Look just about anywhere for retirement advice, and you’ll find more than you could ever read geared towards younger individuals just beginning to think about investing in their retirement, and older individuals nearing the proverbial finish line.
But what about all those people who fall somewhere in the middle, and those who are younger (or older) but don’t know where to start with retirement planning, have lost sight of their retirement goals, or just want to make sure they’re on track and will not run out of money in retirement. Regardless of where you fall on this spectrum, you are in prime retirement savings years, and this advice is for you.
In the following chapters, we’ll clearly communicate the most important elements in retirement planning, from establishing your estate plan and taking RMDs to taxes and healthcare in retirement.
What should you focus on to make sure you you’ve reached your retirement goals when the time comes to retire?
First, let’s cover the basics: Social Security, investing for retirement, and planning withdrawals.
Social Security is a federal program that provides retirement benefits in the form of a portion of your average pre-retirement income, survivor’s benefits, disability insurance, and Medicare.
The Social Security Administration currently provides benefits to more than 47 million retired workers and their dependents, more than 10 million disabled workers and their dependents, and more than 6 million survivors. But Social Security doesn’t pay out equally to everyone. The amount you’ll collect depends on how old you are when you initially file for benefits, and on your lifetime earnings, as well as whether or not you will be eligible for a spouse’s benefits. You’ll receive a calculation of your pre-retirement income, on the basis of your highest 35 years of earnings.
In 2021, for those born after 1959, the full retirement age is 67, although you’re eligible to begin collecting Social Security at age 62. The amount you receive increases the longer you wait to start receiving benefits, up to your 70th birthday. This is thanks to delayed retirement credits.
Investing with Asset Allocation and Time Horizon in Mind
Investing for retirement is a marathon, not a sprint. The goal is to steadily make money over the long haul, not collect a big payday from an overnight stock bonanza. As such, you can’t afford to set up your asset allocation once and then forget about financial planning and investing until the day you retire. The closer you get to retirement, the less risk tolerance you have and the more conservative your investment plan should become.
The opposite is also true, though. Constantly monitoring your portfolio’s ups and downs will only serve to stress you out and make you question your investments. It could even cause you to make rash decisions.
It might be helpful to remember that unless you’re cashing out tomorrow, today’s balance doesn’t matter as much as the amount of time you have left for your money to grow.
Most financial professionals advise checking in with your portfolio at least once a year and plan to rebalance your investments and allocations if necessary.
Don’t be discouraged by a downturn in the market, or let one bad investment change your retirement savings plans. The key to successful investing for retirement is to invest consistently in both good and bad markets. Remember, you’re investing for the long haul, so don’t let a bear market scare you into doing something you’ll regret, like locking in temporary losses by selling when investment values are down. The silver lining of a market downturn is that it’s a great time to buy.
Part of the long-game of retirement planning is being strategic with taxes, but there are so many variables when it comes to taxes; a tax professional is someone you should have in your corner.
With some retirement accounts, you pay taxes upfront (by contributing funds you’ve already paid income tax on); with others you contribute pre-tax dollars but pay income tax on withdrawals. If you expect to be in a lower tax bracket in retirement than when you’re working, it might be better for you to contribute pre-tax and pay the tax on withdrawals. You can use this and other tax strategies and tax-bracket planning opportunities to your advantage both now and in retirement.
With that said, know that a financial professional should never encourage you to shirk your dutiful tax liabilities, exaggerate or fabricate deductions, claim extra dependents, or set up secret offshore accounts.
You might think that your costs of living will go down once you retire, and for the most part they probably will. Your healthcare costs, though, are likely to increase significantly in retirement, especially if you’re no longer eligible for an employer-sponsored healthcare plan.
Healthcare is estimated to be one of the largest expenses during retirement, behind only housing and transportation costs.
But you won’t have to pay out of pocket for everything. You have options for assistance and coverage.
Medicare is the federally administered primary health insurance provider for senior Americans, and you’re automatically enrolled in basic Medicare (Part A) when you reach eligibility (age 65). It’s free for most people, and covers hospitalizations. It doesn’t cover doctor visits, dental care, prescription drugs, and so on. Additional coverage, Medicare Parts B, C and D, are available, each at an additional cost.
