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RETIREMENT PLANNING is complex because there are so many topics to master. In my chapter for the HumbleDollar book My Money Journey, I organized those topics into four categories: guaranteed income, medical expenses, tax-free accounts and asset allocation. In the book, I went into more depth, but here’s my 10,000-foot view of each one:
Guaranteed income is reliable income that isn’t affected by changes in the stock and bond market, and it includes pensions, Social Security and income annuities.
If you’re fortunate enough to have a pension, there might be choices regarding survivor benefits and whether you want to accept a lump sum instead of regular monthly payments. Retirees usually have just one chance to get these decisions right, and choosing poorly can have lifelong implications. Take it slowly, and involve your spouse and financial advisor in these decisions.
Similarly, claiming Social Security is usually only done once, though there is a 12-month window to redo your decision, providing you pay back every cent of benefits received. A bad choice—say, claiming too early—can crimp income for life. Unlike a pension, however, Social Security survivor benefit rights can’t be waived and there’s no lump-sum withdrawal option.
A third source of guaranteed income is annuities. There are many options to choose from, but most HumbleDollar readers say “no” to all because so many annuities are accompanied by high fees and commissions. Still, if you want to boost your guaranteed income, an immediate-fixed annuity could be worth investigating.
Medical expense planning necessitates understanding health savings accounts (HSAs), Medicare and long-term care insurance. In the years before retirement, it might be possible to accumulate significant money in an HSA for your retirement medical expenses. In 2024, for example, a couple age 55 and older could together save $10,300 if they enroll in a high-deductible insurance plan.
Medicare, which typically provides health insurance starting the month you turn 65, has many options and parts to understand. When to sign up and which plans to choose are only “simple and easy” if you do your homework.
Long-term-care insurance has become expensive, as insurance companies abandon the business or jack up their premiums after underestimating the amount and duration of claims. More folks would likely insure for long-term-care expenses if these policies weren’t so expensive.
Tax-free accounts allow workers to amass a nest egg and then use 100% of the money saved to cover their retirement expenses. But instead, many workers favor tax-deferred accounts, thereby postponing taxes until withdrawal, in a bet their tax rate will be lower in retirement.
That may not always be a winning strategy. Thanks to required minimum distributions and potentially higher tax rates after 2025, it could pay to have more money in tax-free retirement accounts. The three tax-free accounts available are HSAs, Roths and cash-value life insurance.
HSAs are doubly tax-advantaged, offering a tax deduction for contributions and tax-free withdrawals when the money’s spent on medical expenses. Roth accounts are excellent for those still working, even though savers must forgo the current year’s income-tax deduction. Early in retirement, when taxable income is often low, it can be wise to convert a traditional IRA to a Roth IRA so that the money and its potential earnings won’t be subject to taxation again.
A third tax-free account is the cash value in a life insurance policy. If you have a whole-life policy, it might be possible to borrow against the cash value and spend the money without paying taxes. Of course, whole-life premiums are a whole lot higher than those for term insurance, so you could pay a high price for its tax advantages.
Asset allocation refers to how we divide our investment money among key investment categories like cash, fixed income and stocks. Having ready cash in retirement is helpful so you don’t have to sell investments at a loss during a market downturn. With savings accounts paying 4% and more, cash is currently a more attractive option than it’s been in a decade.
Fixed-income investments include certificates of deposit, bonds and bond funds. They serve two purposes: Their prices are usually more stable than stocks and they provide an extra dollop of current income. Just remember, bonds and bond funds lose value when interest rates rise, as we saw in 2022.
Stocks provide the potential for growth, income from dividends and the capital for major purchases like a new car. Just don’t get too myopic about them. Too many investors make stocks their sole focus, when cash and fixed income deserve their money and attention as well.
James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. Check out his earlier articles.
