Retirement Planning Tips for Those Nearing Retirement
Retirement is something we all have in our sights by the time 50 rolls around. It becomes less of a far-off goal whispering to us in the back of our minds and more of an imminent goal shouting loud enough to make our heads ring. Retirement is something that requires thorough thought and planning because without that, you run the notable risk of falling short where financial security is concerned. In the words of Benjamin Franklin, “By failing to prepare, you are preparing to fail.” So, what can you do to ensure you are taking the proper steps in preparing for retirement? Here are some retirement planning tips.
Assess Current Savings & Expenses
How much have you saved thus far? Most people will have contributed money over the course of their career to their 401(k) or 403(b) plan and/or IRAs specifically for retirement. Many also will have stashed away cash in an emergency account. Some may even have a health savings account (HSA). This triple-tax advantaged account can be used to pay for qualified medical expenses, including copays, prescriptions, dental care, contacts and eyeglasses, bandages, X-rays, and more. Contributions reduce your taxable income, and the money is not taxed while it is in the account. If the HSA funds are used for qualified medical expenses, taxes are not owed when the money is taken out of the account. The key point is to take stock of what you have saved.
You must also have a solid understanding of your expenses (monthly as well as annually). Think about how these may change in retirement. You may spend less on certain expenses but more in other areas such as travel and recreational activities. It is a good practice to create a “retirement budget,” as your budget while working will more than likely differ from your budget when retired.
Now, coordinate your savings and expenses data with your retirement goals, needs, wants, and wishes.
Pay Down Debt
Another retirement planning tip is to pay down debt. If you have any high-interest credit card debt, now is the time to pay it off, which can be done using various strategies. Debt can prevent you from affording things down the road, eats up extra income, and can lead to poor credit. There are many opinions where mortgage debt is concerned. If it is a low-interest rate mortgage, it is not the end of the world if you carry it into retirement. However, there is much financial freedom associated with being mortgage free in retirement. If possible, eliminating mortgage debt prior to retirement can be a game changer.
Take Advantage of Catch-up Contributions
Once you turn 50, catch-up contributions let you save an extra $7,500 in a 401(k), $1,000 in an HSA and an extra $1,000 in your IRA for 2024. Redirect any spending you have cut toward these catch-up contributions, or regular contributions if you are not already maxing them out (the max for 2024 is $23,000 for 401(k) plans, $7,000 for IRAs, and $4,150-individual and $8,300-family for health savings accounts).
An important note to be aware of is beginning in 2026, The Secure Act 2.0 rules that if your wages are higher than $145,0000, any catch-up contributions you make will have to be done after taxes to a designated Roth account, which means you will not get a tax deduction.
Consider High-yield Online Savings Accounts
Many people still have a significant amount of money in traditional checking and/or savings accounts earning little if any interest. High-yield online savings accounts are online banks with many of the same capabilities. Plus, as of today, they can earn you anywhere from 3% to 5% interest. It is important to understand these rates will fluctuate based on several factors such as federal reserve rates, bank policies, and market conditions. Most are FDIC insured up to $250,000, like that of the traditional brick and mortar bank accounts. Some have debit cards attached, and others can earn you points for traveling or cash back. Many have no monthly fees or minimum requirements.
Consider Consolidating Retirement Accounts
Consolidating your retirement accounts can simplify your financial picture, reduce fees, help become more organized, and help you gain a better understanding of your overall financial situation. By combining multiple accounts into one, you can streamline your investment strategy, track progress easier and potentially enhance your portfolio’s performance.
Review Current Investment Strategy
It is true that for most, with age comes a lower propensity for risk. However, being too conservative can damage your ability to experience growth within your accounts. Even most retirees need to embrace a certain level of risk inherent in stocks to beat inflation and taxes. Speaking with a financial advisor can help you determine the appropriate allocation and investment mix aligned with your risk tolerance and goals. Being diversified and minimizing fees as best as possible is crucial.
Get Your Estate Planning Documents in Order
According to Caring.com, about 55% of Americans over the age of 50 do not have a will in place. The reasons are varied; anything from not having the time/resources to do so to not wanting to discuss such a morbid topic. It is important to understand that estate planning is more than just a will. There are other key documents all individuals should have in place, such as medical directives, which are legal documents that outline a person’s wishes for medical care when they are unable to communicate them, and powers of attorney document, which is a legal document that gives someone the authority to act on another person’s behalf.
What many do not consider is that having these documents in order is really benefiting the people you leave behind. After all, they are the ones who will have the difficult task of making hard decisions and carrying on once you are gone. It is best if everything is clearly outlined, so there are no questions as to what you would want.
Plan for Health Care Costs such as Long-Term Care
No one wants to think about needing long-term care, but the reality is that more than half of people will more than likely require some form of long-term care in the later years. According to the Department of Health and Human Services, the average use of long-term care services is three years. Many wrestle with the decision as to whether it is best to self-fund or take on the up-front costs of long-term care insurance. There are various ways to pay for this type of coverage: government programs if you are a veteran or considered low-income, traditional long-term care insurance policies, whole life insurance, bridge loans, reverse mortgages, and annuities.
Understand Medicare, Medigap & Part D Insurance
Medicare, Medigap & Part D can be very confusing and overwhelming. However, it is important that those nearing retirement take time to learn/understand it. Medicare eligibility does not start until three months prior to turning age 65, but it is important you file when you are eligible because if you don’t your monthly premium for Part A may increase by up to 10%. You will have to pay the higher premium for twice the number of years you did not sign up. If you don’t sign up for Part B when you are first eligible, you may have to pay a monthly penalty for as long as you have Part B coverage. The penalty increases the longer you wait to sign up.
