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How to Transition Into Retirement

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Do you ever think about retirement? For most of us, our vision of retirement is all sunshine and rainbows because we picture ourselves basking in the sun with an umbrella drink, listening to the sweet sounds of the ocean waves. This might very well happen, but have you ever thought about the transition that has to take place before this lifestyle becomes a reality? The satisfaction of earning paychecks with your hard work is now over, and you must now survive on your savings. How in the world is this done? And, how do you get used to this whole new way of life?

My Retirement Lesson

I am very fortunate to work for a caring company. The pay is good, the benefits are great, and I always get the feeling that the executives truly care about the employees. For example, not only does the company match our 401(k) investments, but they also offer a class to all employees that are interested in learning about retirement. Now, I’m only 26 years old (and my wife is only 23), but we want to make sure that we have a plan for our retirement too! So, we attended class 1 of 4 last Tuesday and learned quite a lot!

That Transition Into Retirement

This transition from the workforce to retirement is actually something that I never thought of. Once you retire, there’s hardly any income coming in (for most of us), and you’re basically living off the money that you’ve been socking away for the past 40 years!

Now, rather than looking forward to that next paycheck, you’re withdrawing funds from your retirement account, just hoping that it’s not too much. If it is, you’ll go broke before you leave this world, and that can’t be a very fun experience.

How To Withdraw Your Retirement Funds Effectively

Within my lesson, the instructor briefly touched on taxes in retirement. Did you know that different investments are taxed at different rates? And, since the taxation is not consistent, there is actually a withdrawal strategy to make your money last longer (ie. taxed less).

The 401(k)

Many people believe that you shouldn’t touch your 401(k) until you absolutely need the money (or are forced to by the government). I understand that you’d like your money to earn compound interest for as long as possible, but this is not always the best option.

If you have a large amount of money in your fund and are forced to remove a portion of it, those funds are going to be taxed as “ordinary income”. In other words, if you are forced to remove more than $70,000 from your fund, you’ll be taxed 25% on that money. It’s best to remove a percentage of these funds on your own terms in order to pay less tax.

Dividends

If you are earning money with dividends, you’ll only incur a 15% tax deduction, no matter how much you earn. This could be a great option for your retirement years.

Capital Gains

If you have money in the stock market or real estate (or any other similar investment) and earn a profit, these increases will be taxed as capital gains. And, if they have been held for more than a year, you’ll only pay a 15% tax on this money as well.

Pay Attention to the Tax Brackets

In your retirement years, paying attention to taxes is very important. By withdrawing money carefully from each account (and making sure you don’t enter the next tax bracket), you can pay fewer taxes and therefore allow your money to last longer.

What is your plan for retirement? Have you thought about how taxes will affect those plans?

Money Retirement

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

22 Comments

  1. Plans for retirement. 1. Pay off all debt. 2. Establish passive income sources from real estate and dividends. 3. Enjoy.

    • Haha! I love the idea of real estate, CFM! You’ll still be earning a regular “paycheck” from your rentals, and you also have a nice nest egg of value in the properties. It’s really the best of both worlds. I can’t wait to get started on my real estate investments! 🙂

      • I agree! I will be investing later on in marriage in real estate. You can’t go wrong. Extra cash flow pouring in! I’ll have to refer back to this post when I’m at retirement age. 🙂

  2. I agree that you have to pay attention to the taxes when you go to withdraw it (or where it’s coming from). Many people don’t pay attention to this and lose money. 🙂 With my new goal to retire by 27, I am going to do things differently. Sounds like I have an idea for my next staff post. 😉

    • Haha! Can’t wait to see the new staff post! 🙂

  3. I am starting to prepare now although I have 5.5 years to go. I want to make sure I have things to keep me busy, engaged, interested and stimulated. I plan to start volunteering next year and take classes when I retire.

    • I bet you’ll retire just as you intend! Good luck to you Krantcents!

  4. I’m not sure I’m ever going to “retire.” Not because I won’t be able to afford to – but due to boredom. I’ll always have something I want to do that generates income. The last thing I want to turn into is an old fart that wakes up and visits his local bank to see what CD rates are paying. (These people exist and it’s sad)

    Having said that, I’m still setting $$ aside for retirement as if I’ll have zero income.

    • The nice thing is, retirement doesn’t have to mean that you’ll stop working. I could mearly mean a transition from a job you hate to a hobby that you love! 🙂

  5. It has got to be weird for those that actually turn to rainbows in retirement..you worked for 4 decades and before that 1.5 decades of schooling to finally have no responsibilities? I would go ape shit crazy. Like Funancials I think retirement will be a part time thing for me.

    My plan, like your post alludes to is to have multiple buckets and pull for those buckets in the most efficient manner.

    • I think I might go crazy too! I really just want to do what I love and not need to think about the rest of the details. 🙂

  6. I recently did some calculations and the results are very much frustrating, to be brutally honest.
    Have looks yours self – they are all published.

    If you invest $ 40, 000 a year over 35 years, at modest inflation rate of 2% and administration fee of 1-2% you need stock market to perform at 4% just to preserve value of your money and higher to gain anything.

    This means that you are only preserving money you are investing at a very high risk. So it is just plain wisdom – is there a point to be frugal and try to save, if you ended up loosing money?

    Feeding financial industry and no living your life in full?

    • Hi Financial Independence! Yes, sometimes the numbers only allow us to tread water with our money, but honestly, there are accounts out there that charge less than 1% in fees, plus, the return on the market can easily be 8%+ some years (hopefully we’ll see this again), so much of the time, we are able to increase our investment substantially.

      But, rather than just look at market returns, why not delve into business investments or real estate? They’ll diversify your portfolio and make you the extra money you’ll need each year. Plus, you’ll have more control of the outcome.

  7. It definitely great when you retire with no debt, you can enjoy life.

    • That’s what I figure! Thanks for the comment!

  8. Planning for taxes has always been on our radar. This is why we are investing using our TFSA accounts compared to our RRSP’s. It helps us save on tax.

    • You are one of the few that are thinking about taxes. Good for you!

  9. this is one great information Derek, thank you for sharing your great insight. it’s really important to plan, it’s the essential part of our future financial security.

    • You’ve got that right! Planning for our retirement is unbelievably important! If we don’t, we’ll be old, broke, and sponging off our children. Who wants to end their life like that???

  10. I’m glad you addressed tax diversification here. It’s amazing how often people forget this important issue in their retirement planning. The difference between an effective 15 or 25% tax rate can be massive on a retirement income.

    • It sure can! I know that when I retire, I’m going to watch those tax brackets very carefully.


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