Dear Liz: I’m working for a local government and figuring out when to retire.
I’ve got my pension set up and tried to save as much as possible using a 457 deferred compensation plan, which I invested in an S&P 500 index fund.
Also, I have some non-sheltered brokerage accounts with plenty in savings and no debt. Last year, I used vacation time and extra funds to hit my maximum contribution of $46,000 for the 457 plan.
This year, unless I decide to retire, I’ve managed to contribute the same amount again.
But, I’m finding that my monthly expenses often outpace my income after making that contribution, forcing me to dip into my securities account to cover the gap. Should I keep going like this, or would it make sense to cut back on my contributions?
Answer: If you’re not where you want to be with your retirement savings, then maximizing your contributions during your last working year could be smart.
However, having a substantial amount saved can bring its own complications, like moving into a higher tax bracket once required minimum distributions (RMDs) kick in. These RMDs used to start at age 70½ but now begin at 73 for those born between 1951 and 1959, and at 75 for anyone born after 1960.
Many people with significant retirement accounts might benefit from converting some of their savings into a Roth IRA. While conversions are taxable, they won’t require minimum distributions. Future withdrawals could be tax-free. Though, keep in mind that conversions could impact other retirement elements, like Medicare premiums. It’s a good idea to seek solid tax advice before making this move. A fee-only financial planner could provide a comprehensive view of your finances and help construct your retirement income strategy.
