Harvesting Retirement Planning Strategies: 3 Questions You Need to Answer

Retirement planning is two-fold. The first part is making sure you’re taking the right steps to maximize your wealth. The second part is harvesting retirement planning strategies that fit your goals, your current financial position and your overall situation. This part is often overlooked.

For example, part one: For the last few decades, you may have worked hard and done everything in your power to save for retirement. You diligently put away a portion of each paycheck into your savings and investment accounts. You maxed out your IRA and 401(k) contributions each year. Most importantly, you didn’t let your emotions get the best of you by selling stocks or cashing out at the least opportune times, especially during market corrections.

This may seem like you’re on the right path to retirement, but have you thought about part two? How do you put a plan in place to stretch your money further so that you don’t outlive your nest egg and can still provide for your loved ones?

Retirement looks differently today than it did 30 years ago, and there’s no one-size-fits-all solution, so to answer this question, it’s important that you or your financial advisor look at retirement income harvesting strategies. These strategies involve prioritizing which bucket of your nest egg you take money from to enjoy the duration of your retirement and maximize tax benefits.

What Will Retirement Look Like For You?

Retirement looks different for everyone. Some retirees hope to simply maintain their current lifestyle when they’re no longer bringing home a paycheck. Others hope to travel the world. Before you retire, you should make an honest assessment of your situation and determine which retirement scenario resonates best with you. You should also consider:

  • Are you going to stay in your current home?
  • Will you be gifting money to your children and grandchildren?
  • Do you expect to have large one-off expenditures such as medical bills or travel expenses?

The more precise you can be about your retirement goals, the easier it will be for you to implement your income harvesting strategies.

How Much Money Will You Need to Make This Happen?

Once you have a good idea of what your desired lifestyle might look like, it will be easier for you or your financial advisor to calculate the amount of money you’ll need in order to fund it. Come up with an annual dollar amount that you would be comfortable spending and adjust it for inflation each year (the historical average is about 3 percent per year). Then multiply it by the number of years you expect to live. The resulting number isn’t going to be perfect, but it will give you a rough estimate of whether you have enough assets to sustain your retirement lifestyle.


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What Strategies Will Work Best for Those Goals?

If you’re overwhelmed by income harvesting or not sure which strategies work best for you, talk to an experienced financial advisor. He or she should help determine which path is right for you.

Depending on your situation, there are strategies that you may be able to take advantage of that you may not have considered on your own, such as:

1. Selling your home without paying taxes

If you are an empty nester living in a house that has increased in value over the duration of your stay, you will most likely be able to downsize without having to pay taxes on the house’s appreciation in value. As long as the house is your primary residence, and you haven’t sold another primary residence in the past two years, you may be able to avoid paying taxes on the first $250,000 of gains ($500,000 if you’re a married couple). Housing costs are potentially your biggest expenses in retirement. Pocketing the appreciation in your home’s value while not having to pay taxes can help you stretch your money further.

2. Delaying Social Security payments

You are eligible to start collecting your monthly Social Security check at the age of 62, four years before the official retirement age. However, the earlier you start collecting, the less money you will receive per month.

For example, if you start collecting your benefits at age 62, you’ll receive 73.3 percent of your monthly benefit as opposed to 100 percent if you wait until age 66. If you wait until age 70, you can receive 132 percent. (Your monthly check gets capped at 132 percent.)

If you have other sources of current income, it might be smart to delay the start of your Social Security benefits. This can also be beneficial from a tax liability standpoint. Because Social Security is combined with your regular income for tax purposes, you are potentially liable to pay taxes on it if your combined income is too high.

3. Managing your investments in buckets

The closer you are to retirement, the more diligent you should be with your investment portfolio. For example, without the luxury of a steady paycheck, you may not be able to afford to invest the majority of your assets in stocks and expect to weather a market downturn. Ask a financial advisor about segregating your investments into different buckets based on when you’ll need access to the money.

The first bucket is cash and cash equivalents – money that you have immediate access to and is not exposed to any risk. This money, along with your Social Security checks, should cover your living expenses as well as unexpected emergencies for at least the first couple of years of your retirement.

The second bucket is for income-producing investments, like bonds that are exposed to a minimal amount of risk. This money generates a steady stream of income that allows you to not only beat inflation but also replenish your first bucket consistently.

The third and final bucket is for growth potential. Ideally, you won’t need access to this bucket for the next 10 years, so you may be able to afford to take a little more risk here by investing in some growth stocks. As the money in your second bucket gets moved to cash, you would, in turn, transfer money from your third bucket to your second bucket.

Of course, every situation is different. Retirement planning in Maryland, for example, is different than in other areas. The right retirement plan for attorneys may be different than a retirement plan for a business owner. In my experience helping families prepare for the future, I know firsthand: Retirement plans aren’t the same for everyone.

Harvesting the right retirement planning strategies is important. And the earlier you put your plans in place, the better chance you have to enjoy a stress-free retirement.