Why When You Retire Matters

By Chris Duderstadt

December 20, 2023

Why When You Retire Matters

Key Points – Why When You Retire Matters

  • There’s More to Retirement Planning Than Saving for Retirement
  • Making the Most of the Time That We Have
  • Thinking About the Many Trade-Offs in the Retirement Planning Process
  • Key Considerations with Roth vs. Traditional
  • 8 Minutes to Read | 24 Minutes to Watch

Why Does When You Retire Matter?

Whether it’s arriving at work, church, or one of your kids’ or grandchildren’s games or activities, being on time is always important. One thing that a lot of people look forward to about retirement is no longer being stressed out about showing up on time for work or specific work meetings. But believe it or not, being on time and retirement still go hand in hand. That’s partly because it matters when you retire.

A lot of planning that needs to be done for retirement is focused around timing. There’s a big misconception that all you need to do is save $X amount for retirement. Don’t get us wrong; how much you save and where you’re saving for retirement are very important. There’s just so much more that needs to go into retirement planning, including the timing of it. Let’s explain why it matters when you retire.

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Time Is Our Most Valuable Commodity

One of the difficult things about figuring out when you want to retire and why it matters is not knowing how long you’ll live. We’ve worked with people who have lived well into their 90s or even past 100, and we’ve worked with people who have sadly passed away prior to retirement.

If you really think about it, both those scenarios can be tragic. It goes without saying why it’s devastating for someone to pass away before retirement. It still happens all too often with people passing away from a sudden illness, accident, etc. That’s why we encourage people to front load their spending in retirement and make sure that they’re focused on achieving some of their lifelong dreams while they’re still working. We all need to make the most of the precious time we have.

Making Sure You Don’t Outlive Your Money

But why could it be tragic for someone to live into their late 90s or even past 100? This is where longevity risk can come into play. It’s simply the risk of outliving your money as opposed to having too much money at the end of your life. That can create a lot of panic for people in retirement.

One of the main reasons Dean Barber is so passionate about working in the wealth management industry and helping people get to and through retirement is because he witnessed first-hand what happened to his grandfather.

His grandfather figured that he would live until 76 because that’s how long his father lived. Well, Dean’s grandfather ended up living until 87 and ended up having to move in with Dean’s parents for the final years of his life.

“He retired in the early 1980s. There wasn’t such a thing as a CFP® Professional. There were just stockbrokers and insurance salesman, but they weren’t doing planning to help people get to retirement and through retirement and doing it with dignity.” – Dean Barber

That’s why we take a conservative approach when addressing why when you retire matters. When we’re building someone’s financial plan, we typically put their life expectancy to be at least into their 90s. And the same goes for their spouse.

Many people think that you need to work longer to avoid outliving your money. That isn’t always the case, though. It depends on your unique situation and what lifestyle you’re wanting to live in retirement. Maybe it’s been a goal of yours for a long time to retire early. Doing so could still put you at great risk of running out of money in retirement if you haven’t done proper planning. But you could also end up working longer than necessary if you haven’t put together a plan. A common theme of retirement planning is that it is full of trade-offs. Keep that in mind as you’re thinking about why when you retire matters.

Retirement Planning Is Forward-Looking

It’s critical to start building your goals-based financial plan about 10-15 years before retirement to you’ll have a better idea of what your needs, wants, and wishes in retirement will be and how much they’ll cost. Creating a spending plan for your retirement is a key component of the retirement planning process.

We want to plan for all the possible risks that you could face leading up and during retirement and build a plan accordingly so that you don’t outlive your money. We do that by stress testing your financial plan against a wide range of risks—prolonged market downturns, a long-term care stay for you or your spouse, and many other unexpected expenses.

