especially if you retire prior to 65 (Medicare age). Taxes and inflation are also big pieces of that and can be big pain points for people.

5. Create the Plan, See If It’s Reality, Then Live It

Last, but certainly not least, let’s go to number five on our list of the five long-term strategies for a better retirement. This one really hits home for us because we run into so many people who this applies to. Number five is creating the plan, seeing if it’s reality, and then living it.

There are a lot of people who make good money, but still aren’t happy with where they are financially. In other words, their financial success isn’t translating into living a happy life. It’s usually because they lack clarity. It’s the lack of clarity in what they have, how it’s going support them into the future, and how much more they need to save to get to that ultimate financial independence timeframe. There can also be a lack in clarity for how much longer they need to work.

Stress Testing Your Financial Plan

We like to say, “Create the plan that is your ideal plan.” This isn’t your friend’s plan, neighbor’s plan, or family member’s plan. It’s your plan that designed around your specific needs, wants, and wishes. We’ve mentioned several risk factors—such as health care, inflation, and taxes—that cause a lot of financial stress if you don’t properly plan for them.

“The number of people who have a plan is fractional compared to the people that have done no formal planning. Yet the people that have done the planning are much more confident in their future.” – Dean Barber

Well, once you create your plan, you can stress test it against a wide range of economic conditions to determine your plan’s probability of success. Maybe you’ll receive clarity that you can confidently retire. Or maybe you’re still not quite there yet. Either way, your plan gives you clarity that’s critical to have as you’re approaching and going through retirement.

You can learn more about stress testing your financial plan by reviewing our Retirement Plan Checklist. It consists of 30 yes-or-no questions—many of them specifically about stress testing—and an age-based timeline that gauge your retirement readiness. Download your copy below.

Retirement Plan Checklist

There Are A Lot of Trade-offs in the Retirement Planning Process

Keep in mind that trade-offs are very common within the long-term strategies for a better retirement. Let’s say that you want to take your family on a destination vacation to kick off your retirement. Put it into your plan. If your plan has been stress tested and traveling/spending time with family was a top priority for you, we’re going to do everything possible to make sure you can take the trip.

But maybe putting that trip into your plan does drop your probability of success more than you’re comfortable with. If that’s the case, maybe you might need to put off retirement a couple more months or take a part-time job in retirement. If that trip is very important to you, explore the possible trade-offs to make it happen.

Do You Find These Long-Term Strategies for a Better Retirement to Be Helpful?

The bottom line is that so much of retirement planning is forward-looking. There are a lot of things that are going to change from when you’re working to when you’re in retirement. And those things will keep changing during retirement.

With all the moving parts within a forward-looking financial plan, it’s critical to work with a team of financial professionals. The three C’s—the CFP® Professional, CPA, and CFA—need to be working together for the most important C, the client. That team of professionals should also consist of risk management and estate planning specialists.

To learn more about our team of professionals and how we work together to come up with long-term strategies that can create a better retirement for you, start a conversation with us below.

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We hope that the long-term strategies for a better retirement that we shared can be beneficial to you, and look forward to talking with you soon.

5 Long-Term Strategies for a Better Retirement | Watch Guide

00:00 – Introduction
00:53 – The 5 Long-Term Strategies
03:09 – 1) The Creation of a Long-Term Tax Plan
05:45 – 2) Creating Tax Diversification in Pre-Retirement Savings
09:23 – 3 & 4) Creating a Distribution Strategy & 4) Properly Claiming of Social Security
20:30 – 5) Create the Plan, See If It’s Reality, Then Live It

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.