First and foremost, thank you for subscribing to this blog. I’ve had quite a few new subscribers this year and really appreciate the kind comments I received from readers.
If you have a topic you’d like me to explore next year, just a question that you and perhaps others would like me to respond to, or any suggestions, please let me know at cjc@retirementstewardship.com.
I also wish you and your families a Merry Christmas as you rejoice and celebrate with family and friends over the birth of our Lord and Savior, Jesus Christ.
”And the angel said to them, ‘Fear not, for behold, I bring you good news of great joy that will be for all the people.’” (Luke 2:10, ESV)
A busy and sometimes challenging time of the year
I imagine most of you, like my wife and I, are very busy this time of year. You may also be spending a little more than you like, but hopefully, it’s money well spent on friends and family. You may also be extra generous to the charities and ministries you support. (I do that using Qualified Charitable Distributions as much as possible.)
Others may be struggling at this time for any number of reasons. Aging brings more than its fair share of difficulties, problems, sorrows, and disappointments. It can be incredibly challenging for those who miss loved ones at this time of year.
I’m reminded of this verse from 1 Corinthians:
”Blessed be the God and Father of our Lord Jesus Christ, the Father of mercies and God of all comfort, who comforts us in all our affliction, so that we may be able to comfort those who are in any affliction, with the comfort with which we ourselves are comforted by God.”
In these verses, Paul refers to God as the Father of Jesus, the Son sent for us, our “Father of mercies,” and the “God of all comfort.” He is the loving and concerned Heavenly Father who is always with us and watching over us (Ex. 3:12; Deut. 31:6-8) and understands how we feel. He became the Son incarnate who suffered as we do and is now with us (Matt. 28:20; John 14:18). And the Holy Spirit (John 14:16-17) dwells within us, uniting us to the Father and the Son.
And, for those who have experienced God’s comfort, let us comfort others through the grace and mercy he has shown us. As the Apostle Paul ends his letter to the Corinthians,
“May the grace of the Lord Jesus Christ, and the love of God, and the fellowship of the Holy Spirit be with you all” (2 Cor. 13:14).
My year-end regime
I haven’t done much year-end planning financially, but I am considering a few things I may implement in 2025. Here are the “biggies”:
Review my portfolio asset allocation
My current target is a 40% equity allocation, 52% bonds, and 8% cash (40/60). I may consider rebalancing, but I don’t typically do so unless a category is ”off target” by at least 10%. (For example, my 40% stock allocation has risen to 50%.) Even then, I prefer not to tinker with things too much (most DIY investors tend to).
Also, since I can’t know with any certainty whether rebalancing back to 40% would move closer to an optimal allocation based on future performance, tweaking an asset allocation within a 5% to 10% range is an expression of certainty about things that aren’t very certain at all.
I think most retirees overthink the year-end adjustment process. The process isn’t all that precise. It’s impossible to accurately know your optimal asset allocation unless you have a crystal ball that tells you next year’s asset class returns. (If you have a crystal ball—I’d like to know where you got it—allocate 100% of your assets to the asset class that will outperform all the others. But I suggest you think twice about that.)
I think it’s more about finding your risk and potential reward comfort level, which can be more subjective than what a few percentage point tweaks suggest.
Others who are fans of rebalancing suggest that the stock market is highly valued right now, so it may be time to reallocate some “wins” to bonds and cash. Still, others suggest that the market will continue to grow due to the more positive sentiment coming out of the election. This is a tough call, and I usually stay pat when I’m in doubt.
That said, I’m considering rebalancing or adjusting my target asset allocation, even though I’m unsure how objective my decision-making is. Some would say my allocation is already reasonably conservative.
I have primarily been in the 40/60 category (or thereabouts) since my late 50s. The conventional wisdom (which seems reasonable) is subtracting our age from 100 to determine how much to allocate to stocks. My wife and I are 72, so the optimal allocation would be 28%, significantly less than 40%. (The basic idea is that we become more risk-averse as we age and are willing to trade lower returns for greater certainty.)
A more recent school of thought suggests that since we’re living longer, the number to subtract our age from should be 120. The rationale is that because stocks tend to outperform bonds over the long run, living longer suggests the need for a higher allocation to stocks than the traditional model.
Based on this method, my optimal stock allocation would be 48%, higher than my current target. That feels uncomfortably high, so I’m wondering if the median of the two makes the most sense and if it might make more sense if the number to subtract from was 110.
