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I'm nearing retirement (original date was 12/31/21) but what really changes in retirement?

I know when I was working I'd just throw money into stocks/ETFs/etc. and didn't worry too much about it and never got into bonds. At times some CDs or would hold cash and wait for dips in the market.

To simplify stuff I'm moving more to indexes and maybe a 50/50 split between stocks and fixed income. In my case the fixed income is mostly treasuries. I might move into bond funds down the road.

The hardest things for me to figure out are taxes. Also I expect to draw down money most between 60 and 65 and least after 70. We get one COLA pension as soon as I retire but that will only cover about 1/3 of expenses. Initially the rest will be from my savings, then two smaller pensions at 65, my wife's social security at 67 and mine at 70. At that point our withdrawals from savings may be zero.

The money I'm moving to treasuries will cover us from at least retirement until 67 and might be about 30% of my savings.

I don't count on this in my planning for retirement but it is likely that an older relative (non-parent/sibling in his 80s) will leave us a decent sized tax deferred sum of money. If that happens while a very nice thing, it will certainly add to my tax issues. Anything that I can do to help minimize tax issues if this happens? I'm guessing it would be at least $500K. Again I don't plan on it for my retirement but since I was told it was in his will, I at least want to be aware of the tax issues since if it happens when we are collecting social security, the pensions and have to make RMDs from his account and mine, it could get expensive.

In our case leaving an inheritance isn't a big deal since we have no children, only some nieces/nephews.

Thanks
Rich

I'm not a tax expert, but I can think of two ways to minimize the taxes related to your potential inheritance. One is to decline the inheritance altogether. That seems like cutting your nose to spite your face. Another is to donate some portion of it to a likely charity.

You'll find actual tax experts over on the Tax Strategies board, though.

Good luck.

Eric Hines

I don't count on this in my planning for retirement but it is likely that an older relative (non-parent/sibling in his 80s) will leave us a decent sized tax deferred sum of money. If that happens while a very nice thing, it will certainly add to my tax issues. Anything that I can do to help minimize tax issues if this happens?

Do you know what form of tax deferment this takes? inherited IRA? If so, you have 10 years to draw down the total of the account, and you can break down the withdrawals to minimize tax drag. It's only taxed as it's removed from the IRA.

The big thing that changes in retirement is the lack of earned income, and with that the need to reconfigure your risk tolerances to compensate for no longer having a pay check provide extra dry powder to fuel new investments should you hit a pothole. When it comes to actual income, it really doesn't matter how you get it, as long as it is legal. I know that some people prefer dividends, but I like selling off shares of stock for capital gains as needed. The tax burden seems less onerous that way, but you have to keep an eye on making sure you have sufficient assets to go this way. So if you bought a share of something for $100 and when you sell it it's worth $150, you get the $150 to spend but are only taxed at the lower capital gains rate for one third of that spendable cash.

To simplify stuff I'm moving more to indexes and maybe a 50/50 split between stocks and fixed income. In my case the fixed income is mostly treasuries. I might move into bond funds down the road.

I use bond/cd ladders for cash I need to spend in the next 5 years, everything else being in equities or personal real estate. I do not like the lack of control with bond funds, and will only buy bonds I can keep to maturity as they will return their full value plus interest at that time. We have not yet taken pensions or Soc. Security. I have been amazed at how little we spend, frankly, though that may have been impacted by the lack of travel in Covid times and our general level of contentment wrt things. YMMV. I may be a bit crazy in that I am a fan of mortgage, considering them an inflation hedge. OBVIOUSLY, with more elevated mortgage rates this tidbit is dated, but it's very nice to have a 30 year fixed rate mortgage at 2%, cash in Vanguard making more than what we are paying on interest for the mortgage. Less nice is that we are not sure about living in that house any more, and with a pool and septic, renting would be complicated, not to mention a significant capital appreciation exemption we could realize by selling it instead.

Also I expect to draw down money most between 60 and 65 and least after 70. We get one COLA pension as soon as I retire but that will only cover about 1/3 of expenses. Initially the rest will be from my savings, then two smaller pensions at 65, my wife's social security at 67 and mine at 70. At that point our withdrawals from savings may be zero.

The money I'm moving to treasuries will cover us from at least retirement until 67 and might be about 30% of my savings.

