As you read this article today, it is Mother’s Day, so I want to wish you all a Happy Mother’s Day. Over the years, as I have written this column, I try to have a theme, and because it is Mother’s Day, the piece of this week’s article is Pivotal Days. As a mother and a father, one of the most pivotal days in a parent’s life is when a child is born, life changes at that very moment. When planning for retirement, there are a few pivotal days or ages that you need to keep in mind that I will discuss.

The first pivotal age is 59.5. Why is 59.5 so important? This age allows you access to your IRA and possibly 401(k) retirement funds without the IRS 10% early withdrawal penalty for those of you planning for retirement. Hypothetically, let us assume you and your spouse recently turned 60 and are ready to retire, but you do not know the course of action to get you to your retirement destination. You both do well in your careers, earning over $150,000 a year combined, keeping you in the 22% marginal tax bracket. Throughout your working careers, you and your spouse have accumulated $1,000,000.00 in savings and have a modest standard of living. The breakdown of your savings and annual expenses looks like this:

$750,000 in tax-deferred 401(k)s, transitioned to IRAs when they retire.
$200,000 in Roth IRAs
$50,000.00 in Bank Savings
$60,000 in annual standard of living expenses

Like many of the families that we take care of at The Financial Enhancement Group, you have the same concerns as they do. One of the questions we often are asked is, “How are we going to create an income and set up a distribution plan that will meet our standard of living?” Notice, I mentioned standard of living and not income. Aaron Rheaume, my Director of Financial Planning, says, “A mistake that our industry often tells people is that they must replace a certain percentage of their income, and that simply is not true, you need to replace a 100% of your standard of living.” In our example, our couple needs to create an income of $60,000.00 a year to meet their needs. Based on their savings, this is obtainable. However, an important thing to consider when starting their distribution plan is making sure we are the most tax-efficient with their withdrawal strategy. Taxes matter, and not everyone, even CPAs, think about the future implications that taxes can have on your retirement plans.

In our example, the most likely scenario would be to have our couple start drawing from their tax-deferred IRAs, delaying social security benefits until their Full Retirement Age or even until age 70. By starting withdrawals from their IRAs, they efficiently withdraw from their retirement assets, keeping their distributions in the 12% marginal tax bracket and letting social security grow to the maximum benefit. This strategy will also reduce future RMDs at age 72, another pivotal age, and a future column topic. Happy Mother’s Day!

Joseph A. Clark is a Certified Financial Planner and Managing Partner of The Financial Enhancement Group and an SEC Registered Investment Advisor. Article co-authored by Aaron Rheaume, CKA, Director Of Financial Planning at Financial Enhancement Group. Contact Joe at yourlifeafterwork.com or 800-928-4001. Securities are offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

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