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Today we’ll be looking at why everything about retirement changes at age 62. One of our favorite things about working with clients around the 62 mark is just seeing how quickly things can change for them.
But, unfortunately, many retirees fall into the trap of not fully understanding the opportunities available to all retirees at this age.
That’s why we’re going to walk through three changes that happen at 62, and how you can identify them and use them to your advantage.
So let’s get right into it.
1. Tax Optimization Gets Easier
The first change is that tax optimization gets easier. You see, most retirees have concentrated their savings in tax deferred accounts, and many times they like to begin to reposition those into a Roth.
There are two key components here, and they are both available to anyone that is age 62 (technically, 59.5 is when you get access).
The first one is that you can do in-service distributions from a 401k into an IRA without leaving your employer, and then that can allow you to do Roth conversions if you don’t have a Roth option in your 401k.
This means every 365 days a person, and again lets say you are 62 years old, can roll money from their 401k into their IRA for the purpose of doing conversions.
2. You Can Pay Roth Conversion Taxes Within Your Portfolio
The second one is that you can pay the tax for the Roth conversion from the qualified funds and not pay the 10 percent penalty. Of course, it’s almost always best to pay taxes from outside sources other than your 401k if possible, but there are many people who can’t do that and instead they pay the taxes from the IRA or 401k.
Well, you no longer have the 10 percent problem, and that flexibility is nice. We have a client at Rubino & Liang Wealth Partners, let’s call him Peter, and he’s a good example of what I’m talking about.
Peter is single, and his retirement income is made up of a strong union pension, social security benefits, and a pretty large 401k that he had accumulated over the years.
And he knew he was going to be okay financially, but his major goal was to give his daughter a significant inheritance. But because of all his income sources, he was going to be in a moderately high tax bracket his entire life.
He wasn’t sure how he would maximize his legacy for her. When he discovered what happens to that 10 percent penalty when you turn 59 and a half, it really transformed his inheritance plan because remember, you can now access your funds without that 10 percent additional penalty.
So, in Peter’s case, it gave him more years to do the tax and legacy planning because he could start doing strategic Roth conversions as soon as he came in to see us at age 62. And because he had no money saved anywhere else outside of that 401k, he had to pay taxes from it.
And this really changed the outcome for him because even though he was single – And single people don’t typically benefit as much from Roth conversions because they’re always in that single individual tax filing status – But in Peter’s case, he was really concerned about passing that money on to his daughter and paying the least amount of taxes possible.
And by giving his daughter a Roth IRA as an inheritance rather than his 401k, she could let it grow for an additional 10 years after her passing, tax deferred and tax free. And not only that, if Peter continues to do these strategic wealth conversions each year, it’s potentially saving the family hundreds of thousands of dollars in taxes!
So even if a person is not in the specific situation that Peter is in, an important thing to remember here is that the flexibility allows you to be strategic about your tax planning and your future withdrawal planning, and it can give you a more predictable retirement income. It can also give you more control over how and when you pay your taxes.
Not to get into it in this article, but there are various tax planning opportunities, like opportunities to avoid surprise tax hits if you use different accounts that are taxed various ways rather than only your traditional 401k.
And when you’ve saved your retirement savings in different tax type accounts, you want to be very strategic about which accounts you withdraw from, creating that steady monthly income.
Now, if you want to be strategic about your taxes, it’s going to involve two things, and these are two things that we’ve built into our practice at Rubino & Liang Wealth Partners. First, you want to have a framework looking forward into the next 20 plus years, and that framework is choosing a strategy that works best for you.
That could be a strategy of filling up a certain tax bracket each year.
It could be a Roth conversion strategy.
It could be something that is called a “pro rata” strategy – a general framework about which way will benefit you the most from which accounts you take money from each year.
And the second thing is, once you have your general strategy, you want to revisit it on a year by year basis.
And the practical way that we do that at Rubino and Liang Wealth Partners is that we collect our client’s 1040 tax filing, we analyze the tax return with a multi-point analysis, and we use that data to inform our strategic planning for the year.
But also, to fulfill whatever tax efficient withdrawal strategy or Roth conversion strategy that the framework is leading us to.
Now, as a quick side note, one of the biggest problems in this space is that with most content, whether that be tax planning, retirement savings, or social security, the advice is always pretty generalized. The main issue with this is that it leads to fear-based retirement planning – where you make irrational decisions about your retirement simply out of fear.
