4 Things To Do Before Retiring From Costco
4 Things To Do Before Retiring From Costco
As you prepare to retire from Costco, it's important to take a thoughtful and strategic approach to this next phase of life. Below are four key steps to help you enter retirement with confidence, security, and clarity.
Confirm Your Retirement Plan
If you’re on the verge of retirement, odds are that you have already done some work on building a retirement plan. Now is the time to go over that and confirm what your retirement plan shows before taking a big step into retirement. You should have a plan that compares financial assets and retirement income to expected expenses and stress tests it against the impacts of bad investment markets, high inflation, and unexpected expenses. The results of your plan should leave you with the confidence that your retirement will be a success.Build a Retirement Income Plan
The most important step in preparing to retire is to lock in where your income will come from. You will need to replace your salary, and it is important to know what your income sources are and when they will be starting. Your income plan will help you keep track of important metrics in retirement like what percentage of your income comes from sources not related to the stock market like pensions, Social Security, and rental income versus what percentage comes from investments. It is also a good place to keep track of your withdrawal rate and is essential for retirement tax planning including Roth conversions if those make sense for your financial plan. An income plan should show a year-by-year view of your income and these metrics and give you confidence that your income needs will be met.Adjust Your Investment Allocations
The investment allocation you use while working and saving is almost always not the best investment allocation to be using in retirement. The reason is that those time periods have very different goals. While growing your retirement savings, it is all about maximizing growth and volatility can be a good thing. In retirement, the goal becomes providing income safely throughout retirement and volatility becomes something that needs to be managed. This can be done several ways. Adding a bond allocation, diversifying with international stock, and having an income reserve outside the markets are all good options.Plan Ahead for Retirement Tax Strategies
Early in retirement there is often a unique window for tax planning with long-term ramifications. There are three strategies I have seen Costco employees utilize for a major tax advantage.
NUA rollover - Costco stock held within the Costco 401(k) can receive preferential tax treatment if rolled out to a taxable account instead of withdrawn normally. Normal withdrawals from a 401(k) are taxed as income. An NUA rollover pays income tax on the original basis of the Costco stock, but the remainder can be taxed at the more preferential capital gains tax rate.
0% Capital Gains Tax - A little-known fact is that a married couple can have over $100,000 in capital gains and owe $0 in taxes. How does this work? Early in retirement there is often a period of very low income. There is no Social Security or RMDs, and earned income has stopped. Because of that, the 0% tax bracket is available for capital gains, plus the standard deduction, which together total over $100,000. Selling appreciated stock to use for income early in retirement is a great way ot take advantage of this.
Roth Conversions - This low-income early retirement period is also a great opportunity to do Roth conversions. Most people are in a very low tax bracket, and this can be taken advantage of by taking money from an IRA or 401(k), paying the taxes owed on it, and converting it to a Roth. This creates a powerful pool of tax-free money for later in retirement.
All three of these strategies are powerful but much more nuanced and complicated than I go in depth on here. Be sure to consult with your advisor and tax preparer on how they apply to your tax situation.
Final Thoughts
These four areas form the basis of an intentional and intelligent start to retirement. They create income stability, investment optimization, and tax savings while ensuring your retirement gets off to a good start. I hope you find this helpful, and if you want to know how these things apply to your situation, feel free to reach out to me.
Our office is located just a few minutes from Costco HQ and we work regularly with current and retired Costco employees. If you want a second opinion on your retirement or any of the topics covered in this article please schedule a complimentary meeting with us here.
Garrett Grigas, CFA, CFP®
Financial Advisor & Partner
Phone: 425-902-4840
Email: Ggrigas@geverswealth.com
5825 221st Pl SE
Suite 102
Issaquah, WA 98027
geverswealth.com