Retirement Planning: Are You on Track for a Tax-Smart Exit?

Retirement isn’t just a date on the calendar. It’s an impactful life transition that requires intentional, skillful, and proactive planning—especially when tax efficiency and long-term healthcare needs are involved. In this stage of life, it becomes critical to evaluate whether your retirement strategy aligns with both your financial goals and tax situation.

Assessing Your Retirement Readiness

When planning for retirement, start by establishing a clear vision of what retirement means to you as well as your goals. Will you continue working part-time? Do you plan to relocate or travel extensively? These lifestyle decisions directly impact how much income you’ll need to cover your expenses throughout retirement.  In fact, establishing a retirement expense budget, or even an estimated budget range of expected expenses, is critical to understanding how much you’ll need to cover your lifestyle.

Next, take inventory of all of your expected income sources, such as 401(k)s, IRAs, pensions, taxable investment accounts, and any income from the sale of a business or practice. Each account type comes with its own tax implications, so understanding how they interact is essential.

It’s also vital to model out various retirement scenarios, stress-testing them against potential economic and market changes. At Tenet, a significant part of our financial plan creation and analysis for clients includes reviewing multiple different scenarios to identify different possible outcomes depending on strategies that may be implemented.  This also can help provide clients with perspective on how their long term situation and plans may be impacted in the future due to unexpected changes, such as higher than expected healthcare costs.

Tax-Efficient Withdrawal Strategies

When planning income and expenses for retirement, it is also critical understand the tax implications of your various income sources. For example, brokerage accounts are taxed on capitals gains, dividends and interest but withdrawals from the account itself are not taxed, whereas IRA investments are shielded from tax on investment gains and income while they are in the account yet distributions from the account are taxed as ordinary income.

A key aspect of tax-smart retirement planning is managing the sequence of withdrawals. This involves strategically tapping into different types of accounts to manage your tax bracket each year. For instance, in the early years of retirement, you might draw from taxable accounts first to allow tax-deferred accounts more time to grow. Later, Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s will kick in at age 73 (as of current IRS guidelines), and failing to plan for them can push you into a higher tax bracket. Roth IRAs may be the last account you pull from given they grow tax-free, and distributions are also tax-free in retirement (as long as the account has been held for at least 5 years or more).

Speaking of Roth IRAs, Roth conversions may also be a powerful strategy to consider, particularly in low-income years or the gap years between retirement and when RMDs begin. By converting portions of traditional IRA funds to a Roth IRA, you pay taxes now but enjoy tax-free growth and withdrawals later.

Planning for Long-Term Healthcare Costs

Healthcare is often one of the most underestimated expenses in retirement. According to Fidelity, a 65-year-old couple retiring today may need close to $315,000 for out-of-pocket medical expenses throughout retirement.  That is a big number that needs to be considered in your future plans and retirement spending needs.

Long-term care (LTC) coverage is one way to mitigate this risk. You can consider either standalone LTC insurance or hybrid life-LTC policies, which are a combination of cash-value life insurance and LTC coverage that offers both a death benefit as well as access to funds for long-term care expenses. Alternatively, earmarking a portion of your HSA (Health Savings Account) for future healthcare expenses can serve as a tax-advantaged reserve as well.

HSA accounts can also eventually be an alternative source of retirement income should you want/need to use it for other, non-medical purposes. After turning age 65, you can withdraw money from your HSA for any reason without incurring the 20% penalty that applies to early withdrawals. You would still owe income tax on the withdrawals (just like you would on IRA distributions), but you would be able to use the funds for non-medical expenses without facing the penalty. 

Selling or Transitioning a Business

For many professionals, the business or practice itself is a critical component of their retirement nest egg, especially when considering a transition or sale that generates liquidity. Planning the sale well in advance—ideally 3–5 years out—can allow you to optimize valuation, structure the sale tax-efficiently, and ease the transition for you, your family, customers, and staff.

Business owners considering a sale of their business as part of their retirement plans can benefit greatly by work with professional advisors, particularly those who understand the nuances of practice or business transitions and practice proactive tax planning like our team at Tenet. For example, at a basic level, structuring the sale of your business as an asset sale vs. a stock sale can have drastically different tax outcomes.

Wrapping Things Up

A tax-smart retirement doesn’t happen by accident. It requires thoughtful and proactive planning as well as alignment of your assets, income strategies, and healthcare cost planning. All of these factors are important not only for you but also your loved ones as you journey into this next phase of your life. If you can get ahead and plan around these critical components now, you can have a higher likelihood of creating a more secure, flexible, and enjoyable retirement.

If you have retirement questions or are looking to create a tax-smart retirement plan specific to your situation and goals, reach out to our team today or schedule a meeting with us.

 

Investment Advisor Representative of Sanctuary Advisors, LLC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.

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