New year, new resolutions — and maybe a new life in retirement.
Resolutions are often top of mind at the turn of the new year. Not everyone keeps them (about 80% of these promises are broken by mid-February) but thinking through and implementing a few steps could lead to a fulfilling retirement. You don’t even need to be close to this stage of life — you could be in your 20s and 30s, just starting your career.
Many Americans are unprepared for retirement. Some get there and realize they don’t have enough saved, and even more younger workers say they don’t think they’ll ever have enough to retire. There are all sorts of guidelines for how much to save by various ages and life moments, but the key is to stay on top of your goals and attempt to accomplish small steps to get there.
Advisers shared their suggestions for what to do in 2020 to make your retirement, near or far, the best it can be.
While you’re still saving:
Discover ‘found’ money
“The beginning of the year represents an excellent opportunity to uncover ‘found’ money in your financial plan,” said Samuel Boyd, senior vice president of Capital Asset Management Group in Washington, D.C. This could mean a tax refund from the year prior. Take for example a $2,400 tax refund — that would be $200 a month that could have been received in pay if your “withholding was properly calibrated,” he said. Instead of pocketing the $200, an employee could adjust their withholding for the following year and have that extra $200 automatically shuffled into a 401(k) plan each month. “You didn’t have the money in the prior year each month so you won’t miss it,” he said.
Add money to a nondeductible individual retirement account
This year, workers can put up to $6,000 (or $7,000 if they’re over 50 years old) in an IRA. “If you have funds to pay the taxes, you can wait 31 days and then convert to a Roth IRA and enjoy tax-free withdrawals,” said Marc Schindler, an adviser and founding partner of Pivot Point Bellaire, Texas. Roth accounts also do not have required minimum distributions.
Run a retirement projection
Retirement projections are an analysis to determine whether an individual is on target to retire, and by when. This may be best done with a financial planner, said Diane Pearson, a financial adviser at Pearson Financial Planning in Wexford, Pa. Pearson suggests working with an adviser to run a retirement projection between five and 10 years away from retirement, which can help them understand if they’re on target with their goals and when they can realistically retire. “Also, many individuals plan as though they will be able to work until their retirement age,” she said. “They must consider what helps if they develop a health issue or if the employer closes or downsizes. Planning is crucial.”
Make contributions automatic
Workers are better off setting up an account and having money automatically taken out of their paychecks, than if they were to do so manually. “Inertia is a huge issue with many people planning for retirement,” said Kent Fisher, senior wealth manager and founder of Southern Investment Management Collective in Chapel Hill, N.C. “They do not put their intentions to work in a timely manner.”
Having a steady stream of automatic contributions, even of just $20 or $50, can be powerful — especially the earlier someone starts, thanks to compound interest. Many employers with retirement accounts offer it as an option, and some go a step farther by having auto-escalation, which is an automatic increase of a worker’s contribution rate.
Plan for your future health expenses
Medical bills can be expensive, but it’ll only get to be costlier as you age. Some workers may want to enroll in a Health Savings Account (HSA) at work, which offers triple tax benefits: the money is saved or invested tax-free, grows tax-free and withdrawn tax-free if used for qualified health expenses. They are tied to high deductible health plans, which may be too expensive for some families (since it means they’ll have to pay more upfront before insurance coverage begins). Some people choose to keep the money in an HSA for their retirement, but they’re also helpful when an unexpected expense occurs.
Get ahead of consumer debt
Many Americans suffer from crippling debt, from student loans, auto loans, home loans and credit cards. Some people think they need to pay down debt before they can start contributing to a retirement plan, but that’s not often the best solution. Many advisers suggest balancing between the two, since contributions to a retirement account compound over time (and thus equate to more money in retirement).
Still, paying down debt by making small saving and spending changes could alleviate some emotional stress (as well as the pressure placed on your wallet). Look to pay down the debts that have some of the highest rates, said Salim Boutagy, a financial adviser at Congress Wealth Management in Westport, Ct.
Increase contributions by 1%
Advisers typically suggest workers invest 10% to 15% of their salaries into a retirement account, but that isn’t always feasible. The goal, first, is to meet an employer match if possible, as that’s free money (and usually hovers around 3% or 4%). “Take it if you can get it,” Erin Lowry, the author of “Broke Millennial,” told MarketWatch when her latest book on investing was released last year. The next step is to increase the contribution rate 1% (or more) each year, or when receiving a pay raise (or new job).
Explore new accounts
Workers are lucky if they have 401(k) plans, but either way, there are still other vehicles an individual can use to prepare for retirement. People should look for tax diversification in retirement, said Amy Shepard, a financial planner at Sensible Money in Mesa, Az. One strategy is to separate assets into thirds and into these types of accounts: a tax-deferred account, such as 401(k) or IRA; a Roth account (which invests money with after-tax dollars) and a taxable investment account. “By having your assets split among these various tax ‘buckets,’ you give yourself a lot of flexibility in retirement when it comes to withdrawing and managing not only taxes but also thing like Medicare Part B premiums, Affordable Care Act credits and many other considerations,” she said.
Consider life insurance
Life insurance can be especially important for people with dependents, but it can also be a useful tool in retirement. Life insurance helps pay for funeral expenses, as well as paying off debt in death. Life insurance can also create a wealth transfer to an heir, support a widow or widower and allow the policyholder to give to a charity after they pass. Consider chatting with a financial adviser or insurance agent about if you have adequate insurance coverage, said Daniel Trumbower, a senior wealth adviser at Halpern Financial in Rockville, Md.