“Maybe your kid needed something that cost you $30,000 and then you took a vacation that cost $20,000. It’s not that you shouldn’t do those things, but you need to validate those expenses first through a financial plan so that you don’t upset the future of your plan.” – Bud Kasper, CFP®, AIF®

While there’s no way to predict for when those unexpected expenses might pop up, you can plan for them. That will go a long way toward helping you live out your desired retirement lifestyle rather than being in a constant state of financial stress. Stress testing is a point of emphasis throughout our Retirement Plan Checklist. The Retirement Plan Checklist includes a 30-question checklist that gauges your retirement readiness as well as age-and date-based timelines of important retirement considerations. Download your copy below.

Why When You Retire Matters

Retirement Plan Checklist

What Are Your Income Sources?

Figuring out how to fund your retirement lifestyle and having the confidence that you have enough to successfully get through retirement can’t just be done overnight. There is a lot of planning that goes into determining where you’ll spend from in retirement and when you’ll be doing so. It’s crucial that you understand the rules of your various income sources.

When You Claim Social Security and Its Impact on Why When You Retire Matters

Social Security is an income source that most retirees depend on during retirement. Unfortunately, there’s a misconception about Social Security that relates directly to why it matters when you retire. A lot of people think that the date that you begin claiming Social Security is synonymous with the date you retire.

That can end up being problematic if you decide to claim your benefit when first eligible at 62 and retire at 62. The goal with Social Security is to maximize the benefit for you AND your spouse. Your benefit will get bigger and bigger the longer you delay claiming it.

In some cases, it might be necessary for one spouse to still claim at 62 (or soon after) and have the other delay until 70. This is another instance of where it depends on your unique situation. While we hope it doesn’t happen, what if you or your spouse passed away much earlier than expected? If that were to happen, the surviving spouse would only get to keep the higher of their two benefits—all while becoming a single tax filer.

Do You Have a Pension?

Speaking of benefits, do you have a pension? If you do, you need to understand its role in why when you retire matters. When you retire can impact your pension amount. Make sure you’re aware of the stipulations of your pension. Working until a certain age or attaining a specific number of years of service could lead to a higher pension benefit.

You Don’t Necessarily Need to Wait Until Becoming Medicare Eligible to Retire

While some people wait until their full retirement age for Social Security to retire, others feel like they can’t retire until 65 because that’s when they become eligible for Medicare. Receiving health insurance from the government via Medicare can be enticing compared to going to the marketplace for insurance if you retire prior to 65, remember that Medicare isn’t free either.

If the only thing holding you back from retiring is getting on Medicare, is that really worth continuing to work and putting off the dreams you’re wanting to chase in retirement? There are several trade-offs tied to Medicare and determining when to retire.

If your taxable income is below a certain level, you can qualify for subsidies for your health insurance—basically making your health insurance very inexpensive. How do you get enough money to live on and yet have your taxable income be low enough to qualify for those subsidies? And the answer is with a proper tax plan.

“Part of that is is going to be possibly living on or spending some Roth IRA money early in retirement. If you’re under 65 and can use some money that’s already been taxed and can live on that, you can keep your taxable income below the threshold so that you qualify for the Affordable Care Act credits.” – Dean Barber

Those Darn Taxes

Two other things to consider with pensions and Social Security is how they’re taxed. For example, did you know that Social Security is taxed differently than any other source of income? Social Security by itself is tax-free. But when you factor it in with other income sources, up to 85% of your benefit can be taxable. That’s very important to understand when it comes to the conversation about why when you retire matters.

A lot of people fall into the trap of focusing on paying as little tax as possible in one year rather than trying to mitigate taxes over their lifetime. We see that a lot with how people manage their 401(k). When you’re contributing to your 401(k), you can contribute to the traditional side of it or the Roth side of it. There are pros and cons to both.

By contributing to the traditional side, you won’t be taxed on the contributions until you take the money out. It’s a tax-deferred asset. But if you contribute to the Roth side, you pay the tax when you make the contribution. While you’re required to pay the tax up front, the funds inside the Roth will grow tax-free from that point on. Tax-free income in retirement can be very appealing, as taxes and health care tend to be the top two wealth-eroding factors in retirement.

