Basic important pre-retirement planning things I didn't even realize I didn't know

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43210

Recycles dryer sheets
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Nov 3, 2017
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I'm getting serious about pre-retirement planning to figure when I can pull the plug (I'll post a "how am I doing" thread later) and while I think I'd already gotten well informed about investement and taxes, I've just recently realized a few very basic, very important things that I had totally overlooked.

I had assumed that when I quit, we'd be totally on my own with health insurance. Now it appears that I'll qualify to continue in the employer's discounted family health insurance for life. In my ignorance, I could have neglected to take advantage of this benefit, or unnecessarily planned on not having it. Some people could have the opposite, where they assume they'll have such a benefit when they don't. But this is an example of a very basic, very important pre-retirement planning thing that I'd totally failed to even consider.

I have no pension (nor SS) and will totally rely on savings/investments. I thought I'd gotten well informed about investement and taxes, and considering age 55 rule (and no age conditions for 457b plan), I figured I could fund retirement in my 50s with withdrawals from retirement plans, paying tax but no penalty (carefully watching sustainability and tax brackets). But the very basic, very important thing that I'd totally neglected to check into, is whether these retirement accounts actually allow me to make withdrawals in the way I want, any time as needed without some restrictive rules. I could have pulled the plug only to find I didn't have access to my accounts in the way I'd planned to rely on.

I hadn't really looked carefully into SEPP/72t (probably won't need it), but I recently realized I was totally mistaken about how it works. I thought, for example, that you could take one of your IRAs and drain it in 5 years in 5 (roughly) equal annual installments, but that's totally wrong. There is a formula that makes the annual installments a much smaller percentage of the starting balance, which limits the income you can withdraw this way.

Any other examples like this?

I'm not talking about unknowable things like what will the market and tax laws be doing 20-30 years from now.

I'm not talking about important, but complex analysis of long term strategies for funding retirement that takes everything into account.

I'm talking about very basic facts that are really important, but which you could totally fail to even realize that you need to consider it.
 
Since we can't know what you have already figured out, it's pretty hard to list what is "really important, but which you could have failed to realize".

Personally, that's what I used a fee-only financial planner for (among other things). They helped me with lots of things I hadn't thought of. A good planner will prompt you for benefits lists from your employer and point out what portions might be beneficial. They will review all of your existing retirement plans/annuities and help you decide how to handle them. They will talk through your goals and plans and help you find a way to get there.

Since you have already made some incorrect assumptions that could have proved costly, you may benefit from paying a few dollars for some limited-time professional help now.

Just a few random thoughts:
- Get major dental work done while you are still on a company dental plan
- Get eye exams done
- Get checkups
- Sign up for company-discounted legal work and have (Will, Trust, etc) done
- Have you thought about long-term care insurance?
 
joeea said:
Since we can't know what you have already figured out, it's pretty hard to list what is "really important, but which you could have failed to realize".
Click to expand...
Right, so I don't mean just my specific case, but a general checklist of all the basic information one should gather to be able to prudently plan. (Also I was making a kind of cautionary tales - while you busy getting educated, try not to miss some obvious stuff.)
 
One small surprise we had: We had family coverage through my wife's major bank employer and also had the option to continue it, private pay, to Medicare. In fact they kicked in a fixed dollar amount, IIRC $400/month. Quite nice actually.

But it didn't turn out to be as cheap as when she was employed because the risk pool for this extended coverage was the people who were signed up -- i.e., much older people than the bank's regular risk pool.

So, read the fine print and extrapolate with care.
 
OldShooter said:
One small surprise we had: We had family coverage through my wife's major bank employer and also had the option to continue it, private pay, to Medicare. In fact they kicked in a fixed dollar amount, IIRC $400/month. Quite nice actually.

But it didn't turn out to be as cheap as when she was employed because the risk pool for this extended coverage was the people who were signed up -- i.e., much older people than the bank's regular risk pool.

So, read the fine print and extrapolate with care.
Click to expand...

Right. I saw the price lists, and they look similar/same prices to while working (if you have enough years service) but the cheapest plan, an HDHP/HSA, is not available at all, so it seems the cheapest plan excludes the older risk pool, but the others include it.

But now that I see this kind of coverage even exists at all, I do realize as you say that I'd really better dig into the details.
 
I think a common misconception is assuming that income taxes will be 15% or 25% of income when often it is much lower... especially if one is living off taxable accounts and those accounts are invested in equities.
 
The only thing I can think to add is that I knew when I left my job there had to be after tax money available for me to live on. I knew without that it was a no go. It depends on ones age . If one is not getting a pension , and not old enough for IRA's, or 401k's ,etc, it's tough.

