Since early 2021, inflation has caused prices to increase by 18.8%. Many people expect that the rate of inflation will come down. However, many also mistakenly believe that this would mean prices and the cost of living will decrease. The reality is, even if the rate of inflation declines, we can and should expect that prices will continue to climb, albeit at a lower rate. For this reason, it is important for anyone who is currently retired or who will soon retire to ensure that their retirement planning—including the withdrawals they make from retirement assets—is adjusted for this ‘new reality’. Additionally, individuals should take all necessary measures to enhance their retirement income to ensure it can adequately offset the elevated costs they will most likely encounter throughout their retirement years.

Understanding the Impact of Inflation

Since early 2021, prices have increased significantly, and while the inflation rate has recently dipped, the cost of living is unlikely to decrease. This presents a challenge for those planning or currently enjoying retirement. It’s essential to recalibrate your financial strategies to adapt to this new economic reality.

Optimizing Social Security Benefits

One positive aspect of inflation is that it has caused Social Security benefits to increase. In 2024, Social Security benefits rose by 3.2%, with the average benefit for retired workers currently at $1,907 per month. The maximum benefit amount is more than double that. Understanding how to optimize these benefits can significantly enhance your retirement income. Strategies should be tailored to individual circumstances, considering factors like health, employment status, financial needs, and marital status.

Reducing Taxes on Social Security Benefits

Up to 85% of your Social Security benefits could be subject to income taxes depending on your combined income. Efficient tax planning can help reduce or eliminate these taxes. This may involve strategies like Roth conversions, using Health Savings Accounts (HSAs), or structuring asset withdrawals to keep your combined income in a favorable range.

Additional Tax Strategies

1. Roth IRA Conversions: Converting traditional IRA assets to a Roth IRA can be beneficial, especially if you expect to be in a higher tax bracket in the future. Roth IRAs offer tax-free growth and withdrawals, which can be advantageous for managing tax liabilities in retirement.

2. Harvesting Capital Losses: This involves selling investments at a loss to offset capital gains, thereby reducing your overall capital gains tax liability.

3. Strategic Withdrawal Plans: Developing a withdrawal strategy from your retirement accounts can help your savings last longer while potentially reducing tax liabilities. This involves deciding which accounts to withdraw from first to manage tax brackets effectively.

4. Charitable Contributions from IRAs: For those over 70½, making charitable donations directly from an IRA (Qualified Charitable Distribution) can count towards the required minimum distribution (RMD) and is not included in taxable income.

5. Using a Health Savings Account (HSA): Contributing to an HSA offers tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This can optimize tax savings, especially if contributions are made during high-income years and withdrawals during retirement.

Continued Employment

If you’re close to retirement, you may consider working an extra year or two. This can significantly boost your retirement income by allowing your retirement accounts to grow further and maximizing your Social Security benefits. Staying employed longer can help replace lower-earning years in your 35-year earnings history, potentially resulting in a larger Social Security check.

Creating a Retirement Income Plan

A written retirement income plan can provide clarity and confidence about your financial future. This simple document should outline:

• When your retirement paychecks will start.

• Which retirement assets they will come from.

• How they could grow over time to keep pace with inflation.

• How long those paychecks will last.

Inflation is a reality that cannot be ignored, but with the right strategies, you can help protect yourself from its effects on your retirement income. Our team is here to assist you in crafting a plan tailored to your needs and goals. Don’t leave your retirement to chance. Take control with a written retirement income plan. For personalized assistance, call our office at (435)773-9444 or click here to schedule a complimentary consultation. Let’s ensure your retirement plan is not just keeping up but staying ahead of inflation.