Top 3 Tips Seniors Need to Make Better Money Decisions

When you retire, you’ll stop getting a paycheck every 2 weeks and start thinking about how to get an income over your entire lifetime. This is a tougher problem to solve, and you haven’t been trained for it. Your normal mode of thinking is “how do I pay this month’s bills?” and “how do I reduce this year’s taxes.” This thought pattern probably served you well while working, but now that you’re retiring you need some guidance on how to make lifetime money decisions.

Here are 3 tips you need to make better money decisions:

1. You’ll probably live longer than you think
2. You have more control over your taxes in retirement than before
3. You need to consider what happens when your assumptions turn out to be wrong

1. You’ll probably live longer than you think

While you hate to think about it you probably have a number in mind of how long you’re likely to live. This number is probably influenced by news articles that talk about ‘average life expectancy’ and how long you have seen your relatives live.

Let me tell you why those influences are probably pushing you in the wrong direction.

News articles are writing about estimates from the CDC on life expectancy from birth – they are not writing about your life expectancy. You weren’t born yesterday! You were born 55, 60, 65 years ago! You made it, you survived! Average life expectancy is an average of everybody from birth – they have to account for the 20% chance that a male will die before 65 (according to Social Security’s Mortality Table).

If you’re a 65-year-old male you don’t have a 20% chance of dying before 65 – you made it, and you have a 0% chance of dying before 65!!

You need to focus on your current life expectancy, your personalized life expectancy and perhaps your joint life expectancy.

Your current life expectancy is how long you might live, based on your current age. According to Social Security a 65-year-old male’s life expectancy is age 83, and a female is age 86. This is much higher than their estimates at birth of 76 and 81, or CDC’s current estimate of 77. Not only is your current life expectancy longer than the ‘average from birth,’ but every year you make it through your life expectancy changes – make it to 83 and your life expectancy isn’t 0, it’s 7 more years to 90! That’s why people say “the longer you live, the longer you live!”

You also need to keep in mind your personalized life expectancy. Just because the ‘men in my family died at 70’ doesn’t doom you to repeat the past. Think of when your dad died, or your great aunt died. How much older where they than you? Your dad was likely 25-30 years older than you. Your great aunt could have been 40-50 years older than you. You have 25-35-50 years’ worth of medical advances that are on your side that they didn’t get the chance to make use of?

Think, too, about lifestyle choices today vs. 25-35-50 years ago? You may say that “all the men in my family died at 70,” but did they also start smoking in WW2 or Korea, keep up with 3 martini lunches in the 1950s-70s, and never even hear of cholesterol medicine? How does that compare to your current health choices?

That’s why you need a personalized longevity estimate. Go to Longevityillustrator.org and plug in your current age and health status to see what your health situation and age have to say about your own longevity.

Finally, when discovering your life expectancy you likely need to keep in mind a joint life expectancy. Whether you are considering your pension, Social Security, or even how long you need your money to last, if there are two of you it’s not about when you’re no longer around its about when neither one of you are around.

And simply think about it – its harder for 2 people to die than 1 person to die. That’s why you need to pay special attention to the joint life expectancy, which could be stated as the life expectancy of the couple or “when is the second person likely to die?”

If there are two of you, when you go to Longevityillustrator.org, pay special attention to the joint life expectancy, which is the odds that either one of you would make it to a certain age. For a non-smoking 65-year-old male and female couple with average health, it doesn’t matter so much that the husband could live to 85, or the wife could live to 88, but that the average age for the second person to pass away is 92!

Now of course you probably have different ages, different genders, different health, and smoking status in the couple which is why it’s so important for you to get a current, personalized, and joint life expectancy when you are making decisions.

Put this all together and you realize you might be making decisions based on the CDC’s average life expectancy from birth of 77 when in reality your joint life expectancy might be 92! You are thinking about what to do with your pension and social security and how to invest your money and completely forgetting about the last 15 years of your life!

2. You have more control over your taxes in retirement than before

You might not think it now, but when you’re working and getting a paycheck your taxes are relatively simple. When you hit retirement, your taxes will get more complicated, and yet that gives you more opportunity to strategically save money on taxes in the long run.

When you’re working you get your W-2 for your paycheck, perhaps some bank interest and investment earning 1099s, you put it on your tax return, and you hope you get a refund.

But when you hit retirement, you’ll discover that your Social Security is between 0-85% taxable, your income level 2 years ago affects your Medicare premiums today, and then you have to calculate and pay taxes on your Required Minimum Distributions from your Traditional IRA and 401(k). If you don’t use a tax preparer now it’s time to get one!

Yet all this complexity gives you so much opportunity and flexibility. You can choose to file or Social Security between 62 – 70, which allows you to decide tax-wise when is the best time to realize income at a potentially lower tax rate.

