The Secret to Tax Planning for Retirement

Secret Tax Planning Header ImageWe’ll admit it: this one’s an open secret.  

“Spend less” is the advice you hear time and again in the financial press, and of course it makes sense: the less you need in retirement, the less income you draw, and thus the less tax you pay.

But it’s not the whole story.

After all, not all expenses are equal. No number of vetoed trips to your favorite coffee shop is going to make a significant dent in your tax bill (unless you’re truly a serious coffee drinker).

The secret is a matter of where you reduce your spending — and how.

Here’s what you can do.

Eliminate high-interest debt

Credit card debt is one of the single biggest financial black holes out there. Not only can it cripple your finances due to the sheer interest expense, it acts as a recurring budget item that can’t be taken away.

In retirement, that puts you in a double-bind: not only do you need to keep financing the debt, but you’re paying taxes on the income that you’re drawing in order to do so.

This doesn’t even account for the loss of flexibility if your income falls or you’re in financial trouble another reason. Credit cards not only take money away, they prevent you from putting that money towards something else.

That’s why one of the best things you can do before retirement is to pay off your credit cards.

You’ll save on interest payments, you’ll save on taxes, and you’ll save yourself a potential headache down the road.

Consider paying off your mortgage

While your mortgage may not be a major financial risk factor in your life, it is still a form of debt. That means drawing down on your retirement assets to pay your mortgage exposes you to the same additional tax costs.

Just think: banks people typically put anywhere from 8% (for the very wealthy) to 22% towards their mortgage.1 That’s a lot of income to be spending every month.

If you can pay off or eliminate your mortgage — and thus bring your housing expenses closer to zero — your overall savings could be immense.

One simple way to do it would be to pre-pay your mortgage in the years before retirement, or you could sell your house and downsize to something cheaper instead. The specific strategy you choose should account for the specifics of your financial situation, of course, but also your goals and plans for retirement.

Build a conservative budget

A budget without mortgage or credit card payments is already pretty conservative, to be sure.

But minimizing taxes is, in a way, as simple as keeping it simple.

If you can simplify or downsize in other areas of your life, retirement is a great time to start. A second car, a time share, or a few trips a year might not be so necessary to your happiness, and eliminating those extras can help pad your savings for the road ahead.

Of course, you probably don’t want to live a Spartan existence — after all, what’s the point of retiring if you can’t enjoy it? But do stay aware of your big ticket spending categories and how you might winnow them down a bit.

The payoff isn’t just less money on taxes. It’s a greater amount of flexibility later, when, say, your healthcare budget needs to balloon suddenly — or when you get invited on the trip of a lifetime to some far-off place you’ve always wanted to see.

Let Us Help!

We can discuss this topic and more in person at a complimentary appointment. As a bay area retirement specialist we can give you a review and make suggestions based on your retirement objectives.

 Secret Tax Planning Infographic

1 Brian Stoffel. “Here’s the Average American’s Mortgage Payment, by Age and Income — How Do You Compare?” The Motley Fool. March 23, 2015.

Important disclosures:

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.