I knew there had to be a big enough source of income to sustain me until I was old enough to get my frozen pension,SS,Etc. To me that was the hard part. Once that was done, a lot of things could be kind of figured out over time.
 
It seems like what you are asking about are the "tricks of the RE trade". If it's obvious, it's not a "trick of the trade". But if someone is just wandering into RE land, then some of these might be new news.

So many of them are situation dependent, though.

I will give you the ones that made a difference to me:

  • You often can access your 401k funds, without penalty, at age 55.
  • You can qualify for huge tax credits on health insurance if you don't show much income (i.e. live off of your non-retirement savings).
 
pb4uski said:
I think a common misconception is assuming that income taxes will be 15% or 25% of income when often it is much lower... especially if one is living off taxable accounts and those accounts are invested in equities.
Click to expand...

People definitely need to know all the tax stuff. I'll mostly be drawing from pre-tax traditional (having very little Roth or taxable) and easily can stay in low tax brackets, 15% (or 12%?) and lower down to 0%, since I won't need higher withdrawals.

Some people need to know about "tax torpedos", but that doesn't apply to me since I have no SS and no pension. I should be fine when RMDs start (or will have no regrets if in a higher tax bracket).

ACA can also add up to 18.2% to marginal rates (and there are the cliffs), which many people need to know about (don't expect I'll need this though).

FAFSA/CSS issues may rarely affect retirees, but it will affect me (I'll do a thread on it some time), and it can add up to 47% to marginal rates on income, and may interact with other stuff, and there's up to 5.64% per year asset tax, so fo me this is the biggest tax bomb of them all (but at least I know it exists).

But all this is stuff people need to know (if applicable).
 
UnrealizedPotential said:
The only thing I can think to add is that I knew when I left my job there had to be after tax money available for me to live on. I knew without that it was a no go. It depends on ones age . If one is not getting a pension , and not old enough for IRA's, or 401k's ,etc, it's tough.

I knew there had to be a big enough source of income to sustain me until I was old enough to get my frozen pension,SS,Etc. To me that was the hard part. Once that was done, a lot of things could be kind of figured out over time.
Click to expand...

Accessibility to funds is another important one. If I go before 55, I'll have 457b, though that won't be enough, and I may need to do SEPP/72t, or Roth ladder, or plan ahead to have more in taxable. If I wait til 55, then I can access all 4xx (not IRA) accounts penalty-free, so should be fine.

All this accessibility/penalty/tax stuff is also something people need to know.
 
sengsational said:
It seems like what you are asking about are the "tricks of the RE trade". If it's obvious, it's not a "trick of the trade". But if someone is just wandering into RE land, then some of these might be new news.

So many of them are situation dependent, though.

I will give you the ones that made a difference to me:

  • You often can access your 401k funds, without penalty, at age 55.
  • You can qualify for huge tax credits on health insurance if you don't show much income (i.e. live off of your non-retirement savings).
Click to expand...

Thanks. I am just looking for whatever issues people suggest looking at (and I realize people don't know what does/doesn't apply to me, or what I do/don't know about) and I also hope the thread is useful to others.

I thought I'd gotten knowledgeable about the various issues, so I got a bit of a shock to realize I'd missed a few big issues, and I started to wonder what else I may have missed.
 
I second the recommendation to hire a professional to help. Our FA reviewed all of our various assets and employee benefit plans and helped us come up with a tax-efficient withdrawal strategy. She also helped us reposition our portfolio to a lower volatility portfolio that would generate more consistent cash flow. She asked a lot of questions about benefit plans and had conference calls with administrators for some of my executive benefit plans to make sure we both understood how they worked. Even if you don't feel your portfolio needs any help, hiring a pro for a one-time "check-up" before pulling the plug could save you from making big mistakes.
 
Look into the IRA Aggregation rules. Basically, you need to add both pre-tax and after-tax IRA balances together and can only take a percentage of your cost basis tax-free. That one was a surprise to me..always thought we could pull up to the cost basis of our traditional after-tax IRA out first, but no such luck. It all needs to be added together and then drips out in percentages over time - this really bites you if (like us) you did rollover IRAs from 401Ks.
 
^ Yes, that's another one that can catch people off-guard.
 
Here are some things that surprised me or I have heard surprising others:

1. As pb4uski mentions, taxes can be nearly zero in retirement. One thing that surprised me also is that taxable income and spendable money are two different quantities.

2. I planned on zero non-portfolio income, which was too conservative. I am earning the equivalent of about 1% WR from sources outside my portfolio, which stretches my funds / increases my safety factor.

