DIY Your Retirement, Can it Really Be Done?

By Dean Barber

March 22, 2019

There are thousands of online resources and books that claim to teach you how to DIY (do-it-yourself) your retirement. But is it really possible and does it work?

Should You DIY Your Retirement?

Firstly, DIY retirement planning requires advanced knowledge and understanding in these areas: investments, tax planning, insurance, and estate planning. Not to mention, it would also be beneficial to have substantial knowledge in Social Security claiming strategies.

There is plenty of information on each one of these topics. However, the interaction between these different areas could make it difficult to have an effective DIY retirement plan.

One thing often overlooked is that circumstances may change as you head into retirement, including your feelings toward risk. To have a good do-it-yourself retirement plan, you need to be able to identify what your money needs to do. An effective plan includes how much money, after taxes, you need to have deposited to your checking account each month to have the lifestyle you want.

Taxes in Retirement

To determine if you are on track, you need to understand how every retirement account will be taxed upon withdrawal. For instance, taxes in retirement are totally different than taxes during your working years. During your working years, it’s rather easy to understand what your net spendable money is because you likely have W-2 income and taxes are being withheld from your paycheck. When you retire, however, this becomes far more complex.

Social Security Taxes in Retirement

It used to be easy when it comes to the taxation of your Social Security – benefits were tax-free. In April of 1983, President Reagan signed the taxation of Social Security into law. It stated that up to 50% of Social Security benefits could be considered taxable income as long as the recipient’s total income was over certain limits. In 1993, another income limit that increased the number of benefits subject to taxation was added. Today, some retirees collecting all of their benefits tax-free while others are required to pay taxes on their Social Security. In order to determine how much (if any) is taxable, the IRS uses a provisional income calculation by adding the gross income, tax-free interest, and 50% of the Social Security benefits.

When it comes to taxation, dividends and capital gains are also treated differently. Depending upon your tax bracket, long-term capital gains and qualified dividends can be tax-free. Nevertheless, once you surpass the 25% tax bracket these once tax-free assets will become taxable. This could trigger additional tax on your Social Security and cause even higher taxes on any distributions coming out of your retirement accounts.

Understanding how the different accounts you have will be taxed will ultimately determine how much taxes you pay in retirement. Therefore, most people unknowingly pay far more taxes than they need to in retirement because they don’t understand distributions.

If you’re a DIY’er, make sure that you’ve considered all of the above. If you have questions about how you can achieve your financial goals, schedule a complimentary consultation below or give us a call at 913-393-1000. We’re always ready to start the conversation with you.

Dean Barber

Founder & CEO

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.