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The Top 4 Regrets in Retirement

Retirement withdrawal strategies including filling lower brackets with partial Roth IRA conversions and minimizing RMDs

It’s hard to ignore the topic of retirement. You most likely see news reports about the state of retirement savings in our country, come across articles on your social media, or receive updates on your 401(k) or other investment accounts from your employer or financial advisor. For many of us, retirement is at the top of our minds as we work hard to grow our nest egg so we can one day slow down, change pace, and finally have all the time we need to pursue passions and invest in relationships.

But one question that probably doesn’t cross your mind as you inch closer to this milestone is this: What if you get to retirement and it’s not all it’s cracked up to be? Have you considered the idea that you could regret your decision to retire? Here are four common retirement regrets to keep in mind as you prepare for your golden years.

1. Not Having a Roth IRA Contribution Strategy

Not saving enough is a common retirement regret, but it’s also essential to save in the right ways and with the right savings vehicles. On top of maximizing your Roth contributions, you should consider opportunities to convert your traditional IRA funds to a Roth IRA.

When it comes to IRAs, common wisdom has long been that you’ll be in a lower tax bracket when you retire, so you might as well take the deduction now and pay the tax later. But what if your IRA and 401(k) savings itself ends up being responsible for moving you into higher tax brackets in retirement?

We have worked with many new clients who come to us in the well-off but unfortunate position of having poured all their savings into traditional tax-deferred savings accounts.  These lifelong savers often end up with millions in tax-deferred accounts when they retire, yet they are left stunned at the tax burden. For example, if your combined tax-deferred retirement savings is valued at $4.5 million, your annual required minimum distribution (RMD) at age 70½ will be $164,234.^[1]  This puts you in the 5th highest tax bracket of 22%^[2], with your required distribution possibly increasing every year!  Beyond RMDs, retirees needing to live off $200,000 annually from their IRAs will find themselves in the 4th highest tax bracket of 35%.

A Roth IRA conversion strategy can solve these problems and help you pay significantly less tax.  For example, between your first retirement year and age 70 (when RMDs begin) you can systematically convert dollars from your IRA into a Roth IRA each year.  Without earned income these are typically low-income years, providing you with a great opportunity to “fill the bucket” of lower 12% or 22% tax brackets with Roth conversion dollars.  With taxable income rates of 12% up to $77,000 for joint filers (after a $24,000 standard deduction) you could have room to convert tens of thousands of Traditional IRA dollars each year at the lowest tax rate, especially if you have taxable investment accounts that can supplement your living expenses.    The result is that you can have a tax-efficient liquidation strategy and avoid ever being pushed into top tax brackets, now and forever!

2. Not Creating a Personalized Social Security Claiming Strategy

Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the amount of benefit you receive.

Full retirement age (FRA) differs based on the year you were born. For those born in 1937 and earlier, FRA is 65. After 1937, two months is added each year until FRA becomes 66 for those born between 1943 and 1954. Starting in 1955, two months a year is added again until the FRA becomes 67 for those born in 1960 or later.

If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full Primary Insurance Amount, which is the full benefit that you have earned, based on your highest 35 years of earnings.

Early eligibility begins at age 62, and if you choose to claim early, you will receive a reduced benefit. Your basic benefit is reduced a fraction of a percent for each month you begin receiving benefits prior to full retirement age, up to 30%.

You can also delay benefits until age 70. Your benefit will increase by approximately 8% per year for each year past FRA you delay. Increases are calculated monthly so you can claim at any time between FRA and your 70th birthday and receive a prorated increase.

3. Retiring Too Soon

Whether you were forced to retire earlier than you had planned or you made the decision on your own, retiring before you are truly ready can cause plenty of regret. In fact, 30% of retirees admitted they would gladly re-enter the workforce if a job became available.^[3]

If you decided to retire prior to turning 65, you probably had to find pre-Medicare coverage, which is often quite a bit more expensive than an employer-sponsored plan. By waiting until you turn 65, you will qualify for Medicare and not be forced to obtain other health insurance to cover you during the transition.

Financially, the earlier you retire, the fewer years you have to save and the longer you will have to live off of your money. If your finances are keeping you up at night or you are living at a lower quality of life than you are used to, you may regret retiring when you did.

Working even a few years longer can provide these valuable benefits:

• More time to accumulate savings
• More years to apply towards Social Security which could result in a larger benefit amount
• Health insurance coverage through your employer
• Purpose and identity
• Stronger mental and physical health^[4]

4. Not Having a Retirement Bucket List

Free time is a major perk of retirement, but when you go from working full-time to not working at all it can be a shock to your system. Saying goodbye to your career, your colleagues, and your routines can cause anxiety and depression. But if you plan ahead to fill your time with activities that will fulfill you, you can avoid the negative emotions that can come with this life transition.

Do you want to know what activities result in a fulfilling retirement? A BMO study on retirement planning reveals that retirees who stayed busy and active, pursued independence, and volunteered their time were satisfied with their life.^[5] One study of retirees even found that those who volunteered 200 hours a year were less likely to develop high blood pressure.^[6] The takeaway here is to be intentional about your time in retirement. Make a list of things you want to do, places you want to go, and people you want to spend time with, then strategically map out the details so your goals become a reality. It’s easy to lose your identity when you say goodbye to your career, but filling your time and venturing out into new territory will help you build a new identity and give you something to look forward to.

Do You Want a Regret-Free Retirement?

You probably don’t want to celebrate the incredible milestone of retirement and then wake up the next day wondering if you made the right decision. Deciding when and how to retire is one of the most difficult decisions you will make in life, but you don’t have to make the hard choices alone. At Windgate Wealth, one of our goals is to protect your wealth while you live easily within a personalized retirement plan. If you want to avoid facing these common regrets when you retire, you can reach us by calling (844) 377-4963 or emailing windgate@windgatewealth.com. You may also book your complimentary consultation online.

Perritt Capital Management, Inc. is the registered investment advisor for Windgate Wealth Management accounts
All investments carry some level of risk, including the potential loss of principal invested.

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Chicago IL 60606
844-377-4963