Three Things I Can Decide

Some lucky people get to plan a happy retirement day. Many friends are reaching their traditional retirement age and they are planning for that event. One friend even has a countdown clock on his smart phone.

Others in the Financial Independence Retire Early (FIRE) movement are planning for their happy retirement day, which will come when they reach their magic number. When they have enough, they can walk into work and announce their early retirement.

Those of us who enter a forced early retirement, though, share one thing in common. We didn’t get to decide when our retirement began. All of a sudden, it began.

Yet, there are topics that we can decide in our unexpected retirements. In this blog, I’ll cover three topics:

Focus on Health

The first thing I decided was to focus on my health. No, we cannot decide what health we will have. That is above our pay grade. But we can decide how we deal with it.

In an earlier post, I mentioned that more than half of all those who retired did so before they expected. And about a third of them, did so for health reasons. For you are in that circumstance, then please take this time to focus on your health. Make sure you get the care you require. If that takes time, be a patient patient. Accept that retirement is a way for you to focus on what matters most.

If you are like me and entered early retirement due to job loss, then it’s time for you to focus on your health too. I decided that after 75,000-plus hours sitting behind a desk in my career, I was overdue for more walks in the park. I have focused on managing my high blood pressure and high cholesterol with regular doctor’s visits, and I’m working on reducing stress.

Focus on Fees

The second topic that I can decide is how much to pay in investment fees. Your decisions about your retirement investments will determine how much you pay others. If you invest in low-cost index funds, you will pay pennies to invest every hundred dollars. If you ask someone else to manage your money with active management, you will pay dollars and dollars.

Have you received those offers in the mail? If you have $500,000 in assets, there is a planner who wants to talk to you. And they only make money when you make … well, read the fine print and you discover they make money every year, whether you make money or not. If you want that deal, that is entirely up to you, but you’ll discover that a point and a half in Assets Under Management (AUM) fees will take years of your retirement dollars and put it in someone else’s pocket.

I’ve focused on reducing investment fees by investing in low-cost index funds. I spent the first few years switching from actively managed funds to passive index funds. I am fortunate that my last employer’s 401(k) had very low-cost investment options. If you have an employer’s plan with high fees, consider a rollover to low-cost IRA options.

If you are invested in an IRA, focus on broad-based index funds. I have even decided to move my wife’s retirement funds at Fidelity into their Zero funds: FZROX, for a total market fund and FZILX for an international index fund.

Focus on Taxes

Fees are a kind of a tax, and the third topic I can decide is taxes. No, I’m not going to reprise the Steve Martin routine about, “You can become a millionaire, and never pay taxes. First, get a million dollars. And never pay taxes.” I can’t say, “I forgot!” As a retiree, I must pay taxes, but I can decide how to pay my taxes and how much each year. Part of the “strategic” in my strategic withdrawal strategy is how to manage the taxes that I will pay.

Use the lean years after work and before pensions and Social Security benefits begin to manage your income. Perhaps take some Roth conversions and pay taxes up to the top of the 12 percent tax bracket, rather than wait to take required minimum distributions (RMDs) in much higher tax brackets later in retirement.

You can also decide whether you will pay state taxes or not. Granted, moving is an extreme way to control your taxes, but ultimately you do get to decide where you live. There are states with no income taxes, and others that exempt some retirement income sources. Here in New Jersey, retirement income is exempt if I manage gross income below $100,000. Guess what I’m doing.

I’m currently trying to decide how to pay taxes. So far, I have not had to pay quarterly estimated taxes by using withholding from my IRA withdrawals. If you withdrawal enough to meet “safe harbors” rules, you’ll avoid penalties.

Some income sources will not give you a choice. If I take a withdrawal from my 401(k), the plan administrator will withhold 20 percent, no matter what. I filled out a W-4P for my small pension and have enough points to avoid withholding, but will that require me to begin making quarterly estimated tax payments? For withdrawals from an IRA, I get to decide for each transaction. Can I size those withholding amounts to avoid quarterly payments? I’m learning that there are advantages and disadvantages to both approaches. But, ultimately, how I pay my taxes each year will be something I can decide too.

In his final year, Ben Franklin wrote a French colleague in November 1789. He included in his letter a very famous line. You probably know about half of it. “Our new constitution is now established. Everything seems to promise it will be durable, but in this world, nothing is certain except death and taxes.” Franklin died the following April.

There are certainties in this world, including death and taxes. But you get to decide how to deal with them.