When you’re near retirement:
Start planning the nonfinancial parts of retirement
What will you do with your time? Does it look like volunteer work or travel? “Develop a purpose,” said Kristin Pugh, senior wealth adviser and director of learning and development at TrueWealth Management in Atlanta. “There are a large number of retirees that once they get into retirement, one or two years in, they are bored, stagnant and realize that it is not what they thought it would be.”
It’s important to also note that things will change, even in retirement, said George Reilly, a financial adviser and principal of Safe Harbor Financial Advisors in Occoquan, Va. “Retirement is not a static period in life,” he said. “Things can and do change and their plans should change accordingly.”
Take a ‘mini retirement’
Before resigning from your job and living out your retirement dreams, test it out, said Jake Northrup, financial adviser and founder of Experience Your Wealth. This is especially true if you plan on moving, whether it’s across the country or the globe. A “mini retirement,” which could be a few weeks or a few months, allows individuals to see what their daily routine will look like in retirement, or what the weather is like in their dream destination during the off season. “This is a big reason why so many people in retirement go back to work — they aren’t actually happy when they no longer work,” Northrup said.
Make the ‘catch-up’ contributions
Workers 50 and older are allowed to contribute more to their 401(k) plans and IRAs than those under 50. In 2020, the maximum contribution limit for a 401(k) is $19,500, but for Americans 50 and older, the limit is $26,000. For IRAs, the limit is $6,000, with an additional $1,000 for people 50 and older.
Plan your Social Security benefits
Think about your goal year for retiring, and then calculate when may be best to take Social Security benefits. Americans can begin claiming at 62 years old, though they wouldn’t get their full benefit until their Full Retirement Age (FRA), which depends on when they were born. If they were to delay their benefits, they’d even get more than they are owed. “Sometimes waiting just a few months can increase the benefit/amount that you receive,” Trumbower said.
Create or update important documents
Wills and power of attorney documents are important no matter your age, but especially as you age. Check that your paperwork with employers and financial institutions are up-to-date and that your beneficiaries are who you actually want to inherit your assets (and not a former spouse or deceased family member).
Prep your current home
Some retirees choose to downsize their homes. Individuals looking to do so may want to make a few cosmetic touches to their current home, which could help it sell, Boutagy said. Current and near-retirees may also want to work with their loved ones, or even consultants, to declutter their home.
On the other hand, others want to stay in their homes in retirement. In that case, they should start thinking of what their house will need when they age. Some elderly family members may need extra banisters in stairwells and bars in the bathroom or bedroom, while others may need a ramp to the front door installed.
Come up with a retirement budget
Aside from daydreaming about what you’d like to do in retirement, it’s important to understand what it will cost. For example, if someone wanted to have a similar lifestyle in retirement as they do before retirement, they’d need to have enough saved to produce an annual return equal to their after-tax salary, said James Guarino, managing director in the tax practice at Baker Newman Noyes in Woburn, Mass. They should also consider factors that will naturally change — someone may no longer need to budget as much in commuting costs, but perhaps they should expect to spend more in dining out. “The point being, without an estimate of current and future expenses, one cannot know whether he or she is saving enough for retirement,” he said. “Ultimately, it comes back to planning and organizing.”
When you’re in retirement:
Update your financial plan to be Secure Act-friendly
The government recently passed retirement legislation, which could have huge implications on a person’s financial plans and future goals. One such change was limiting the years a nonspousal beneficiary could claim required minimum distributions on an inherited retirement account. Previously, they had their lifetime to draw down assets, known as the “Stretch IRA.” Now they must do so within 10 years. This could derail an accountholder’s inheritance plans and potentially leave their children or grandchildren with a tax burden.
Take less money during market pullbacks
Market volatility is inevitable but if you can afford to, taking less out when the stock market isn’t doing so hot can be advantageous, said Brandon Opre, a financial adviser and founder of TrustTree Financial in Huntersville, N.C. “The reason for taking less in down years, if possible, is to avoid compounding the downward spiral of asset drawdown,” he said. “If you are pulling out funds after the market is down in a given year, a retiree may experience a significant drop in account value which will be hard to bounce back from.” This is known as the “sequence of return risk,” said Michael Hennessy, a financial adviser and founder of Harbor Crest Wealth in Fort Lauderdale, Fla., and it’s why some near-retirees may actually delay their retirement, if they can handle doing so.
Check in on your portfolio allocation
To avoid a “sequence of returns risk” — or simply to ensure your portfolio is working toward your goals — retirees should check in on their portfolio allocation annually. In the case of an impending bear market, near-retirees and current retirees may want to adjust how their money is invested (with the help of a financial adviser) by employing income laddering or bucketing approaches, two strategies that could mitigate the risks of compounding losses from market downturns, Hennessy said.
Find ways to make money in retirement
“Don’t underestimate the power of earning income in retirement,” Northrup said. Retirement just means more freedom to do what you want how you want, and for some people, that may still involve work. It could be a shift from full-time to part-time, or entrepreneurship in the form of a new business or consulting. There are also benefits beyond extra cash in your pocket, he said. “When you generate income in retirement, it reduces the amount you need to withdraw from your investment portfolio to support your living expenses, and thus, reduces the amount of money you need to retire,” he said.