There are still more healthcare expenses that Medicare Parts A-D don’t cover. That’s why there’s a separate, additional policy, called Medigap insurance, to bridge the gap. Medigap might help with copays and deductibles.There are 10 standard Medigap policies, each with different levels of available coverage, and plan details are set by the government.
If you’re currently working and your employer offers a health savings account (HSA), it’s definitely worth participating. An HSA allows you to make tax-efficient contributions to save toward your out-of-pocket healthcare expenses in retirement. HSAs offer tax benefits three ways: contributions are pre-tax, earnings are not subject to taxes, and withdrawals are tax free as long as they’re used for eligible healthcare expenses.
Another consideration: If you’ve been contributing to a pre-tax flexible spending account (FSA), don’t forget to spend the money in your FSA account before you retire, or you’ll lose it. You can still file a claim to be reimbursed for qualifying expenses after you retire, if you incurred the expenses before you retired.
An estate plan is more than just who gets Grandma’s diamond ring and how your earthly remains are handled. Your will and testament are legal documents that designate who makes decisions on your behalf, what happens if you become sick or injured, and how all of your assets are distributed in the event of your death.
Although death is one of those things no one likes to think about, if you are married, run a business, own a home, have children or grandchildren, (or all of the above), a will and estate plan are an absolute must.
Same goes with life insurance: You’d do better to have it and not need it, than need it and not have it. Some financial professionals recommend buying more insurance than you think you need – and if you’re not sure how much you need, ask us!
If anything significant has changed in your life since you last updated your estate plan, you’ll want to dust off those documents and contact your financial professional to make sure they’re still current and relevant. In the unfortunate event that you die unexpectedly, life insurance will provide for your family so they can continue living the lifestyle they’re accustomed to, stay current on mortgage and bill payments, have money for college tuition, and so on.
Establishing a comprehensive estate plan and having life insurance coverage in place will give you comfort in knowing that your family will be well provided for in the future, and that your specific wishes will be honored.
Since there really is no one size fits all investment strategy, and since most retirees want to leave a legacy, investing in retirement is one way to help achieve that goal.
Some advice for simple, but successful investing include:
- Determine an asset mix that’s appropriate for you. The percentage of your portfolio that you designate for each type of investment will depend on your timeframe and your expected return.
- Invest for a tolerance for risk. Retirement should be peaceful. During the distribution phase, the keys to successful investing in retirement are to manage your portfolio to make your money last your lifetime and to avoid big short-term losses.
- Keep your retirement needs in mind when working out investment strategies. You’re looking for a “just right” investment strategy, with the perfect balance of risk and return. Once you know what you need to finance your retirement, you can set up your investments to provide income accordingly. Chasing higher returns could jeopardize your bottom line, and may not be worth the risk.
- Have a plan for your drawdown period. Your investment strategies will change once you transition from the accumulation phase of retirement planning to the distribution phase. You’ll need to map out your plan for future investing, making withdrawals, and filing for Social Security benefits, to not only make the most of tax advantages and growth potential but also to ensure that your retirement money lasts as long as you do.
To learn more about these strategies or for help customizing them for your retirement plan, contact us.
Ask any financial professional and they will concur: Sooner is always preferable when it comes to starting to save for retirement, because the more time you have, the more you can save and earn.
But those same experts would also agree that a late start is better than none at all. So if you haven’t decided between 401(k)s and IRAs or thought about retirement healthcare, the time to start is now. Right now. Like today. And know that you are not alone! It’s our job to help people just like you get their retirement plans up and running.
Just as you wouldn’t trust an electrician to fix your roof, or a roofer to install a light fixture. It’s always smart to work with an expert on tough, important jobs, and retirement planning is definitely no exception.
If you still have questions about establishing a retirement plan, working toward your goals, or just want to make sure you’re on the right track, TAKWEALTH can help you. Schedule a no-obligation complimentary call and have your questions answered.