So, to solve this problem, we’ve created a complimentary quiz to help people figure out if they’re on track to retire, given their situation and retirement goals. After a couple of days you’ll receive a personalized video in your inbox from a financial advisor here that will run through your exact situation and answer the big “can I afford to retire” question.
Another thing that often comes up when we see people at age 62, is that you’re closer to not needing your workplace health care, but you don’t quite qualify for Medicare yet.
Many people delay retirement because they’re unsure about what to do, and there is this general sense that healthcare is too much of a wild card and it’s super difficult to plan for.
Let’s use Glen and Lori as an example. Lori watched her mother struggle to cover healthcare needs when she found herself in need of long-term care services. And what she said her family went through during that time – the family scrambling to make decisions, to try to find information – it caused Glen and Lori to realize how unprepared they were for their own healthcare needs in retirement.
What they discovered about planning for health care after 62 would transform the way that they feel not only about retiring at 67, but potentially even retiring earlier. They found that it was a good window of time for them to take the time to sort out their health care planning for the future retirement.
First of all, when you’re 62, you still have time to learn about how to include a proper healthcare budget in your plan, because you’re getting close enough to 65 to get the information that you need.
Glen and Lori learned what Medicare will and will not cover. They included a budget in the plan for the three areas of healthcare in retirement, which are
- your Medicare premiums
- your out of pocket costs
- and your Custodial care needs
and once they did that they could see that they were more than on track to retire at 67 In fact, they found that they could afford to pay for private health care to bridge the gap between retiring at their current age of 62, and age 65 when Medicare begins.
A lot of people won’t even consider retiring before 65 because they automatically resist paying for private health care out of their pocket, but sometimes its actually a GIFT that you can give yourself.
By paying for private health care out of your pocket from (let’s use Glen and Lori as the example) the ages of 62 to 65, you give yourself the gift of years of summers that you can experience on YOUR terms, not work.
Now, We’ve rarely met someone who retired who didn’t say, “I wish I would have retired earlier.”
Yes, it costs more.
And of course waiting until after you’re 65 to retire helps you if you’re underfunded for retirement.
But oftentimes, when we’re more accurate about our planning for health care, we realize that we may have over saved for retirement.
And maybe, just maybe, it’s more expensive for you to die overly rich. So for Glen and Lori, by understanding their Medicare and their long-term care options in advance, they were able to remove one of the biggest uncertainties that keeps people working longer than necessary.
But understanding health care costs in advance can also give you something else, and that is, You could use the time to set aside funds to cover that health care gap and even give yourself a one or two year earlier retirement as a gift.
Or it could motivate you to create a health care emergency fund to cover out of pocket costs, or inspire you to max fund your HSA if you have one.
For Glen and Lori, it was really a game changer because having watched her mother’s crisis, they were able to put to rest their concerns about being prepared for their own needs, and it can help prevent that scramble for information and the decisions that their family had experienced a few years prior.
3. Addressing The “Retirement Wall”
Now the third change is that you face the retirement wall of 65. And this is something that is very common, and if you’ve never heard of it before, basically it’s the mounting pressure that many people who are over age 60 feel about getting ready to turn 65 and being ready for retirement.
Am I ready for retirement?
Have I saved enough and can I maintain my lifestyle?
Now, traditionally, people tend to use arbitrary numbers, “that magic number” Or that “rule of thumb”, like for example, “you need to have eight times your salary by age 65”, or “if you have 25 times your distribution need from your portfolio, because 25 times equates to the 4 percent withdrawal rule”.
But this lack of individual consideration makes people feel like a number. It makes them feel like they’re missing something personal. The old way of doing this might have worked 15-20 years ago, but it doesn’t work now.
The world of retirement planning has changed, and the old tools weren’t built for today’s challenges.
Conclusion
Now that you know why you need to stop waiting to retire, you need to understand this one thing. This article only discusses part of the picture.
Many successful retirees weren’t the richest or had the best savings plan; they simply had the best strategy.
And that comes down to getting personalized advice instead of following general financial advice online.
So, to help as many people as possible with that, we have put together a complimentary questionnaire, once you complete it, you’ll get a personalized video walking through if you can afford to retire, using your exact numbers. Click here to access the quiz, fill out the questionnaire, and within a couple days, you’ll have personalized advice for your situation.
Until next time, take care!