3. I am surprised that many people don't keep track of their spending carefully for several years before retirement. This is a mistake I've seen reported less often recently, but it still bears mentioning.

4. This hasn't affected me yet, but apparently dental care can be really expensive in one's 60's / 70's. Root canals, extractions, implants, dentures, bridges, etc. One should have a plan for this.

Overall, I think it is wise to investigate everything and confirm assumptions that may have a material impact on one's ability to FIRE.
 
I was surprised how little our ACA health insurance costs us now that our income is low.

Due to the large subsidies, we pay less than we used to pay while I was employed, with lower co-pays and far lower deductibles. Even when my employer paid a significant portion of the premiums for a high-deductible plan, we are paying less now.

Since my wife is still working, we are being careful to keep her income low enough by maxing out her 401k. So far, it's working out very well. At least in my part of the country, it's worth a bit of planning to get these subsidies.
 
I had no idea that my husband's union offered and subsidized health insurance after his retirement until I went to a (retirement) union meeting with him. I was pleasantly shocked. The union will take taxes and your cost of health insurance directly out of the pension check and deposit the remainder. When both spouses receive Medicare (we were told to apply for A&B only) the Union plan cost will actually go down. This took a huge concern off my mind.

I couldn't get his plan coverage anywhere else.
 
Health insurance after retirement was definitely something where I hadn't gathered the facts.
 
Some of the things that I was tipped off, by posts here, to investigate prior to retirement:

* Not a bad idea to put a HELOC in place prior to retirement. Even if you never use it - it's nice to have a line of credit you can use if needed... especially if you want to tap IRA/401k (taxable) spending over multiple years. (A lot of our funds are in pretax accounts... so withdrawing a big chunk has tax consequences AND could eliminate our ACA tax credits.) We haven't had to use it - but it's there... just in case.

* As someone else mentioned - get any expensive medical/dental/eye exams/glasses taken care of while you have employer benefits for this stuff. We moved a replacement crown in sooner for DH since we knew we'd be going off of the cobra dental.

* Along the same lines - consider doing any expensive planned home improvements while you can cash flow them from employment income. We finished the bulk of our kitchen remodel before I pulled the plug.

43210 said:
FAFSA/CSS issues may rarely affect retirees, but it will affect me (I'll do a thread on it some time), and it can add up to 47% to marginal rates on income, and may interact with other stuff, and there's up to 5.64% per year asset tax, so fo me this is the biggest tax bomb of them all (but at least I know it exists).
Click to expand...

You're not alone having kids college expenses ahead of you. I don't know that I'd consider FAFSA/CSS stuff a "tax" - but there is a system and sometimes you can structure your assets/income to reduce the college costs and increased the amount of financial aid offered by a school. We recently met with a specialist on EFC/FAFSA/CSS stuff. Our low retirement income helps us. Unfortunately, on the CSS profile - our granny flat rental in our backyard counts heavily against us. We've got enough in their 529's to mostly cover the public UC/CSU colleges... if that's where they end up.

I'll be interested in your thread on the topic. There are several regulars looking at this stuff in the nearterm or just through it. I've got a HS Junior and a HS Freshman - so this is a subject I'm really focused on these days.
 
Part of our planning has been to actually live on our planned retirement budget. We did it for a couple of quarters a year starting around 3 years ago, and since the end of 2016 have been living on it. This has helped us fine tune our spending categories. Certainly not an exact science but, along with looking at our past spending trends, it has made us a lot more comfortable with our retirement spending plans.
 
43210 said:
FAFSA/CSS issues may rarely affect retirees, but it will affect me (I'll do a thread on it some time), and it can add up to 47% to marginal rates on income, and may interact with other stuff, and there's up to 5.64% per year asset tax, so fo me this is the biggest tax bomb of them all (but at least I know it exists).
Click to expand...

rodi said:
You're not alone having kids college expenses ahead of you. I don't know that I'd consider FAFSA/CSS stuff a "tax" - but there is a system and sometimes you can structure your assets/income to reduce the college costs and increased the amount of financial aid offered by a school. We recently met with a specialist on EFC/FAFSA/CSS stuff. Our low retirement income helps us. Unfortunately, on the CSS profile - our granny flat rental in our backyard counts heavily against us. We've got enough in their 529's to mostly cover the public UC/CSU colleges... if that's where they end up.

I'll be interested in your thread on the topic. There are several regulars looking at this stuff in the nearterm or just through it. I've got a HS Junior and a HS Freshman - so this is a subject I'm really focused on these days.
Click to expand...

I've just started a thread on the topic
Kids in college after retirement (lower income version)
http://www.early-retirement.org/for...er-retirement-lower-income-version-89513.html
 
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