Milestones in Focus - Financial Planning Timeline: The Golden Years

February 01, 2022

Aging is a natural progression and is something we all must face if given enough time on this earth. As the saying goes, “failing to plan is planning to fail”. In the golden years of any household’s lifecycle, the reliance on and support from professionals and/or family should be expected. Organization and communication are both paramount when entering this phase. Getting ahead of the following topics before urgent needs arise, will help preserve your estate and personal directives, along with family cohesion.

Manage Spending

A well-funded retirement would ideally strike a balance between qualified and non-qualified assets which are defined as pre and post-tax resources. During your golden years, these assets frequently experience significant drawdown. To safeguard against depletion, limit annual withdrawals to 4% - 6% of account values. In doing so, the withdrawal amounts may be offset by the underlying performance of the investment accounts. We understand that in any given year there may be emergencies that require excess distributions, but this framework can still be used as a general benchmark. Assuming that expenses are managed, and that intergenerational planning is also a goal, a tactical approach to asset depletion should also be incorporated during this phase.

Thoughtful Asset Withdrawals

Many retirees find themselves selling assets to generate cash flow. Tax deferred investments such as 401(k)s, 403(b)s, 457(b)s, Traditional IRAs, etc. will not receive a step-up in cost basis and are now required to be fully distributed by your designated (non-spouse) beneficiaries within 10 years of your passing. Unfortunately, these beneficiaries will often receive these distributions in what could be their peak earnings years. Due to this paradigm shift, compare your potentially more favorable tax bracket to that of your beneficiaries’; it may be prudent to accelerate the distributions of tax deferred accounts during your lifetime. Many experts now consider non-IRA assets as more tax favorable assets for generational planning purposes, as they may receive a step-up upon your passing.

Giving Intentions

Philanthropy and end-of-life giving can be structured as early as one would like, but during the golden years there may be an increased sense of urgency or desire. Fortunately, it is not too late to plan. Whether it be a looming estate tax bill, legacy planning, or altruism, several solutions may be implemented to increase the impact of your giving.  Three of the most common charitable giving structures that we recommend, beyond outright gifts of cash or assets,  are described as follows:

Donor-Advised Fund (DAF):  Donor makes an irrevocable gift to a DAF of appreciated asset to which they receive a full write off in the year of the gift. Gift can then be invested and distributed accordingly. The donor may exercise discretion as to when, how much, and to whom the charitable gifts are sent. All receiving charities must be 501(c)3 registered.

Charitable Remainder Trust (CRT): Donor makes an irrevocable gift to a CRT of a highly appreciated asset for which they will receive a write-off estimated to be between 25-50%. Once established, the donor may withdraw a predetermined amount (e.g. 5%) for the remainder of their life. Upon passing, the remaining balance (minimum 10%) is sent to the donor’s listed 501(c)3 charity.

Pooled Income Fund (PIF):  Donor makes an irrevocable gift of appreciated assets to the PIF for which they may qualify for an immediate, partial deduction, based on their life expectancy and anticipated income stream. Once established the donor may withdraw a predetermined amount (ex. 5%) for the remainder of their life, while the assets receive market performance of the underlying investment pool. Upon passing, the remaining balance is sent to the listed 501(c)3 charity.

Beside the charitable strategies above, retirees may wish to consider lifetime gifting to loved ones.

Annual Exclusion Limits: In 2022, gifts of up to $16,000 per individual or $32,000 per married couple, qualify for the gift tax annual exclusion amount. Such gifts will not incur a gift tax, nor will they reduce your lifetime exemption amount. Keep in mind, the annual gifting exclusion is viewed on a per beneficiary basis and does not limit the number of beneficiaries to whom you may gift.    

We hope this big picture overview on spending, withdrawal strategies, and gifting serves as a thoughtful reminder of important topics to consider in your retirement.