You can choose to take money out of your Traditional, Roth, bank, or brokerage account – all 4 of these have different tax consequences!

You can even decide to take money out in December one year and use it the next – that’s two different tax years!

So many people think the only control they get over their taxes is adjusting their withholding and finding a tax preparer that can get them a good refund.

You have so much more control, and ability to project out what your tax situation is. When the tax situation looks to be a low-rate tax year you’ll want to pay taxes on purpose at that lower rate. When the tax situation looks to be a higher tax rate year, you’ll want to do what you can to defer taxes to another year.

The best way to make use of this flexibility and control is to project out your tax rate over each year of your retirement well ahead of time. Work with a tax and retirement-focused financial advisor who can do that for you. Or, at the minimum project out your tax rate before and after key financial changes.

Before and after:

• You retire
• You start your pension
• You start one of your Social Security benefits
• You start the other spouse’s Social Security benefit
• You hit the Required Minimum Distribution age of 72
• You become widowed and need to file as a single taxpayer

What you’ll often find is that your tax rate is likely to be lower when you just retired, but haven’t filed for your maximum social security benefits, and haven’t hit RMD age of 72, and still file as couple on your tax return.

Use those opportunities to pay taxes, on purpose, through a Roth Conversion so that later on you can get money out of that Roth account without paying income taxes on it, without having it subject to the RMD rules and without having it affect your Medicare premium costs.

3. You need to consider what happens when your assumptions turn out to be wrong

Every financial plan makes assumptions – about interest rates, market returns, tax rates, spending amounts, life expectancy. It’s great to make assumptions and to have good reasoning and back up for how you came up with those, but you also need to consider and prepare for when your assumptions might be wrong.

Are you assuming a great market return, like the ones from 1988-2000, or 2009-2021? What if you’re wrong? What’s your plan for reducing your spending, and how much do you reduce it by?

Are you planning to invest in safety assets like money markets, CDs, or fixed annuities? What if the interest can’t keep up with inflation?

Are you convinced that tax rates are going up, or whichever political party you think is evil is going to destroy your retirement? What if you’re wrong? Democrats and Republicans have raised taxes. The stock market has gone up and down no matter who the President is.

Think through the consequences of your assumptions and your worries and think about what will happen to your retirement, investments, and taxes if you’re wrong. Make sure that your decisions and your investments and your tax decisions are diversified well enough so that you’ll be OK if you’re right and you’ll be OK if you’re wrong.

And the biggest one of all is your assumption about how long you will live in your retirement. Your assumptions are likely off here for three reasons:

• You may retire before you expected
• You’ll likely live longer than you expect
• -You may have people who rely on your income that goes away when you die

According to the Stanford Center on Longevity when you ask someone when they’ll retire they’ll tell you 65, but when you ask someone when they did retire they’ll tell you 61.

The Society of Actuaries finds that the average person underestimates their own life expectancy by 2 years. The Stanford Center also points out that even the experts (like the Society of Actuaries) have underestimated how medical advances have pushed out life expectancy over the past 50 years.

When you’re thinking about taking Social Security early, or how you spend your 401(k) think about:

• What happens if I die early?
  • In reality, your money didn’t have a chance to run you – you ran out of time before you ran out of money
• What happens if I live longer than I thought?
  • Your money would have a chance of running out before you expire. And your social security and pension will be even more vital for you.

When you’re deciding what level of survivorship to add to your pension, you’re probably looking at those few hundred dollars less you’ll be getting for the rest of your life, for the privilege of your spouse getting more money if you die first.

Think about the bigger pain – the few hundred dollars less each month, or the few thousand dollars that your spouse might get less if you die first.

Look at your pension and your Social Security and discover your ‘Survivor Gap’ – the difference in guaranteed monthly income if there are two of you alive, or if just either one of you is alive. If that gap is too large, then make sure you

• have investments set aside for that possibility, or
• plan to downsize earlier than you expected, or
• take a higher level of pension survivorship so your spouse is protected, or
• delay the Social Security of the higher-earning spouse so the survivor amount is higher, or
• make sure to still have enough life insurance in the first half of retirement

Retirement is a new financial world you’ve never faced before. You’ve worked hard and learned over time how best to manage your money when you’re working.

When you hit retirement, you’ve never done it before and you often have choices with your pension, Social Security and 401(k) that you get to make one time, and never get to reverse. When you’re facing those choices make sure to work with a financial advisor who is focused on retirement planning and has helped countless others make these choices before.

And remember these 3 Tips Seniors Need to Make Better Money Decisions

1. You’ll probably live longer than you think

2. You have more control over your taxes in retirement than before

3. You need to consider what happens when your assumptions turn out to be wrong

Jeremy Keil, CFP®, CFA is a retirement-focused financial planner with Keil Financial Partners and host of the Retirement Revealed blog and podcast.