People with a reliable income source from a pension and substantial savings are in a unique niche. Only about 2% of the U.S. population fits this profile, combining a pension (held by 20% of people) with $1 million or more in savings (top 10% net worth).
Our firm calls this the 2% Club, and we specialize in planning for this specific group. Over the years, we’ve identified the unique challenges and opportunities members of this group face, plus the strategies that may allow you to maximize your retirement plan effectively.
This article is written by CFP and author Joe F. Schmitz Jr., founder and CEO of Peak Retirement Planning, a company focused on helping clients grow and preserve their wealth.
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1. Recognize the value of your pension
Pensions are incredibly valuable. For example, a $50,000 yearly pension for 10 years can equate to $500,000 in retirement, not accounting for any cost-of-living adjustments. This reliable income stream often means less reliance on withdrawals from savings, allowing funds to continue growing.
Having a pension means you may not have to save as much for retirement. The 4% rule suggests that most savers would need about $1.25 million to draw $50,000 annually from investments. A pension effectively provides the same amount without depleting savings.
2. Understand the importance of tax planning
Retirement doesn’t always mean you’ll be in a lower tax bracket. With a high pension income, potential tax implications are significant.
For instance, the interaction between pension income and Social Security can create what’s known as a “Social Security tax torpedo,” effectively increasing your tax rate beyond the nominal bracket.
Social Security could be tax-free for those with a lower income, but those with a pension could force their Social Security to be up to 85% taxable, which could lead to more taxes in retirement.
Consider converting traditional IRAs to Roth IRAs to proactively manage the liabilities of the tax torpedo. You could also explore relocating to a state with favorable tax laws, considering both income and taxes on pension income, since some states tax pension income, and others do not.
3. Manage the widow’s penalty
The transition from joint to single filer tax status upon a spouse’s death can substantially increase tax liability, often referred to as the widow’s penalty. Planning for survivorship through careful allocation of pension benefits, life insurance and other assets is crucial.
One way around this is to opt for a 100% pension survivorship option. This strategy might cost more upfront, but it ensures the surviving spouse maintains a stable income.
You could also look into life insurance to replace the cost of electing the survivor option or explore self-insuring with your investments saved over the years.
4. Embrace the opportunity to enjoy your wealth
Many in the 2% Club struggle with transitioning from saving to spending. Practical spending that enhances your quality of life without jeopardizing your future security is essential.
Plan for intentional experiences or purchases: fly first class, relish travels or support charitable causes. Think of these as investments in joy and fulfillment.
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At our firm, we give some of our clients who struggle with spending “Peak Approved” stamps to help encourage them to enjoy their hard-earned money.
We call these clients Midwestern Millionaires (I even wrote a book about them!). They have Midwestern values, such as being frugal and hardworking and diligent savers, which means they are the best savers and the worst spenders.
Some also refer to this as the middle-class millionaire. We tell them there are only three things they can do with their money, as they cannot take it with them: give, gift or spend. What will it be for you?
5. Define your financial legacy
With robust savings and investment growth potential, define how you wish to distribute your wealth when you pass away. This could mean anything from supporting family members to making philanthropic contributions.
Defined legacy planning ensures the fruits of your lifelong work are distributed according to your wishes, whether by gifting it during your lifetime or structuring it in your will.
Also, ensure you get all estate planning documents in place, as only 30% of people pass away with an estate plan.
Being in the Midwestern Millionaire and 2% Club categories comes with privileged opportunities and responsibilities. By focusing on advanced tax strategies, managing the widow’s penalty, spending wisely and planning your legacy, you can enjoy a fulfilling retirement.
Our biggest recommendation if this is you: Work with a niche retirement planning team that understands the unique needs of this financial situation to ensure you truly maximize your retirement years.
Planning for not only a high income from your pension but also a high net worth from being a diligent saver requires more advanced planning.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