That’s not very scientific, but it results in a stock percentage of 38%, which is less than my current target of 40% but still very close, so why bother? As I’ve thought more about this, I may adjust my target allocations to look something like this:
- 35% stock (25% domestic, 10% international)
- 57% bonds (25% intermediate-term, 17% short-term, and 15% TIPS)
- 8% cash (ultra-short-term treasuries)
Keep an eye on dividend and interest income
In at least one way, the last couple of years have benefited retirees like me with an “income with some capital growth” investing strategy. Interest rates and stock and bond prices in 2024 have been up.
However, the next few years could be different if interest rates revert to previous lows, but as the chart below suggests, that may be unlikely.
The “point plot” chart shows that the Fed funds rate is expected to be in the 3.75% to 4.25% range over the next few years, resulting in a respectable yield for income-oriented investors, which many retirees are. Whether it will stabilize at around 3% in the long run remains to be seen, but that seems reasonable, barring some major unforeseen economic events.
So, what about long-term rates, which tend to affect many bond and bond index funds more than short-term rates?
The chart below from Econoforcasting suggests that they may stabilize around the 4% range, almost the same as short-term rate projects. (Longer-term rates are usually higher.)
This means that interest income from intermediate-term corporate and treasury bonds may stay at a level that most retirees will find acceptable. But, inflation can effectively make a 3% to 4% yield year-over-year worth less and less. That’s one of the reasons I have a fairly substantial allocation to a TIPS fund in my portfolio.
Planning for Required Minimum Distributions (RMDs)
IRS rules say I will enter the RMD “zone” next year as I will turn 73 later in 2025. There’s a little more to this than some basic math; there are some timing decisions involved. I plan to write about this in more depth in my next article.
Giving
I am up-to-date on my Qualified Charitable Distributions (QCDs) and want to ensure they are credited to me for tax purposes this year.
But I regularly think and pray about my giving each year—what or who I am giving to and in what amounts. I hope to increase our giving as we age.
Tax planning (and optimizing my withholding)
Mention end-of-year planning, and most people immediately think of taxes. For me, tax planning at this point is more tactical than strategic because our financial situation is pretty stable. Plus, we never know when Congress will make major changes to the tax code, as they did in 2017. And 2025 could be interesting since the 2017 law is set to expire at the end of the year, and the new administration has promised to reduce taxes even further.
For now, I’m assuming they’ll remain about the same.
Because of our move this year, we spent more than usual, but not nearly so much that we’ll be pushed out of the 22% marginal tax bracket into the 24% bracket. I’d love to be in the 12% marginal bracket, but I’m finding that difficult to do in the early retirement years (when spending tends to be higher for most retirees), and RMDs won’t help. QCDs will help some.
The IRS has published its inflation-adjusted tax tables for 2025:
Standard deductions.For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024. For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for tax year 2024.
Marginal rates. For tax year 2025, the top tax rate remains 37% for individual single taxpayers with incomes greater than 751,600 for married couples filing jointly). The other rates are:
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
- 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).
I generally have my taxes withheld as I go—but not from Social Security. I request Fidelity withhold federal and state taxes when I withdraw monthly from my Traditional IRA. I then make up any shortfalls when I do my taxes early the following year. (I would prefer not to get a refund.)
By default, retirement account custodians like Fidelity typically withhold 10% of the distribution for taxes, but you can instruct them to withhold a higher percentage. (Since I don’t withhold anything from our Social Security benefits, 85% of which are taxable, I have typically withheld 20%.)
I recently realized I had misinterpreted the IRS rules about withholding under those conditions. I thought I was REQUIRED to make monthly or quarterly payments (as most individuals and businesses are), but retirees receiving Social Security benefits and taxable distributions from an IRA have another option.
You can also request that they withhold none (zero), which is the other option, at least temporarily. You have to send them in eventually, but it can be a lump sum before the end of the year.
You can do this because IRA withholding rules are unique in that the IRS treats the withheld taxes AS IF they were paid evenly throughout the year, regardless of when the distribution is taken. This means a distribution dedicated to tax withholding made late in the year can effectively cover the tax payments from earlier months or quarters.
I see a couple of advantages to this.
Instead of sending the money to the IRS, I can keep it in my cash reserve account, which is invested in the Fidelity Government Cash Reserves Fund (FDRXX), currently earning over 4%.
