A guide to creating your personalized retirement paycheck.
Retirement planning is not what it used to be. The good news: people are living longer and enjoying healthier, more active lives and pursuing new passions in retirement. Yet longevity poses challenges for how you’ll manage the retirement savings you’ve worked hard to accumulate over the decades.
No matter how you picture retirement, living in it will be different from working toward it. You’ll transition from saving and building wealth through a steady paycheck to converting your wealth into a reliable income stream for the rest of your life.
This is a unique challenge for today’s retirees. Previous generations of Americans spent fewer years in retirement and could count on a combination of employer pensions, Social Security and personal savings to provide a reliable retirement paycheck. Now, creating that same paycheck is more complicated given the demise of pensions, volatile financial markets, inflation, taxes and the potential for living 20 years or more in retirement.
How do you picture retirement? One of the most important, yet sometimes overlooked, steps in preparing for retirement is to visualize what you want your retirement to look like and to prioritize your goals. In short, think about what you are retiring to rather than what you are retiring from.
That can be a daunting task, but here’s another way to approach it: What are your retirement needs, wants and wishes? Obviously, your essential expenses—food, housing, health care, taxes, and insurance—come first, sustaining you over the years. Your wants—travel, entertainment, memberships, and gifts—reflect your desired retirement lifestyle, while wishes—a second home, bequests, and legacy planning—fulfill your legacy.
To start, ask yourself some basic questions about how you want to live in retirement and how you wish to be remembered:
Next, consider questions about retirement income planning:
Now plan your priorities. What’s most important to you?
What is the most expensive purchase you will make in your lifetime? Your retirement. Retiring with confidence means managing risk and eliminating as many of the unknowns as possible. A personalized wealth plan simplifies the complexities of retirement income planning and makes it easier for you to see where you stand today, tomorrow and beyond.
A wealth plan addresses all aspects of your financial life and can help you:
If you plan to retire within the next five years, consider taking these steps today to help in your efforts toward having what you need to enjoy a comfortable retirement lifestyle.
Consolidate your accounts to see the big picture
Consolidate your accounts to give you a big picture on how to best position your retirement plan and help prepare for—and manage—retirement income. Asset consolidation gives you more clarity, a streamlined approach, greater control and a deeper understanding of your assets. It may even save you money.
Be smart about your debt
Consider accelerating your higher interest rate payments so that the loan will be paid off before you retire. To curb new credit card debt, try paying cash for major purchases. By limiting new debt and reducing existing debt, you can minimize the amount of retirement income spent on interest payments.
Determine your total cost of retirement
Build a wealth plan that considers the cost of all your needs, wants, and wishes. Your financial advisor can help you project these expenses over time so you can see how much you will need annually to fund your retirement.
Consider your options for claiming Social Security
Retirees often give up tens of thousands or even hundreds of thousands of dollars by taking Social Security benefits too early. If you claim Social Security at age 70 instead of 62, the monthly benefit could be 76 percent higher, adjusted for inflation.
Take advantage of a Health Savings Account
Health Savings Accounts offer a number of benefits beyond spending for the short-term, such as saving for longer-term qualified medical expenses, including those in retirement. Because a Health Savings Account is one of the most tax-efficient savings options available, consider contributing the maximum, then pay for current health care expenses out of pocket and invest the account assets to allow for continued tax-free growth to cover future health care expenses.
Diversify your assets by location for tax flexibility
Having a mix of accounts with different tax treatments—tax exempt, tax deferred and taxable—allows for greater flexibility when managing your taxes in retirement. Consider the benefits of allocating some retirement savings to a Roth 401k or IRA. A Roth conversion or partial conversion may also be beneficial, especially in lower income years or down markets. You will have to pay the taxes, but you will benefit from tax free growth, and you can withdraw funds in retirement tax-free when needed.
Review withdrawal strategies
Evaluate withdrawal strategies to take advantage of lower tax years early in retirement. Everyone’s situation is different so make sure to personalize your distribution strategy to provide for the most tax efficient “long term” planning strategy.
Retirement planning isn’t just about numbers and graphs; it is about understanding that no one’s retirement is the same, the importance of having a personalized approach to help minimize the risks in retirement, and revisiting your plan every year to stay on course.
