Written By: Teresa Arrigo
As a kid, I remember thinking 30 was old. Now that I’m well past 30, my perception has changed drastically! Medical advances are helping people live longer which presents us with some unique circumstances for those entering their 70s and beyond regarding finances. Some choose to work longer, but some simply need their retirement dollars to stretch farther. Regardless, there are unique circumstances to consider in your 70s and beyond. I already mentioned the need to make money last longer, but a couple of other circumstances to consider are managing required minimum distributions (RMDs) and preparing the next generation to manage your estate.
When my grandparents were retiring, they had pensions and social security along with their investments. Their life expectancy was 85-90 at best. Today’s retirees find pensions are less common and retirement lasts longer. Retirement is an income problem – the bills keep coming even after we end our working careers. That is why managing expenses and utilizing an appropriate investment strategy is more important than ever. Create a budget if you haven’t already and be realistic about your spending habits. If you have debt, take steps to eliminate it. Also, consider allocating assets to prepare for future long-term care expenses. Finally, your investment strategy should stay balanced between protection of assets you need for income now and growth of assets you will need for income later. An investment approach that doesn’t allow for growth of some of your assets may mean running out of money before you run out of time.
RMDs can be a source of confusion and concern for those entering their 70s. Many don’t understand how they are calculated, which accounts are affected, or how they affect their financial plan. Let’s discuss how they work. In the year that you turn 70 ½, you are required to begin taking distributions from your pre-tax IRA accounts, even if you don’t need the income. It is added to your taxable income for the year and affects your income taxes. If you have been taking income from these accounts already, you may be taking enough to cover your requirements with these distributions. However, even if you don’t need the income, the RMD must be exposed to taxation which can affect your Medicare premiums and income taxes for that year. What happens if you don’t take your RMD properly? You will owe a substantial penalty (50% of the required distribution). If you are still employed beyond 70 ½, you may be able to delay taking RMDs from your employer’s plan. Certain plan types allow you to contribute as long as you are employed and avoid taking RMDs from that account until you fully retire. But remember, just like other aspects of your financial life, you are not alone. A qualified financial advisor can coach you through this process and help you create a strategy for managing your RMDs within your overall financial plan.
As you navigate your 70s and beyond, you may want to also consider including the next generation to some degree in your financial planning and management. Your heirs will one day be in charge of managing your estate. Consider including them in conversations with your advisor. This will allow your heirs to receive education now in preparation of helping you later in your life. If you have a trust, the trustee(s) you have chosen would be a great person to consider. If you have power of attorney documents, be sure that person knows and understands your financial state. Create what we call a “Honey, I love you” file with a breakdown of holdings, assets, and information they may need to take care of your affairs after you pass. That file can be held in your safe deposit box, safe, or another secure place in your home.
Your financial life cycle is much like the other aspects of your life – ever changing. From accumulation years to retirement and beyond, it is important to be prepared for each stage. That preparation starts in the offices of qualified financial advisors. They can help you create an investment strategy, manage RMDs, and empower your next generation to help you enjoy your 70s and beyond.