“So many people say to put all your money into a 401(k) and do the pre-tax, traditional method because you’ll be in a lower tax bracket in retirement. That’s just not true.” – Dean Barber

A Big Upcoming Change in the Tax Code

There’s another big event coming up that directly involves taxes and why when you retire matters that a lot of people still don’t know about. On December 31, 2025, the Tax Cuts and Jobs Act will sunset unless Congress steps in. That means that tax rates will go up, reverting to the higher rates of 2017. There are some huge tax planning opportunities available between now and December 31, 2025, that can help you mitigate taxes over your lifetime.

Let’s say that you’ve been making contributions to the traditional side of your 401(k). It’s important to understand that if you take that money out after December 31, 2025, it will be taxed at higher rates than today’s current rates. Well, there’s still a way to get that money out at a later date without being subject to those higher rates. That’s by doing a Roth conversion—i.e. converting funds from a traditional IRA to a Roth IRA. By doing a Roth conversion, you’ll be required to pay tax on the conversion, but then all your earnings will grow tax-free.

The Roth Has Its Perks, but There Can Be Some Unintended Consequences of It Too

There is a lot to like about the Roth, but there are some unintended consequences that can make it problematic. First, if you’re charitably inclined and 70½ or older, it can make a lot of sense to keep more money in traditional and utilize Qualified Charitable Distributions rather than doing Roth conversions. Through QCDs, you can donate up to $100,000 a year directly from a traditional IRA to a qualified charity and not have it show up on your tax return. That annual total bumps up to $105,000 in 2024.

Converting to a Roth IRA also could throw you up into a higher Medicare bracket. If you exceed certain income limits, you’ll be subject to the IRMAA tax, which will increase your Medicare Part B premiums. Also, make sure you have enough money to pay the tax up front if you’re considering a Roth conversion.

Investment Management

The last topic we want to touch on in this article about why when you retire matters is investments. Remember those risk factors we discussed earlier? We’d be remiss if we didn’t focus a little more on investment risk. When you have some investments that are thriving, it can be difficult not to let it ride and further capitalize on more potential success.

But remember that markets are cyclical and that market volatility is normal, even if it’s uncomfortable. Market volatility can be very uncomfortable for someone who has just retired and no longer has a paycheck to fall back on. Sequence of returns risk can cause a lot of financial stress for soon-to-be retirees and new retirees. It’s the risk of negative market returns occurring during that timeframe. Not being overexposed within a specific sector of your portfolio, especially during that period, is pivotal so that you start retirement off right.

So, if you think that your advisor is crazy to consider selling positions within your portfolio that have been earning nice returns and buying positions that haven’t done so well, hear them out. Letting it ride can subject yourself to a lot more investment risk than you might realize. If you haven’t rebalanced your portfolio recently to get back to your ideal asset allocation, now might be the time to do so.

Can You See Now Why When You Retire Matters?

Just with some of what we’ve discussed, there is a lot to consider as you’re deciding when to retire. The transition from working life to retirement is a big one to make and requires a lot of planning to be done successfully. Have you thought about all the things you and your spouse want to do in retirement? And how are you going to cover the costs of your goals and your other expenses now that you won’t be collecting a paycheck from your employer?

Figuring out the answers to those questions can be daunting if you want to retire ASAP and haven’t thought about them. That’s why it’s critical to start planning about 10-15 years prior to retirement so that the transition will be as smooth as possible. If you have questions about retirement planning and what it could look like for you personally, start a conversation with our team here.

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Our team is committed to giving you more confidence that you’re doing the right things with your money, freedom from financial stress, and more time to spend doing the things you love. Make the most of your retirement by working with a team of professionals that will put your interests ahead of their own.

Why When You Retire Matters | Watch Guide

00:00 – Introduction
01:17 – When You Retire May Not Be in Your Control
02:28 – More People Will Turn 65 in 2024 Than Ever Before
05:38 – Health Care, Taxes, and Retirement Timing
10:18 – Longevity Risk
– Sequence of Returns Risk
– Roth Conversions
– What We Learned Today


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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.