Planning for the unexpected
Maintaining your independence for as long as possible remains a top priority for most Americans. While it may be unsettling to consider a long-term care event, it is increasingly a reality for many Americans.
of 65-year-olds will need some form of long-term care.1
National annual median cost for a private room in a nursing home.1
years; the average length of stay in a nursing home.1
1 Longtermcare.gov, U.S. Department of Health & Human Services, accessed 2022
Retirement is not a single, consistent block of time. Many people think about their retirement years in three distinct stages, each with its own unique needs that your wealth plan should be prepared to accommodate:
8,000 days
Are you prepared for the long haul? With today’s rising lifespans, you could be facing 20 plus years in retirement, which translates into 8,000 days.
When you look at it that way, it becomes clearer that retirement is not an end, but rather a new phase of life that you’ll want to plan thoughtfully.
In real estate, it’s location, location, location. In retirement, location matters too.
Tax diversification in retirement can make a major difference in how much you pay in taxes—and when those taxes are due. That’s because different investments are subject to different tax rules, and different types of accounts have different tax treatment. Diversifying your investments into different accounts—a strategy often called asset location—has the potential to help lower your overall tax bill. Tax-considerate income strategies start by understanding the differences between taxable, tax-deferred, and tax-free accounts.
Taxable accounts
Taxable accounts include brokerage accounts and income on certain types of investments, including dividend interest and distributions from mutual funds, even if the fund is not sold. If you sell your investments like stocks, bonds, and mutual funds, you’ll pay taxes on the gains. Investments held for less than a year are typically taxed at the higher rates, while investments held for more than one year are taxed at lower rates.
Tax-deferred accounts
Tax-deferred accounts allow you to delay paying taxes on investment gains, and potentially accumulate more over time through tax-deferred compounded growth. Deferred accounts allow you to contribute pre-tax income, reducing your current tax bill.
For example:
Tax-free accounts
Tax-free accounts are funded with after-tax dollars. You pay taxes when you contribute, but your investment will benefit from years of tax-free compounded growth and withdrawals in retirement are also tax-free.
Balancing act
Balancing the need for income against investment risk, taxes and longevity is a dynamic process, and it’s wise to revisit your plan on an annual basis.
Get a clear snapshot of your retirement income plan. RBC WealthPlan helps clients prioritize their goals and address their concerns.
Gain valuable insights
RBC WealthPlan’s Retirement Paycheck is an advanced, interactive technology that helps you and your financial advisor understand your current situation, the possibilities available and the tradeoffs that may be necessary to achieve various outcomes.
RBC WealthPlan identifies your sources of retirement income using powerful visualizing tools. The Total Income Analysis below shows a 30-year projection of how one person will meet their spending goals throughout retirement.
A personal income plan identifies available sources of income and assets to fund your expenses in retirement in a tax-considerate manner to create a reliable paycheck. The plan must also anticipate the effects of longevity and usually incorporates four broad categories of income sources.
From a tax perspective, in general, it’s wise to withdraw from your taxable accounts first, then tax-deferred, then tax-free. That’s because the money you take from a taxable account (such as a brokerage account) may be taxed as capital gains at a lower rate than what you’d owe on distributions from traditional 401(k) plan accounts, traditional IRAs and certain other tax-deferred savings, which are taxable as ordinary income. Have your tax professional review your accounts for specific guidance.
Unlike your working years where your employer withheld and pre-paid your taxes, in retirement you have to fund your full tax bill. Your RBC Retirement Paycheck will help estimate the taxes that may be due. Consider having taxes withheld from taxable distributions, making quarterly payments or setting aside funds specifically for your tax bill to take the sting out of tax day.
Social Security
Approximately 56 percent of people who get benefits pay income taxes on them, according to the Social Security Administration. That’s because their income in retirement exceeds limits set by tax rules and regulations.
Ordinary income tax rate
The level of income you have in retirement affects your tax liability. If you meet certain income thresholds or receive capital gains from taxable investment, you may face other taxes.
Alternative Minimum Tax (AMT)
Individuals who reach certain income levels may be subject to AMT. This tax is calculated by eliminating certain deductions that are typically allowed under standard tax calculations.
3.8 percent Medicare surtax on net investment income
Married individuals filing a joint return with income above $250,000 and single filers with income of $200,000 or more may be subject to a 3.8 percent tax on net investment income. The tax can be applied to interest, dividends, capital gains, rental and royalty income, and non-qualified annuities that exceed the threshold amounts.
Tax-preferred treatment: Long-term capital gains/qualified dividends tax rate
A more favorable rate applies on long-term capital gains and qualified dividends, generally, from U.S.-based stocks.
To fund retirement, first start by defining income sources that are predictable and certain. These income sources may include:
Determining the timing and distribution amount related to these retirement benefits is a critical next step. There are several factors to consider, and key considerations for each reliable income source.
