How to Manage Savings for Retirement
Whether you dream of a travel-filled retirement or would prefer to relax and enjoy spending more time at home, you are probably wondering what you might consider to make your golden years as stress-free as possible.
For those who spent the last several decades in a wealth-accumulation mode, withdrawing savings may trigger anxieties about the future. Some of the choices you may make during the earliest years of retirement may significantly alter the speed with which you spend down your retirement savings.
Moving to a State with No (or Low) Income Taxes
Nine states do not have any income tax on personal income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Although New Hampshire does not tax wage income, it does charge a 5% state tax on dividend payments and interest income received by individuals.1
Retiring and establishing residence in one of these states with no personal income tax can save the significant amount of state income tax levied in other states for every 401(k) or individual retirement account (IRA) withdrawal you may take. For example, California, Hawaii, and New Jersey have the highest tax rates for those in the top income brackets.
California’s personal income tax rates start at 1% and go up to 13.3% for income above $599,012. Hawaii’s personal income tax rates start at 1.4% go up to 11% for income above $200,000. New Jersey’s personal income tax rates start at 1.4% go up to 10.75%.2
There are certainly trade-offs to this approach, as low-income-tax states may have significant sales taxes, higher property taxes, or may offer fewer public services than those found in states with higher taxes. Nevertheless, state income tax rates are worth investigating for those looking to preserve their retirement savings.
In some cases, it may make sense to plan a move to a no-tax state to establish residency in the year before you begin taking any required minimum distributions (RMDs). Use this strategy correctly, and you have to pay only federal income taxes on these RMDs.
For most states, spending more than 183 days (half a year) in that state during a single year makes a person a resident of that state. 3
Deciding When to Take Social Security Benefits
Another important factor in preserving your retirement savings involves when to take Social Security benefits. The earlier you claim, the less you receive per month. Waiting until age 70 to request Social Security benefits increases the monthly payment.
But while it may seem sensible to put off Social Security so that your total benefit is as large as possible, this approach has other considerations. Taking Social Security earlier may reduce the amount you need to withdraw from retirement accounts, helping these funds continue to grow until your RMDs begin at age 72 (70 ½ if you reached 70 ½ before January 1, 2020). If you have health problems that could shorten your life, taking early Social Security payments may also make sense.
A financial professional may help you consider different scenarios to get ideas of when it makes sense for you to claim Social Security.
Considering Guaranteed Income Products
Social Security benefits are one form of guaranteed income. But because these benefits cap out at $4,194 in 2022 (for the highest earners who delay claiming until they are 70 years old), the benefits may not be enough to support a previously high-income household.4
Guaranteed income products such as annuities have the potential to provide a monthly source of extra income to help maintain an acceptable lifestyle during retirement.
This material was created for educational and informational purposes only and is not intended as ERISA, tax or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
We suggest that you discuss your specific tax issues with a qualified tax advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
1 https://www.bankrate.com/taxes/state-with-no-income-tax-better-or-worse/ (Nov. 21 2021)
2 https://www.nerdwallet.com/article/taxes/state-income-tax-rates (Dec. 9 2021)
3 https://www.nerdwallet.com/article/investing/state-residency-for-tax-purposes (Dec. 14 2021)
4 https://www.investopedia.com/ask/answers/102814/what-maximum-i-can-receive-my-social-security-retirement-benefit.asp (updated Dec. 22 2021)
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