If you are already receiving Social Security benefits, you will be automatically enrolled in Medicare Part A and Part B. You have the option to turn down Part B coverage because you will need to pay a premium for it, currently $174.90 per month.
If you think you will need to obtain health care coverage earlier, start looking at your options. For example, some retire prior to age 65 and then use COBRA coverage for the 18 months until they reach Medicare age.
Medicare Supplement Insurance (Medigap) is extra insurance you can buy from a private health insurance company to help pay your share of out-of-pocket costs in Original Medicare. The costs range depending on which plan you select, but the average monthly cost in 2024 is $137.
Part D is a separate prescription drug plan available to all Medicare enrollees. Part D plans may be standalone plans or come as part of a Medicare Advantage Plan. Each Part D plan can vary in costs and the drugs covered, and plans can change from year to year, so it is important to review your plan annually. The average premium in 2024 is $55.50.
There are many resources available to help with understanding Medicare, such as Medicare.gov, Giardini Medicare, National Council on Aging, AARP, Maryland Department of Aging, and more.
Plan for Social Security
One of the biggest decisions a retiree can make is when to claim Social Security. The earliest you can claim it is age 62. Many people make the mistake of claiming too early. By claiming earlier, you are permanently reducing payments thereby settling for a lower monthly benefit (and lifetime benefit), as well as locking yourself into smaller COLAs for the entire duration. For example, if your full retirement age is 67 and you start claiming benefits at age 62, the Social Security Administration will calculate your payments based on 60 months—a 20% reduction for the first 36 months (five-ninths of 1% times 36) and another 10% (five-twelfths of 1% times 24) for the remaining 24 months, cutting your monthly Social Security benefits a total of 30%.
Claiming Social Security later gives you a guaranteed increase. For example, if someone with a full retirement age of 67 starts taking benefits at age 69, they would receive a credit of 8% per year multiplied by two (the number of years they waited). Their benefit amount would be 16% higher than the amount they would have received at age 67. Everyone’s situation is unique, so the ideal claiming strategy for one person may be different than someone else’s. Several factors play a role in the decision-making process such as life expectancy, financial needs, marital status, employment status, taxes and more.
No matter the age you decide to claim benefits, as you enter your forties and fifties, setting up a “My Social Security Account” and reviewing your estimated benefits and work record is important.
Have a Distribution Strategy in Mind
When you retire, you will switch from an “accumulator phase” to a “distribution phase.” Your focus shifts from building your nest egg to drawing from your nest egg. Understanding how much to withdraw and which type of accounts to pull from first is paramount at this stage. Typically, the first place you should go for income in retirement, provided you have four to six months of expenses in an emergency fund is cash (checking or savings accounts).
(1) Drawing from cash keeps your taxes low in your early years of retirement and allows the assets with more growth potential (usually your riskier investments) to have more time to grow.
(2) Drawing from taxable accounts should be next. This would be individual and joint brokerage accounts. Withdrawals are likely to be taxed at more favorable long-term capital gains rates if held for more than a year. Also, these accounts are not tax-deferred, so they will grow more slowly than a retirement account.
(3) Pre-tax retirement accounts (IRAs, 401(k)s, 403(b)s, etc.). These accounts are tax-deferred and will be taxed as income once you withdraw from them. Eventually, the government will require that you withdraw from these accounts in the form of required minimum distributions. How much you are required to take is calculated by dividing the balance of your retirement account as of December 31st of the previous year by a life expectancy factor provided by the IRS, which is based on your age and in most situations can be found in the Uniform Lifetime Table.
(4) Social Security. You can claim anywhere from age 62 to 70. When you choose to do so depends on several factors as we referenced above. Some will choose to pull from their pre-retirement accounts after claiming Social Security. It really depends on the person’s specific circumstances. The longer you wait to claim, the larger the reward.
(5) Roth IRAs. Roth accounts grow tax-free, and qualified withdrawals are tax-free. They are tax efficient savings vehicles and disbursements are tax-free for beneficiaries. Withdrawals can typically be deferred for 10 years beyond your death.
These are only a handful of retirement planning tips that can help you as you enter this next phase. Giving your retirement planning the attention and time it deserves is worth it, as the peace of mind you will have as you enter the golden years will be priceless. Contact us today to see how we can help you. Call (410) 840-9200 or visit www.mainstadvisors.com.
Sources:
Schwab. (January 26, 2024). What to Know About Catch-Up Contributions. https://www.schwab.com/learn/story/what-to-know-about-catch-up-contributions
Forbes. (July 28, 2023). How To Save For Retirement In Your 50’s: It’s Not Too Late!
https://www.forbes.com/advisor/retirement/save-for-retirement-in-your-50s/
Smart Asset. (June 19, 2024). How to Consolidate Your Retirement Accounts
https://smartasset.com/retirement/how-to-consolidate-retirement-accounts
Kiplinger. (September 2024). How to Pay for Long-Term Care
https://www.kiplinger.com/retirement/long-term-care/how-to-pay-for-long-term-care
https://www.medicare.gov
https://www.medicare.gov/health-drug-plans/medigap
https://www.ncoa.org/article/what-is-medicare-part-d/
Schwab. (August 14, 2024). Guide on Taking Social Security: 62 vs. 67 vs. 70
https://www.schwab.com/learn/story/guide-on-taking-social-security
Kiplinger. (June 1, 2023). Which Retirement Accounts Should You Withdraw from First
https://www.kiplinger.com/retirement/which-retirement-accounts-to-withdraw-from-first
