Sarenski Ted

Retirement planning is going to be the focus of your baby-boomer clients over the next ten to fifteen years. The retirement column will be your guide to assist you in delivering services to this group, as well as those younger, so they will enjoy comfortable, stress-free retirement years. The psychological impact of retirement is as important as the financial aspect when working with clients planning for retirement.

I like to use the “F-word” when doing any planning. “Flexibility” is very important for the future non-earning years. The current tax code is linked more closely with investments than it ever has been before. We now have differing capital gain rates, AMT issues, different rates for interest income compared to dividend income and a new 3.8% Medicare tax on unearned income for singles with Adjusted Gross Income over $200,000 and couples with AGI over $250,000. How do you assure the most flexibility? Consider the three-legged stool of retirement.

Ideally, we should encourage our clients to have equal pools of pre-tax savings and after-tax savings. The third leg of the stool, Social Security, will be addressed in future issues. No longer can we assume that someone heading into retirement will be in a lower tax bracket than the tax bracket they were in when they were earning money. Seventy-seven million baby boomers over the next twenty years are going to require more medical services provided by Medicare and collect Social Security benefits, the cost of which cannot be solely born on the shoulders of those younger. Tax rates will most likely be higher for the boomer generation in retirement than the tax rates in effect during their peak earning years. Equal pools of pre-tax and after-tax funds will allow a person to control the tax bracket he or she is in by drawing enough from the taxable pool to take advantage of deductions, exemptions and lower tax brackets and then make up the rest of the funds they need to live on with funds from the after-tax pool of savings.

I have seen many high-earning professionals near retirement with millions in pre-tax savings and a pittance in after-tax savings. These people are then fully subject to the tax rate schedule which makes every incremental dollar they need cost more and more when they draw funds to live on in retirement. Early planning for these folks can help create the after-tax pool by considering converting pre-tax money into after-tax money using Roth conversions. High earning professionals many times have the flexibility (there’s that “F” word again) to control the receipt of their earned income and create low earning years so as to take advantage of Roth conversions in those same years. The ability to undo the conversion through October 15th of the following year gives tremendous flexibility in an uncertain investment environment so a person is never locked into a position that is disadvantageous.   

Another way to create an after-tax pool of savings, and possibly get matching money to boost that pool, is to contribute the remaining years’ 401(k) contributions to a Roth 401(k) if your employer’s plan has been amended or created to include the Roth 401(k) provision. Conversions of prior 401(k) tax-deferred contributions can be converted to Roth 401(k) contributions too! A word of caution is important here. Conversions of pre-tax 401(k) monies to Roth 401(k) monies do not have the ability to be reconverted prior to October 15th of the following year. The individual is stuck with the decision of the conversion; it cannot be reversed later.

Saving after-tax money to the extent one can is the simplest way to build that pool. Time, of course, is limited for the boomers. But, they are in their high-earning years and many of their costs for housing or children’s education are behind them. Sacrificing some desires for the next few years could make a large difference in keeping taxes low and food on the table in their retirement years.

Your baby-boomer clients need you to have these discussions with them before they ever consider not working. While you are discussing these ideas with them it will be the perfect time to suggest to them that they have these discussions with their children. Their children own the one thing that your boomer client is lacking; time. Let’s get the next generation better prepared for the non-earning years than the current one appears to be.


Ted Sarenski has authored articles on financial planning that have appeared in many major financial planning resources including a CPAs Guide to Social Security for the AICPA.

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