Oct 6, 2016 3 min read

In the past four columns, we discussed some important aspects of retirement planning. Our parents and grandparents lived in a different world. They knew if they worked long enough, they would receive a pension and Social Security, so their retirement was mostly on autopilot and it would take care of itself.

Today, most retirees do not receive a pension and they are responsible for their investment decisions.

While still working, you are in the accumulation stage of retirement. This is when you get a tax deduction for contributions to your IRA or 401(k). This money grows tax-deferred until you start to withdraw funds during retirement. You save on taxes now and pay taxes later.

If you have many years before retirement, you can be more aggressive with investments. As retirement gets closer, you should be more conservative.

When you reach retirement, you have entered the distribution stage. Here, everything changes 180 degrees. You start to pay taxes on this money. You must protect yourself from sequential risk. This is when your market investments take a large loss, and your opportunity to earn back these losses is reduced. Fees can have a major effect on returns and market risk must be minimized.

Many people underestimate how much money they will need to fund retirement. Today, a 50-year-old male on average will live to age 80; a 65-year-old to 83; and a 75-year-old to 86. Women average several years longer.

This means if you plan for a 20-year retirement, half of all people will run out of money. Do you want to get a job at age 85?

If both partners in a couple are 65, there is a 72 percent chance one of them will live to 85. The odds of one reaching 90 is 45 percent, and 18 percent on making 95.

That is great news if your health and quality of life can be maintained. Plan for this possibility by monitoring early spending and maybe creating your own private pension.

Remember, when planning your retirement, different classifications of assets should be used for specific uses. Your qualified money, IRAs, 401(k) accounts and other assets should be used to create future income. This is your most expensive money because you owe taxes. You can invest this in less liquidated investments. Your nonqualified money should be invested in more liquid choices. This is the cheapest money you will use to buy a car, fix a roof, buy a second home or do other things.

All funds withdrawn from a qualified account will pay taxes at the ordinary tax rate. This is your highest rate and you do not get the benefit of capital gains or qualified dividends.

Remember to do tax planning with your qualified money. I recently met with a client who needs to pull a sum out of an IRA to build a garage in the spring. After reviewing the client’s tax return, we determined that the individual should take half out before Dec. 31 and the other half in the New Year. This could save thousands of dollars in taxes.

We will discuss other tax-saving strategies in a future column.

Gary Boatman is a Monessen-based certified financial planner.

He is the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com