What Do I Need to Retire?

Research from the Employee Benefit Research Institute’s Retirement Confidence Survey shows a lack of preparation in retirement planning. According to the annual survey, 66% of those 55 years and older said they were confident they had sufficient savings to live comfortably throughout retirement. However, just 48% within the same age group haven’t figured out their retirement needs.

Kiplinger’s article entitled “Ready to Retire? Not Until You’ve Done These 3 Things” says knowing where you are now and knowing what you’ll need and want in retirement are important to protect your portfolio throughout your golden years. If you want to retire at 65, then age 55 is when you’ll want to start making some important decisions.

Let’s look at three steps to take in your last decade of your working years to help create a safety net for a long retirement:

At 10 years or more before retirement, you should diversify your tax exposure. You may have a large portion of your portfolio in an employer sponsored 401(k) or in IRAs. These tax-deferred accounts give you plenty of benefits now, because you’re not taxed on the contributions. At age 50 and older, you can make additional catch-up contributions that let you put away $26,000 in 2020 in your 401(k) each year. Because you’re probably going to pay a lower tax rate in retirement when you begin taking taxable withdrawals, it gives you a nice tax advantage today.

In the years before your retirement, build assets in tax-free accounts for flexibility, so you can keep tax costs down in retirement. Assets in a Roth IRA or a Roth account within your 401(k) can give you a source of tax-free income in retirement. You paid taxes on the money you put into a Roth, so it grows tax-free and withdrawals after age 59½ are income tax free. If you’re over 50, then you can add up to $7,000 into the account this year.

When you are five years from retirement, create a health care plan. A huge expense in retirement is health care. Plan for out-of-pocket health care costs as well as long-term care. Taking advantage of a health savings account, if you’re in a high-deductible health insurance plan is a good way to save for the out-of-pocket health care expenses that won’t be covered by Medicare or your private health insurance. You can fund an HSA up to $7,100 for families ($8,100 if you’re 55 or older). Contributions are made on a pre-tax basis, so your account grows tax free, and withdrawals are tax- and penalty-free, if used for qualified health care expenses. You should also look at long-term care insurance.

When you’re just a year from retirement, start spending as if you’re already retired. Be sure you can live comfortably, when spending at your retirement budget.

No one can see the future, but you may be able to limit the effects of shocks to your retirement savings.  Adding in these layers of protection at least 10 years prior to retirement, can help you secure your retirement goals.

Reference: Kiplinger (Jan. 24, 2020) “Ready to Retire? Not Until You’ve Done These 3 Things”

Suggested Key Terms: Retirement Planning, Tax Planning, Financial Planning, IRA, 401(k), Roth IRA, Long-Term Care Insurance

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