John Randall Shores, CPA, PA
Certified Public Accountant
Pensacola, Florida
850-444-9979

RETIREMENT TIPS

THE FOLLOWING ARE SOME OF THE MOST COMMON MISTAKES MADE WHEN RETIRING:

1.) YOUR RETIREMENT DREAM HOME - Virtually every retiring worker has a retirement dream home as one of their goals for retirement. Wealthy retirees may have two or three dream homes. These are worthy goals but remember, when you retire most worker's income will decline to one degree or another. Also, usually when you retire your children are grown and you will need additional bedrooms only when they and their children visit.    

Please remember the larger the square footage of your retirement dream home the greater the cost of up keep (i.e. taxes, insurance, maintenance, utilities, etc.).  Also, many retirees will make major costly improvements, upon retirement,  to a home they have been living in for many years. If your retirement assets can justify these improvements, then enjoy. If you use anything more than 5 to10% of your retirement funds on these improvements, BEWARE.
 
Frequently retirees make major improvements to their home or buy a significantly larger and more expensive home without considering the long term costs. This results in the retiree spending a significant portion of their retirement funds on their dream home which results in fewer retirement funds being available for travel and entertainment.


2.) KNOW THE ORDER IN WHICH YOU SHOULD USE YOUR RETIRMENT FUNDS - Always use your savings that are in non-retirement accounts FIRST (i.e. regular bank accounts and brokerage accounts). To the extent possible, always delay the distributions from Traditional Individual Retirement accounts and 401 (k) accounts until the mandatory distribution age of 70 1/2. If possible you should only withdraw the Minimum Required Distibution (MRD) because distributions from Traditional IRA and 401(k) accounts are taxable as ordinary income. Roth IRAs should be the very last retirement funds that are used. By following this order you should minimize the tax consequences of your distributions.

In the recent market crash, I was amazed at the number of investors and/or retirees who withdrew their IRA and/or 401(k) funds because they did not like the investment performance of their funds. Never withdraw your IRA or 401(k) because of your disatisfaction with their performance. Leave the funds in the IRA or 401(k) and move to a different investment or brokerage account. All a withdrawal does is generate a tax bill and does not significantly change the type of investments that are available. Viritually the same investments are available in the IRA and 401(k) accounts that are available in your regular taxable brokerage account.

Always consult a CPA or financial professional on the tax consequences of your retirement plan.

3.) PARTICULAR CARE SHOULD BE TAKEN IF YOUR COMPANY'S PENSION IS DISTRIBUTED TO YOU IN ONE LUMP SUM- This makes you responsible for ensuring that the unused funds cover your remaining retirement life. Unfortunately, many retirees view Lump Sum distributions as lottery winnings to be spent as quickly as possible. I have know of retirees who received over $500,000 of lump sum distributions and were bankrupt within 5 to 10 years.

BEWARE - Frequently in a lump sum distribution there is a portion that can be rolled over into an IRA (Individual Retirement Account) but also
there is frequently an ordinary income portion that represents a replacement of wages for retiring early. ALWAYS be sure you understand the portion that can be rolled over and the portion that will be taxed as ordinary income in the year of distribution. Frequently the ordinary income portion can exceed $100,000. This can greatly increase the marginal tax rate for the income earned during the year of this distribution. If the retiree is also drawing social security during the year up to 85% of social security benefits for the year of distribution can be taxed and this higher rate. Proper timing of the lump sum distribution can reduce the tax impact of the distribution if a rollover to an IRA is not possible.

If you receive a lump sum distribution, have a financial professional estimate a realistic yield that can be obtained on this lump sum and calculate the annual amount that can be withdraw to insure the lump sum distribution will last for your full retirement. Also, be sure you understand the tax implications of any distributions that will be paid as ordinary income.  This will minimize the tax consequences of the distributions.

4.) DIVERSITY YOUR RETIREMENT INVESTMENTS - While this recommendation duplicates one of my Rules for Investing, it is worth repeating. If you have a 401(k) with your employer, DO NOT invest more than 10 to 25% of this 401(k) in your employer's stock. If you have doubts about this recommendation speak to a former ENRON employee who lost everything including their job and their retirement savings.

True there are some exceptional companies like Microsoft, Apple, etc. who have made their employees very rich. But the majority of public companies have their ups and downs and most companies offer a range of potential investments for their employee's 401(k) contributions. 

5.) ADJUST YOUR RETIREMENT EXPENSES TO MATCH YOUR RETIREMENT INCOME - While this may seems to be an obvious statement, experience has shown that retirees frequently increase their expenses when they retire just as their income is declining.This can be the results of more time for travel or just continuing some of the luxuries that their retirement income may be insufficient to cover (i.e. country club memberships, golf outings, meals in restaurants, etc.). Frequently retirees do not recognize that they are using their retirement resources at a faster rate than is wise, until a problem occurs (roof needs fixing, air conditioner replacement, etc). One of the major contributors to using savings faster that anticipated is items 6.) below.

6.) BEWARE OF RETIREMENT TOYS - THEY BREAK BANK ACCOUNTS AND SOMETIMES BONES - The two most dangerous toys which can destoy a retirement plan are Boats and Recreational Vehicles. Both are expensive to purchase, costly to maintain and operate, expensive to insure, and frequently under-utilized once the new wears off. The value also drops in most cases even faster than an automobile. 

The popular joke is that the word BOAT stands for Bring Out Another Thousand. It was first told to me by a client with a 56 foot Motor Yacht, so he had experience with the cost of owning a boat. Unless you are prepared to spend your money gladly and frequently stay away from Boats and Recreational Vehicles. When gas prices were over $4.00 per gallon, a client mentioned that it had cost him almost a $1,000 in gas to fill all of the gas tanks on his RV (a luxury monster). At 8 or 9 miles to the gallon, a $1,000 of gas does not last long. When you burn a $1,000 bill with each trip just on gas it sometimes takes the fun out of RVing.

QUALIFICATIONS REGARDING THE ABOVE COMMENTS:
THE ABOVE INFORMATION IS FOR YOUR CONSIDERATION ONLY. THESE RETIREMENT TIPS SHOULD NOT BE FOLLOWED BLINDLY WITHOUT CONSIDERING ALL FACTORS RELATED TO YOUR SPECIFIC RETIREMENT PLAN. THESE COMMENTS ARE INTENDED AS GENERAL CAUTIONARY NOTES AND NOT SPECIFIC RECOMMENDATION FOR A PARTICULAR RETIREMENT SITUATION.
Website Builder