Of course, I’ll have to make a large withdrawal and request Fidelity to send 100% of it to the IRS at the end of the year. That may not feel good at the time, but I will at least have the satisfaction of knowing that I was earning interest on it all year instead of the government.
I could do the same thing with QCDs, but my church and most other charities I donate to each year need the money during the year, so I’m less inclined to do it with them.
This could also be helpful to individuals with uneven income during the year or those facing unexpected tax liabilities.
The key is to fulfill the IRS requirements and make sure I send them enough at the end of the year to avoid any penalties for underpayment of estimated taxes. According to Investopedia, the underpayment penalty is,
”reported and the fine is applied when the taxpayer completes the annual tax return. Taxpayers must generally pay at least 90% of their taxes due during the previous year to avoid an underpayment penalty. The fine can grow with the size of the shortfall.”
Estimating taxes and avoiding penalties should be relatively easy for most retirees. Here’s an example to illustrate:
Let’s say my wife and I have a total of $90,000 in gross cash flow (not our actual income):
- $40,000 gross Social Security income
- $50,000 IRA withdrawal
First, I need to determine how much of our Social Security is taxable. I already know, but I can use an online Social Security taxation calculator to calculate it. I estimate that $34,000, or 85% of our Social Security, is taxable.
Therefore, our Adjusted Gross Income (AGI) is $84,000. Let’s also assume I made Qualified Charitable Distributions of $15,000, so our new AGI is $69,000. For 2025, our available standard deduction will be $33,200.
Our AGI, less the standard deduction, results in a taxable income of $35,800.
Assuming the current tax laws remain unchanged and plugging our taxable income into the current tax rates, I get the following:
- The first $23,850 of income is taxed at 10%, equaling $2,350 in tax.
- The next $11,950 is taxed at 12%, resulting in a tax of $1,434.
- Total federal taxes owed will be about $3,784
To estimate our needed tax withholding, I would divide $3,784 by the total of our Social Security and IRA income minus QCDs and the standard deductions; the result is 10.6%.
Now that I know how much, here are our options for tax withholding:
- Have 11% in federal taxes withheld from our Social Security and IRA distributions.
- If we want no taxes withheld from the IRA, we could have 11% federal taxes withheld from Social Security.
- Or vice versa, we could have all $3,764 of federal taxes withheld from the IRA distribution and none from Social Security.
- Or make quarterly tax payments of $946.
If I withhold taxes from Social Security only, I would have less Social Security income and would need to withdraw more from my IRA each month to pay expenses. If I don’t, I’ll have to withdraw from the IRA for taxes. Therefore, there is no decided advantage for one over the other.
However, instead of withdrawing from either for monthly or quarterly tax withholding, I can do it as a lump sum before the end of the year.
Should I decide to do this, I would calculate the 90%-plus withholding number to avoid IRS penalties, which in this example would be $3,406. Then, in December 2025, I would withdraw that amount from my IRA and request Fidelity withhold 100% of it for taxes.
The advantage of this is that, based on current interest rates, I would earn approximately $136 in interest on the money that remained in my Fidelity IRA cash reserves account for the year. That seems to make a lot of sense to me.
Expense planning
I don’t do as much detailed budgeting in retirement as I did before. However, I track specific trends and compare them to those of the previous year. One challenge is that retirement expenses aren’t very predictable.
Our recurring expenses are somewhat predictable, but there can be significant volatility in year-to-year retirement spending, including spending shocks and unexpected expenses.
Spending shocks are, by definition, low-probability events. You may not expect to replace an HVAC system or an old car. But you may plan to paint the house or add a patio. A substantial uninsured medical bill can also hit your budget hard.
I have learned to expect significant unplanned expenses. Those who think they can predict retirement spending may be a bit overconfident.
I’ve written before that I am already taking what amounts to an RMD and will continue to do so in the future. I am right at what is generally considered a “safe withdrawal rate” (SWR) of between 3.5% and 4.5%.
But regardless of what the SWR “rule” suggests that you can spend every year of retirement, the actual “safe-spending” amount varies up and down, often significantly, depending on your market returns, unexpected expenses, marital status, and age.
Most people should not assume there is a reasonable fixed amount that you can safely spend throughout retirement from a volatile portfolio.
Retirement finance can’t be on cruise control unless all income comes from non-volatile sources such as Social Security, pensions, and annuities.