The decision of when to begin collecting Social Security is different for everyone. Most people qualify to begin taking Social Security benefits on their 62nd birthday but have the option to delay taking benefits as late as their 70th birthday.
The main advantage of delaying the start date is that each year of delay increases annual benefits between 6–8 percent. In contrast, for individuals with limited assets or health risks, it may make sense to take Social Security benefits early.
Most importantly, do not look at Social Security filing in isolation. Consider coordinating your spouse’s benefits filing decision with your own to optimize your combined income for your joint lifetime. And always consider your filing decision in the context of your personal goals, taxes, and overall plan cash flow needs.
Planning ahead for your required minimum distributions, or RMDs, can lower your tax bill during the distribution phase of life. Any money in a 401(k) or traditional IRA will be subject to RMDs, which now begin at age 73 following the passage of the SECURE 2.0 Act.
Fortunately, there are methods to choose from when it comes time to take your required minimum distributions. You can choose whichever approach works best for you.
Remember: You can begin to withdraw money from your 401(k) when you turn 59 ½, but that doesn’t mean you should. Think strategically about how you use your qualified assets.
Delay your RMD
You must take your first required minimum distribution for the year in which you reach age 73. However, with this first RMD, you can choose to delay distributions until April 1 of the following year.
If you wait until April to take your first RMD, however, know that you still must take your second RMD by December—saddling you with two taxable distributions in one year.
Consolidate RMD withdrawals
If you have multiple IRAs, one of the best strategies to avoid liquidation when an investment’s value has dropped significantly, or when an investment is projected for long-term growth, is to combine your RMD amounts for all your IRAs and take the total amount due from the IRA(s) with the most cash available or least volatile investments.
Tax laws require that an RMD be calculated separately for each IRA, but you may withdraw that amount from any of your IRAs, except a Roth IRA. If you have multiple IRAs, you may want to designate at least one as having short-term, low-risk investments or significant cash reserves to cover the RMD payments each year.
Make a qualified charitable distribution (QCD)
IRA owners age 70½ and older may take a tax-free distribution of up to $100,000 per year if it is paid directly from their traditional IRA to a qualifying charity. This qualified charitable distribution (QCD) can be used to satisfy your RMD for the year. This tax advantage is lost if you take receipt of the funds first, so be sure to instruct your IRA custodian to pay the distribution directly to the charity.
The risk of outliving assets in retirement has increased, given the longer life expectancies Americans now enjoy. One strategy for addressing this concern is to purchase an annuity that can provide a regular stream of income throughout your life— and the life of your spouse. Annuities may produce a guaranteed stream of income that you can’t outlive and are often used to supplement retirement income. You can fund an annuity with a single lump sum and/or a series of payments. In return, you can have the insurance company make scheduled payments to you. The payment amount depends on the type of annuity, contract terms, and factors such as age, variable or fixed payments, and single or joint income needs. Annuities aren’t for everyone. But they’re uniquely designed to help accumulate money on a tax-sheltered basis or provide guaranteed lifetime income, or both.
Annuity payment guarantees are based on the claims paying ability of the issuer.
Consider an annuity to meet these needs:
After tapping the available reliable resources for your retirement needs, the next source of income that should be used is earnings and income. Resources may include:
Remember that earnings from taxable accounts may increase the possibility of reaching a higher income threshold, resulting in more significant tax liability. In contrast, the earnings from tax-deferred accounts can be reinvested without triggering current tax implications. Therefore, you typically want to place income-generating assets in retirement accounts, such as 401(k)s or IRAs, and place lower-tax investments, such as index funds and exchange-traded funds (ETFs), in taxable accounts. The taxes you owe on investment earnings can vary, depending on the type of asset held or the source of earnings. Some income is subject to tax at ordinary income tax rates, while other income is subject to the more favorable long-term capital gains/qualified dividends rate.
Which assets should you draw from first? There are several approaches you can take. Traditionally, tax professionals suggest withdrawing first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where withdrawals are tax free. The goal is to allow tax-deferred and tax-free assets the opportunity to grow over more time.
Tax impacts of retirement income
When crafting your retirement paycheck, identify the funding sources that may be used to determine income taxes, Social Security benefits subject to taxation, and additional required Medicare premiums.
Qualified withdrawals from Roth IRAs and health savings accounts generate tax-free funds that won’t trigger increases to Medicare premiums if your income is above a certain level.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor. No information, including but not limited to written materials, provided by RBC WM should be construed as legal, accounting or tax advice. Chart courtesy of J.P. Morgan Asset Management.
