Many Americans worry about how to reduce taxes in retirement and rightfully so. Taxes can eat away large amounts of your nest egg. Most Americans save a large portion of their nest egg in tax-deferred accounts such as 401(k)s, only to be surprised that the IRS will get a good portion. By understanding and avoiding the retirement tax gap, many families can save considerable tax during their retirement years. This savings can be applied toward vacations, travel, living expenses, and quality of life.

THE RETIREMENT TAX GAP

Each April Americans know it’s tax time and it generally isn’t an exciting time of year, especially for higher earning and higher net worth families. Many retirees mistakenly think they are minimizing their retirement taxes, but instead may be missing opportunities for considerable tax savings. I call this the tax gap.

The tax gap is the difference between what you are paying versus the smaller amount you could be paying. See, as Americans we don’t mind paying our fair share of tax, but what we do oppose is giving extra money to the government. If we’re going to donate, the last person we want to give to is Uncle Sam. After all, the government is known for good financial management.

Let’s be real conservative and say you saved $500 in tax each year for 20 years (ages 65-85). That’s $10,000 additional during retirement. What if this amount was $25,000? What if it was $50,000? What if it was $100,000 or more? What would you do with that money?

So who’s responsible to find this gap? Is it your accountant? While there are definitely some CPAs and accountants that are better than others, the reasons for the retirement tax gap is much bigger than how your accountant files your tax return. The problem is that there are two entirely different ways to view taxes: tax returns vs tax planning.

To illustrate, I’d suggest watching a video called the Power of Ten by the office of Charles and Ray Eames. It illustrates our relative size in the universe by starting from a man sitting on a blanket in a park. It then travels out via the power of 10, second by second until you see the entire United States, then earth, then sun, then solar system. It then goes from that same hand in the park and travels inside the cells of the hand by the power of 10. 

One view takes you closer and closer. The other view takes a broader approach. You’ve probably heard the statement that “you can’t see the forest for the trees,” meaning that you are simply too close to the situation. Both views give you a glimpse of reality and can be useful. 

But what does this have to do with taxes?

TAX RETURNS VS TAX PLANNING

When you or your tax professional prepare your returns you scrutinize the previous year, looking for all the legal and ethical ways to minimize your tax burden. This is like getting closer and closer looking at the cells in this man’s hand. Tax returns are a vital and important part of tax minimization. If you have a great accountant, hopefully they’ve been doing a great job for you.

But there is another way of looking at taxes that is much less common; it’s also one of the main reasons people find themselves in the tax gap and may be missing significant opportunities for tax savings. This perspective is found in tax planning - taking a five, ten, or even twenty year approach to minimizing retirement taxes. Tax planning will look at the big picture of all your retirement assets over your retirement timeline and incorporate strategies to proactively reduce taxes. Tax planning can help you know which assets to spend first during retirement. Planning can help you decide how to pass assets down to your heirs and avoid the costly fees and headaches of the probate process.

Put another way, filing a tax return looks back on the previous year while tax planning looks forward. Most people hire accountants to do tax returns for the previous year but few take the opportunity to do tax planning looking forward to future years.

Many squander the chance to lead their families during retirement and lose massive opportunities for fulfillment and happiness. As you embrace your ability to lead your children and grandchildren during retirement, your family can have greater unity and your retirement years can take on much more significance.

Relationships with children and grandchildren can be some of the most powerful and important relationships we experience but can also cause some of the deepest wounds. No matter where your relationships currently reside with your loved ones, your retirement years give you a new chapter to level up those relationships that matter most.

Leadership in the workplace is often discussed and praised yet society rarely emphasizes leadership in the home. Often media and pop culture downplay the role of strong parents and grandparents, emphasizing dysfunction instead. 

The truth is that grandparents who retire enter a unique phase of life to influence and lead their families in unprecedented ways. Instead of letting your most important relationships evolve through chance, seize the possibility to unite your family, create incredible memories, and leave an intentional legacy embedded with the values that will help your family thrive for years to come. 

As you mold and shape retirement, here are five powerful strategies to help you lead your family during retirement:

UNITE YOUR FAMILY THROUGH VISION

“The greatest danger for most of us is not that our aim is too high, and we miss it, but that it is too low, and we reach it.”

-Michelangelo

"Leadership is the capacity to translate vision into reality.”

-Warren Bennis

Most businesses develop vision statements and know the significance of leading with vision. Where do we want to go? What are we trying to achieve? When do we want to get there? The professional business world is ripe with vision statements and goal setting. Somehow, this rarely translates into leadership in the home, especially during retirement.

I once heard a story of a single father, who was less than happy about his seventeen year old daughter’s choice in a boyfriend and was letting her know it. Instead of coming closer together, their relationship was being strained and he knew it. So what was he to do?

He decided to tackle the issue by finding something new and exciting that he knew his daughter was interested in. She had expressed interest in volunteering in third-world countries so the two of them scheduled a trip. 

This trip inspired her to see a bigger vision for her life and what she wanted to do after high school. She realized pretty quickly that her boyfriend didn’t match her vision for a greater future and they drifted apart.

