Reflections From The Early Days Of Spending In Retirement, Part 3
What’s The One Expense In Retirement That Most People Get The Least Satisfaction Out Of Spending?
Hint: I love a warm fire on a cold, snowy day. But that same fire, if not properly contained, can do damage to anything in it’s way. Kind of like taxes.
Perhaps extreme to compare a roaring fire to taxes, but hear me out. Whatever goes into the fireplace (or to the government), you will never see (or spend) again.
Fortunately, much can be done with a little knowledge and planning. It’s useful to think of taxes as yet another, substantial retirement expense that needs to be managed.
Revisit/Understand Your Overall Financial Situation
At least 10 years before retirement, do some critical thinking about your finances.
Where will your retirement income and (cash flow) come from and when? What is the breakdown between “tax-paid” and “tax-deferred” money? Will your retirement cash flow be enough to meet your needs (or too much…a nice problem to have!)? How likely are you to receive an inheritance (or other money) that could push you into a higher tax bracket? Would it make sense to retire early and withdraw some funds sooner at a lower tax rate?
Know (And Plan For) Your Tax Rate
It pays to know when your income will push you into a higher tax bracket (both before and after retirement).
Many will be fortunate to have their tax rate decrease in retirement- the lower, the better! Others may be surprised to discover an increase in taxes (and payments back to the government). For example, will your government retiree benefits be clawed back because you earn too much income? Whatever your circumstances are, do some careful planning to keep as much money as possible for your golden years.
Choosing Where You Take Your Retirement Cash From (And When) Matters
Is spending from a tax deferred retirement account the same as spending from an after tax investment account? Not at all. You’ll keep much less of your money from the former account than the latter. Hence, the importance of considering where to save your cash before retirement and where/when to draw cash out after retirement.
Are Your Investments In The Right Accounts?
Many people understand the benefits of diversifying their investments but what about planning the accounts that they’re held in too? For example, Canadians should earn highly taxed income in tax free savings accounts and US dividends in retirement savings accounts to keep more money in their pockets.
As I review my own spending in early retirement, I realize the only cash I can spend is after tax money. Therefore, taxes are a line item in my annual spending plan (if not deducted at source). I’m fortunate, as a CPA, to have a better understanding of tax than the average person. Our ability to achieve financial independence has partly been due to implementing some wise tax planning strategies.
Taxes are NEVER a boring subject if you can figure out how to keep MORE money for yourself and family!
Please don’t panic if you don’t understand some/all of what I’ve said. Taxes are confusing at the best of times! If you need help to evaluate your own situation, consider contacting a reputable tax professional. Don’t pay more taxes than you deserve to…it’s never too late to change!
Proud founder of this blog Let’s Talk About Money, Patricia Gass, CPA, CA, provides personal finance coaching and education to improve your money skills. Follow her on linkedin, twitter or pinterest