By Christian Cyr, CPA
When people retire after decades of work, they are often ready to celebrate. Colleagues can even send them with a champagne toast.
But maybe these young retirees should temper this celebration a bit. Retirement can be an emotional victory, but it doesn’t have to be a financial victory. For many people, this is the most difficult phase of their financial life.
This simple fact is not always recognized in the world of financial professionals, where the emphasis is on building a nest egg and where advisers often offer investment products that are more favorable to them than to their customers.
Less effort is put into positioning retirees for the long term – a retirement that might last two or three decades funded by savings that might not last that long.
To make matters worse, a seismic shift has occurred quietly over the past two years, arguably altering retirement outcomes for the foreseeable future. The direction of our country’s fiscal and political actions has silently created what many see as a tax time bomb under the feet of those who are or are about to retire. And not everyone talks about it.
At least they don’t talk about it until a retiree finds out what the situation is. It could start to play out this way: A retired couple speaking with their financial professional expresses satisfaction at having saved $ 750,000. Their advisor politely informs them that their total is more like $ 500,000.
At first they are puzzled because this number in their wallet balance looks like $ 750,000. But soon this situation becomes clear when the advisor points out that all of their money has been saved through tax-deferred accounts, the keyword being “deferred.” Once they start withdrawing money from these accounts, the tax bill will be due.
That’s not what the couple had planned for all those years of saving up and, metaphorically speaking, making their way to the top of Retirement Mountain.
But getting to the top of Retirement Mountain is the easy part. Navigating the descent of retirement is where most of the risk occurs and where real planning is required. I coined the phrase “top-down planning” years ago, which is the art of strategic financial planning and decision-making during the retirement years to make your money last as long as possible, reduce costs. taxes and maximizing multigenerational wealth.
Here’s an example: One of the best “downhill planning” tools these days is the Roth conversion, where you withdraw money from your tax-deferred accounts and transfer the funds to a Roth IRA. You pay taxes when you convert, but the money in a Roth then increases tax free.
The general concept is simple: pay a few taxes now to avoid paying more taxes later. Right now we have some of the lowest tax rates in history, which worries a lot of people – myself included – that at some point those tax rates will go up.
But there’s another issue for the retiree brewing that also makes the Roth conversion attractive. Due to the SECURE law, beneficiaries are now obliged to completely liquidate inherited pension funds within 10 years of the death of their parents. In other words, they have to withdraw the money from those retirement accounts, paying taxes as they go.
In many cases, this can cost families hundreds of thousands of dollars. But if the parent has all of that money transferred to a Roth before they die, their beneficiaries will pay no tax.
Of course, a Roth conversion is just one example of how retirees can use “top down planning” for retirement. A financial professional who focuses on this phase of life can help you with other strategies to navigate your way.
With the right advice and planning, you may be able to fully enjoy that champagne toast after all.
About Christian Cyr, CPA
Christian Cyr, CPA, is President and Chief Investment Officer at Cyr Financial. He is a financial professional who can offer investment and insurance products and services. A chartered accountant for over 20 years, Cyr has helped clients understand prudent approaches to investing, building wealth and retiring comfortably. He spent over 15 years in the corporate world as a CFO before founding a registered investment advisory firm specializing in retirement planning. Cyr speaks to audiences nationwide on investing and retirement, has been featured on Strategic Investor Radio, the National Association of Active Investment Managers Shark Tank Competition and other media. He holds a master’s degree in finance from the University of Illinois at Chicago and a bachelor’s degree in finance from Eastern Illinois University.