I can't tell you what to do, since that is dependent on things we don't necessarily share, like risk tolerance. Dad was fully invested in stocks at 85, as is Sis at 70. My family example does not lean towards being heavily invested in bonds other than as a way to juice your returns of short term funds that should not experience a decline in principal. Anything we don't need in the next 5 years is (or will be as I am particularly cash heavy right now,)in stocks, either individual or ETF. Our assets are such that we can ride out down markets, however. The size of your oops cushion has an impact on the risks you can take. I personally have not liked bond funds, and find that they really are not reacting in opposition to the stock market these days, so what kind of hedge are they? Again, individual bonds held to maturity is different than bond funds. Yes, being fully invested in stocks can be risky, though that is mitigated by a 5 year cash cushion. Please just remember than bond funds have risk to capital as well, and there is risk inflation risk if you get stuck in investments that do not en masse at least keep up with inflation.

We had it relatively easy, as DH had a couple of lucrative years as a contractor for the company he retired from. That gave us time to figure out many of the relatively unknowns, while he still had money coming in, even though the money was not regular. It's a great way to go if you can do that.

Sorry, pretty rambling. Hope you get something useful out of it and feel free to ask questions. Just remember that what is working for us may not be for you, but it is always good to at least look outside the box.

IP

IP

Hey Rich,

Would you happen to be a Fidelity customer? If so, they have an excellent financial planning tool that allows you to put in many variables and play what if scenarios with various strategies. Just about very number can be entered / tweaked. It comes out with an 'end-of-life' balance from what you input. I gather you want yours to come out to just about zero.

If you're not a Fidelity customer, your investment firm may offer a financial planning tool. You may also want to use google to search for one, but I've found that many are very simplistic for my liking.

I always find that it's best to start to put some numbers to a plan, evaluate and tweak as you go.

Hope that helps!
'38Packard

Yeah, I first used the Fidelity retirement tool a while ago when my previous employer used Fidelity for their retirement plan. I think I've used most every free tool around. Of course the one big unknown is always predicting the future such as your expenses. You can input your current ones but they could go down or up depending on health and inflation.

I'm still getting used to being married and not 100% in control of all of my expenses. While my wife doesn't spend a lot on herself, she gets carried away with gifts for others. I've been working on 'fixing' that issue.

Money has always come and gone for me. I've never followed a budget, tracked expenses, etc. but just kind of know if I'm spending too much to clamp down on things. (And while I've made decent money it has never been something crazy since much of my pay came from government jobs). I would make sure to have money go directly into investments from my paycheck and once that happened I would almost never withdraw that money (except in rare home purchases). I think my wife had to live off much lower income and tended to spend whatever was in her bank account since in most cases she needed it. Sometimes I felt like Jerry Seinfeld where Elaine once threw a $20 out the window and then Jerry later finds a $20 elsewhere. Of course none of my purchases were high end. I think the biggest has always been eating out but that is one that can be easily curtailed in retirement if need be.

Thanks for the comments.

I retired last July. What's changed? Well, I can wake up when I like and generally don't have to be anywhere at a specified time. I don't have to do anything I don't want to do (except for household stuff, of course).

I was reading just yesterday that some people have a hard time because they suddenly don't feel useful and are "just waiting to die". I'm not getting that. I don't really have a need to feel useful. What does it matter? I'll be dead in 20 or so years anyway. I'm enjoying my time now. Whether it's watching TV, cruising the internet, take trips (we've already done a few, and are planning more), or whatever. It's a lot less stressful. No fighting traffic, no "fires", no having to request leave, etc.

But that's me. If someone has to be busy all the time, or feel useful all the time, they'll have to overcome that somehow. Well..."busy" can be accomplished with a hobby or volunteering. For me, "hobby" is whenever I feel like it. Sometimes I'm not in the mood. Editing photos is not something I can do well if I'm not in the mood (photography is my main hobby).

Also, being under 65, I had to avail myself of the ACA. A bit tricky estimating income to set the subsidy. Hopefully I got it right for 2022 (we'll see soon), and for 2023. If not, I suspect I'll have to pay a penalty. This year our income is dividends and likely some cap gains. Which will be offset by the cap losses from last year (I bailed on a few companies).

As for spending, 1poorlady is very frugal. But, yes, as a couple you need to be on the same page (more or less) to avoid any friction. Like you, I don't really budget. But I do track expenses so I know where the money is going, and how much remains. Since the checking account isn't getting paychecks anymore, I need to be sure there are funds there to do the auto-pays (utilities, etc).

Worst thing that's different is that you don't get holidays or vacation days off.

And nothing to look forward to on late Friday afternoon. I once was picking up some dry cleaning around 3:30 on a Friday afternoon and the 2 girl clerks were all smiles and bubbly. I asked why they were so happy, and the said "Weekend is in 1 hour!!!"

Another difference is you have time to do deep dives on youtube video streams. Like this: https://www.youtube.com/watch?v=VFTY6WyJU0E "War Factories - The Secret History of WW II" 22-part series.

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