Episode 132: 3 Things You Must Understand If You’re Retiring In 3-5 Years, Part 1

Today’s Prep:

What happens with your taxes in retirement? This is the first of our three-part series for what to do and how to prepare if you are three to five years away from retirement.

(Click the featured times below to jump forward in the episode)

Equipping Points:

If you are three to five years away from retirement, this podcast is especially for you. These years are key years to strategize before retirement. If you’re young, the key things to keep in mind are to work on your career, save, and don’t worry too much about it. In your 50s and late 50s, you might be wondering, do I have enough? When can I step away from work?

A major element to think about is the tax implications in retirement. To start, did you know that your Social Security is likely to be taxed? Your work income (if you are still working), your dividends, your interest income, rental income, and half of you and your spouse’s Social Security income all get added together to determine the kind of taxes you would pay.

If you have a pension, you will likely need to make the decision between a lump sum and the monthly payments. The decision comes down to a number of factors, including taxes. A lump sum rollover is worth considering to provide the monthly amount you were expecting while keeping it from becoming a taxable event. David gives a few different examples of how this could go.

Have you heard of the widow’s tax? This applies to both a widow or widower. If you are married filing joint, your tax bracket could be very different than when you file as an individual. If you or your spouse pass away, you’ll want to be prepared for the difference financially. A Roth conversion is something you may want to consider to prepare ahead of time.

You want to have a discussion with your advisor about all of these taxes. Keep in mind that you’re likely to be bumped into a higher tax bracket when you have to start taking out RMDs. Having a good understanding of the taxes you may face will help you plan accordingly with your finances.

Listen to the entire episode or use the timestamps below to skip ahead.

[0:40] – Celebrating the 4th with family, fun, and fireworks.

[3:10] – Why is the three to five year timeline before retirement so important?

[5:05] – Your Social Security is likely to be taxed.

[7:40] – Should you take a pension lump sum or monthly payments?

[12:31] – The widow’s tax is rarely discussed but important.

[16:52] – Talk to your advisor about all of these.

Today’s Takeaway:

A lot of people that I’ve talked to have not thought through the implications of how their tax bill is going to impact their retirement.”

– David Dickens

Additional Resources:

PODCAST: 5 Things Grandparents & Parents Need to Know About 529 Plans

PODCAST: What’s Your Retirement Income Literacy?

PODCAST: Do Retirees Really Need Life Insurance?

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More From David:

The host: David Dickens

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