You may think about your health savings account (HSA) solely as a way to pay for current-year eligible medical expenses. But are you aware it can also be used as a long-term investment vehicle that can play an even greater role in your overall retirement income strategy?
You can use your HSA with other retirement accounts to maximize your after-tax retirement income. Saving in an HSA for retirement gives you a tax-advantaged account dedicated to future medical expenses—allowing you the opportunity to avoid dipping into retirement accounts intended for cost-of living expenses. Also, HSAs are a great way to pay for qualified medical expenses in retirement.
A triple tax benefit
It is important to tackle basic estate planning as part of your overall plan. No matter your age or wealth, key legal documents, proper titling of assets and maintaining beneficiary designations are important first steps.
Estate essentials
Your estate includes everything you own: your home, personal possessions, savings, investments, retirement accounts, real estate, business and digital assets.
Regardless of your age or estate value, protecting these assets requires a set of estate planning documents, including a current health care directive, will and power of attorney. Without them, transferring your estate, which may include gifting while you’re alive, can be complicated by taxes, probate and family emotions.
It is also vital that your assets are properly titled and your beneficiary designations are accurate. This is especially important if your plans for transfer differ from a traditional linear family transfer, or you are single or have a blended family.
Trust considerations
Many people think estate planning is about their death. But it’s really about your control over your assets—control while you’re living, and control after your death. One of the most basic ways to gain control is through a simple will. But for people with more complex estates or concerns, a trust can provide a legal structure to facilitate control and see your wishes are carried out. A trust is often used to minimize estate taxes and can offer other benefits as part of a well-crafted estate plan.
There are many reasons for implementing estate planning strategies, including:
Taxes matter
Increases in the federal estate and gift tax exemption present additional planning opportunities and may also have unintended consequences for existing estate plans.
In light of these changes, existing estate plans should be reviewed, including most trusts, especially those that use formulas that reference the standard exemption. There may also be an opportunity to remove limitations or rework trust structures to eliminate unnecessary complexity. These may include moving assets back into the estate to take advantage of the revaluation of assets at death.
If you are fortunate enough to have wealth beyond funding your retirement, you can start focusing on your legacy plan. Proper legacy planning includes drafting (and updating) a will or trust to help confirm that all your assets will be distributed exactly as you wish.
When developing your legacy plan, give special consideration to these key questions:
It’s important to spell out a clear direction about your personal legacy wishes since your choices can affect tax planning strategies in retirement. Tax-advantaged gifting strategies should be considered to confirm the smooth transition of assets to beneficiaries before and after death.
Gifting during your lifetime
Sometimes it’s wise to make gifts during one’s lifetime to decrease the size of an estate and minimize estate taxes after death. Decisions about when to make a gift should factor in the federal estate exemption threshold and state estate tax laws.
If you’d like to benefit a charity and don’t need your RMDs for retirement income, a qualified charitable distribution from your IRA may make sense.
A wealth plan is uniquely suited to help you navigate your financial life throughout retirement. Created thoughtfully and managed over time, an RBC WealthPlan enables you to set a course, define milestones, track successes and redirect you should your circumstances change.
A personalized retirement income plan can help you:
IMPORTANT: The projections or other information generated by RBC WealthPlan regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.
Annuities are designed to be long-term investments and frequently involve substantial charges such as administrative fees, annual contract fees, mortality & risk expense charges and surrender charges. Early withdrawals may impact annuity cash values and death benefits. Taxes are payable upon withdrawal of funds. An additional 10 percent IRS penalty may apply to withdrawals prior to age 59-1/2. Annuities are not guaranteed by FDIC or any other governmental agency and are not deposits or other obligations of, or guaranteed or endorsed by any bank or savings association. With fixed annuities, both the money you invest and the interest paid out are guaranteed by the claims-paying ability of the insurer. Investments in variable products will fluctuate and values upon redemption may be less than the original amount invested. Investors should consider the investment objectives, risks, and charges and expenses of an annuity carefully before investing. Prospectuses containing this and other information about the annuity are available by contacting your RBC Wealth Management financial advisor. Please read the prospectus carefully before investing to make sure that the annuity is appropriate for your goals and risk tolerance.
Trust services are provided by third parties. RBC Wealth Management and/or your financial advisor may receive compensation in connection with offering or referring these services. Neither RBC Wealth Management nor its financial advisors are able to serve as trustee. RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.