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I’ve had access to an HSA account for a few years now, and we have just over $29k in it. I upload all the paperwork for our medical expenses, and we have $9,340 in expenses that can be reimbursed at any time if we need the money. All but $1,000 can be invested, and I have it all in VTSAX. I think of it as my backup emergency fund. If I ever need a few thousand for an unexpected outlay, it’s there as a last resort (I prefer to not touch it at all).
I like your thinking about investing your HSA assets but on our HSAs I decided to use the accumulated balances to pay for our post retirement qualified medical expenses to be sure our HSA balances did not become taxable income or a tax headache to our contingent beneficiaries should our HSAs still have a balance upon the second spouse to die.
From IRS Pub 969 –
Spouse is the designated beneficiary.
If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.
Spouse isn’t the designated beneficiary.
If your spouse isn’t the designated beneficiary of your HSA:
• The account stops being an HSA, and
• The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.
If your estate is the beneficiary, the value is included on your final income tax return. The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the
beneficiary within 1 year after the date of death.
One more area where I am trying to simplify my financial matters for those who follow me.
Another great excerpt from James Mcglynn. He has proven again to be a savant in this retirement space as I lean heavily on his expertise. Being a person that is actually using “real world” experience and not academia, my experiences with James have always been digging in the “weeds” of retirement income planning.
The HsA continues to be one of the most underutilized and powerful planning tools, but many do not understand how they work nor have access to them.
thanks again for your contribution to Humble Dollar.
Excelent summary James. I had recent discussion with a couple a year or so from retirement. I was a bit surprised how little they knew about HSAs. They are still not as well understood as they should be. Thanks for helping get the word out.
HDAs are fine if you can afford to contribute and assume a high deductible risk. The reality is most lower and middle class Americans can’t do that and certainly not while saving for retirement. The result for many is just a high deductible plan.
like many ideas out of Congress they are good in theory and academia, but fall short in the real world. Will we ever learn to keep things simple?
Usually the high deductible plans cost less than the other plans offered. The money saved in the HSA after 1 year is usually enough to cover the deductible. The HSA is most beneficial for those in higher tax brackets. I didn’t design the HSA but if it is available I will try to educate the readers of its benefits.
Thanks Rick. I think the problem with HSA’s was that the initial amounts were too small for the investment firms to care. I know Schwab recently purchased Lively HSA so I would suspect that they will do a lot more educating about them.
Good executive summary James. It seems that every one of these categories are so important, and they’ve all gotten a lot more complex than they were even for my parent’s generation. “Set it and forget it” seems a lot more naive than it used to, that’s for sure.
Yes. I have spent 8 years preparing to sign up for Medicare next year and feel pretty confident. Fortunately “Humble Dollar” provides good advice in many of these categories.
Do you really think it’s that complicated?
Sign up for Parts B and D and take a Plan G Medigap and you’re done. That is the only choice that gives you freedom of providers with minimum – mostly no – oversight – interference – of the services provided.
Part D take a bit of comparison if you are taking several medications.
Every other option, promises, cost savings etc. is mostly noise.
For you and me it is not complicated as we have done the research. For those who haven’t they also can be swayed by the Advantage sales pitches which are very reasonable.
I am not avoiding annuities because of the fees, because I wouldn’t buy the kind that comes with high fees. I am avoiding them because of the risk of inflation. If you can point me to an annuity (immediate or deferred) that has a Social Security type COLA I would probably buy one. (I don’t count fixed annual increases.)
Aren’t you trading the inflation factor for market risk? And if inflation is high and you adjust withdrawals accordingly aren’t you at greater risk?
Needless to say you know that you would be paying for that annuity with a SS type COLA so what is gained?
I wouldn’t put all by retirement eggs into an immediate annuity, but I might buy an annuity with a portion of after tax savings with return of remaining principle just to add a guaranteed income stream if I didn’t have one.
Good point. That is why Social Security maximization is so beneficial. I have some longevity annuities that will give me mortality credits but with 4% inflation will just be ok.