One way to do this is to clearly articulate your family values and principles. One suggestion is to have a family dinner or barbecue. Get everyone together and take a few minutes to lead a discussion on what your family stands for. Look for consensus and something everyone can buy into. You could even pass out a sheet with twenty different values or statements and have family members circle what’s most important to them (i.e. hard work, integrity, growth, courage, faith, etc).  Identify at least five values and formalize them in some way. One way to make this more concrete way is to create a Family Vision Statement.

Whether your family vision is an informal discussion or formalized in an actual document, helping your family see a bigger vision can create unity and excitement.

DEVELOP AN INTENTIONAL CULTURE

“A nation’s culture resides in the hearts and in the soul of its people.”

-Mahatma Gandhi

Your family culture is what you do, how you do it, and how you treat each other. For example, what do you do during the holidays and Christmas season? What will you do for Thanksgiving? How often will you reach out to your children and grandchildren? What influence will you have on their life?

Putting your finger on exactly what retirement will look like can be difficult. Often, people get blindsided when unexpected events derail their plans. Understanding the four specific stages of retirement can help you thrive and flourish, even in the midst of life’s curveballs. Seeing retirement as a journey instead of a destination can be a powerful mental model.

Here is the problem: Retirement isn’t an event but rather a new phase of life that has distinct stages that can be planned for. Each stage of retirement will bring new opportunities and challenges, both financially and emotionally. If you don’t become aware and plan for these various stages your retirement can be upended and you can be blind-sided.

BLIND-SIDED IN RETIREMENT

Do you remember the movie, Remember the Titans? It’s one of our family’s favorites and very well could be one of the best football movies of all time. The story is set in 1971 at TC Williams High School in Alexandria, Virginia. 

One of the main characters, Gerry Bertier, is an All-American football player who tragically gets in a car accident and becomes paralyzed. He was blind-sided. (In a story for another day, he goes on to become a Paralympian and become an inspiration to many.)

Just like Gerry Bertier was tragically injured and and his life derailed, many retirees have their retirement dreams derailed or even shattered.

Here are some examples of being blind-sided in retirement:

You lose 20% or more of your retirement investments right before you retire so you have to work longer or retire on less.

You learn that you claimed your Social Security incorrectly and it cost you more than $100,000. (See my free training on Social Security).

You take too much out of your investments early in retirement and run out of money.

You are unable to take vacations and travel because you don’t think you have the money.

You have a major health challenge and you become a burden on your children and don’t know how to pay for it.

Once you pass away, your spouse lives in poverty because proper planning wasn’t put in place.

You spend your whole life uniting your family, only to have the assets you leave behind divide your family members through legal battles.

Though life can be very unpredictable, retirement planning can help you avoid many of the reasons retirees are blind-sided. 

PLANNING FOR THE FOUR PHASES OF RETIREMENT

The journey of retirement can be divided into four phases. As you understand each stage, it can reduce your chance of being “surprised” during your retirement years. That isn’t to say that life won’t happen and throw you curveballs, but at least you can prepare for them. 

Each of these stages can be different years in length but for simplicity can be broken down into decades.

PRE-RETIREMENT - THE WORK AND SAVE YEARS (Ages 55-65)

As you approach retirement and see it on the horizon, it becomes much more of a focus and concern. Retirement can be an exciting stage of life but “Am I ready?” or “Will I be o.k.?” can be a common questions you ask yourself. The closer you get to the big day, the excitement and anxiety builds. Most people recognize that retirement is much more complex than they realized and they need answers.

Common questions and thoughts in the pre-retirement stage:

How much money do I have in my investment accounts?

Should I save more?

How much will I have when I retire?

How much will my Social Security be?

Do my current financial professionals have the skill set to help me prepare for retirement and then help me during retirement?

Do I need a financial advisor to help me?

When will I retire?

How much can I live on?

If I retire early, how will I pay for health insurance?

How will I replace my income

EARLY RETIREMENT - THE GO-GO YEARS (Ages 65-75)

This stage of retirement begins as you transition into retirement and continues as long as your health and desires allow you to stay active. As you begin retirement,

There are three keys to thriving during retirement. Young people are remarkably good at looking into the future. But, many who approach retirement fall into the trap of looking back instead of forward. Our greater future is created when we focus on the future more than the past.

VPS (Vision + Planning + System) = Thriving

Key #1 - Vision

Understand where you are now (the current you) and look forward ten years into the future (the future you). What do you want life to be like? Who do you want to become? A key part of retirement planning is getting crystal clear on your retirement vision. Put this vision through three specific filters: 1) family, 2) finance, and 3) fulfillment.

Key #2 - What's Your Plan?

What's your plan to achieve your goals and vision with your family, finances, and fulfillment? There are eight key areas to consider: 1) income planning, 2) protection planning, 3) growth planning, 4) tax planning, 5) health care planning, 6) estate planning, 7) family and legacy planning, and 8) fulfillment planning.

Key #3 - What System Will You Use?

What system will you use to help your vision become a reality? Our system is called the Thrive By Design Retirement System™.