"The nature of retirement is changing, and planning for retirement is becoming increasingly challenging,” says Mitchell A. Drossman, national director of wealth planning strategies at U.S. Trust. For one thing, people are living longer than ever before. Not only will retirement assets need to last far longer than in the past; healthcare expenses are likely to be much greater. Add to that the fact that investment returns are generally more modest than they’ve been in the past and are likely to remain that way, taxes are higher and may continue to rise, and old standbys like pension plans are being eliminated or frozen by employers. For many, retirement assets are likely to consist of some combination of Social Security, IRAs, 401(k) plans and deferred compensation or deferred annuities.
“Planning strategically with your advisor as early as possible can help you to avoid costly mistakes, to pursue your goals more effectively and to leave a greater legacy for the people and organizations that are important to you,” Drossman says.
Define your goals, examine your finances
As a first step in planning your retirement, it makes sense to sit down with your advisor and take a thorough look at your financial situation and your retirement goals. You have enough to retire, but will you have enough to retire and live the way you’d like to live, do the sorts of things you’d like to do, and still be able to pass wealth on to the people and organizations you care about? Maybe you want to start a new business, or travel, or pursue philanthropic interests? What sort of lifestyle would you like to have in retirement?
“Unfortunately, we often have unrealistically optimistic expectations about how much we’ll be able to use from our retirement assets,” says Kim Garcia, a wealth planning solutions executive at U.S. Trust. “Investors also tend to overestimate investment returns, especially these days.” At the same time, there is a tendency to underestimate our needs; contrary to many expectations, expenses don’t often drop dramatically in retirement; yes, it’s true that some expenses do drop, but others increase, sometimes dramatically. In other words, the drop in daily commuting costs to the city isn’t going to be enough to offset increases in healthcare costs.
If the numbers don’t add up, something has to give. It’s a matter of producing more or adjusting spending. “So it’s really about sitting down with your advisor, running the numbers, matching them against your goals and planning accordingly,” says Drossman. Whatever your vision of retirement is, planning ahead is more important than ever. By putting some thought-out strategies in place, you can position yourself for the retirement you want.
Gifting retirement assets to a charity during your lifetime has different tax implications depending upon your age. While a withdrawal of assets before age 59 1⁄2, for instance, is taxable and would incur a 10% penalty, a charitable gift of those assets would provide an equivalent deduction but without the penalty. At 59 1⁄2, the penalty disappears, and the charitable gift deduction could offset up to 100% of the taxable income. At 70 1⁄2, when you must begin taking distributions (or pay a 50% penalty), if you don’t need the income, gifting it to a charity can provide a deduction that would offset the taxable income.
“Of course,” Drossman notes, “in some years, charitable IRA rollovers are permitted, in which case you would be able to make a qualified charitable distribution to a qualified charity, which would eliminate tax on the withdrawal as well as the deduction on the gift. In the past, Congress has routinely renewed the charitable IRA rollover after it expires (often retroactively), and renewal is likely again. So we tend to plan accordingly.”
“Using your IRA to make a tax-efficient gift to charity is often desirable but it may not always yield the most favorable result,” he says. “Funding your charitable gift with appreciated long-term stock could be preferable. Deciding which is better depends on several factors, such as the amount of appreciation in the stock and whether your financial goal is to maximize your own wealth or your family’s inheritance.”
If the numbers don’t add up, something has to give. It’s a matter of producing more or adjusting spending.
Also, a charitable gift of appreciated long-term stock is taxed differently from a charitable gift of an IRA in at least two respects.
First, in the case of a gift of appreciated stock, you can generally deduct the full value of the stock even though you have never been taxed on the appreciation. This benefit is not available with the IRA option, and therefore a gift of appreciated stock might produce a better overall tax result.
Second, at your death, appreciated stock will receive a step-up in basis whereas an IRA does not. This might make the stock a better asset for your family to inherit for income tax purposes, in which case making a lifetime charitable gift of the IRA, while preserving the stock for the step-up, might produce a better overall tax result.
“This is definitely an area where consulting with your advisor about the most advantageous way of making your charitable gift can make a difference,” Drossman says.
Early and thorough planning can make the difference
The bottom line is that retirement planning has grown increasingly complex, and this is especially true for wealthy individuals.
“The key,” says Drossman, “is to sit down with your advisor and start planning as early as possible. At U.S. Trust, we can help balance financial resources and retirement goals — focusing on your financial situation, the income you’ll need in retirement and the legacy you’d like to leave to individuals and organizations.” By focusing on potential trade-offs and changes you can make now to help pursue financial security in retirement, U.S. Trust can help you to develop a strategic plan designed to pursue your goals.
To read more on retirement and taxes, read ”Tax Considerations and Retirement”.
Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.