The crash diets have failed, the brand new budgets won't budge, and your Peloton is now the most expensive clothes horse in the world. But even if every one of your New Year's resolutions is toast, there's still one early-year task you should do well: your retirement review.
This is the perfect time to take stock of where your retirement is headed — whether you're still at work or have stopped working and are now collecting Social Security, financial planners say. It offers you the opportunity to review a full year's worth of investment returns and personal expenses, as well as a momentarily new perspective on how you want to spend the final phase of your life and what costs will be involved.
A study from the Journal of Clinical Psychology estimates that about 116 million American adults make New Year's resolutions in January each year, but that more than half will abandon them within six months. At the same time, about four million people are expected to turn 65 this year, according to an analysis of census data by the Alliance for Lifetime Income, a nonprofit research arm of the retirement industry. Almost all of them will have to support themselves for decades.
Whether you're still working or already retired, reviewing your retirement plan and how it compares to reality is a crucial step, said Michael Crews, author of the book “Saturday Everyday” and managing director of North Texas Wealth Management in Allen. Texas.
“Most people have never been retired, and when you've never been retired the learning curve is steep,” Mr Crews said. “People think the goal is retirement, but that’s only half the battle. The goal is to retire and not run out of money.”
Here are some key areas to check.
What are you spending?
January is a good time to pick up your annual credit card reports as well as tax documents, any Form 1099s for gig workers and freelancers, and, if you receive a salary, your final pay stub of the year. This allows you to see what your after-tax income is and what you're spending, said Bill Dendy, president of Alicorn Investment Management in Dallas.
“This is the perfect month to figure out what you spend monthly and yearly so you can figure out where your money is going each month,” Mr Dendy said.
These numbers are key to planning for the income you'll need in retirement and determining whether your expenses will align with your budget when you stop working.
Common advice is that retirees only need about 80 percent of the income they had while working. But in the early years of retirement, people often pursue travel plans or make big purchases like a boat or recreational vehicle and end up spending as much or more than they did when they were working.
“With inflation, costs are higher, and some people may find that what they thought would be the perfect number for retirement is too low,” Dendy said.
Review your investments.
In addition to checking the performance of your investments, it's also a good time to review your asset allocation to make sure your money is diversified so you don't take on too much risk. After a big year for stocks – the S&P 500 ended the year up 24.23 percent – investors should make sure their money isn't over-invested in stocks before a market downturn occurs. They should also consider whether their investment mix presents an appropriate level of volatility and risk for people near or in retirement.
“People are waiting to adjust until we have a major market correction, which is the worst time to make a change,” Dendy said, because it results in real losses. “That’s fine when you’re 30, but when you’re 70 it’s a challenge.”
Investors who have started with an appropriately diversified portfolio should also consider whether their holdings need to be converted to their original investment plan. Some major brokers offer automatic rebalancing that can be set up online.
How do you handle Social Security and Medicare?
Three to five years before you retire, look at different strategies for collecting Social Security, such as: B. claiming spousal benefits, which may also include claims to benefits from your former spouse if you were married for at least ten years. For people born after 1954, the age for receiving full benefits is between 66 and 67. For those who delay receiving benefits, the monthly amount increases by 8 percent per year until age 70. Coordinating benefits with your spouse can get complicated. There are online calculators, including on the Social Security Administration website, and some paid online services. A call to the agency or a financial planner may also be helpful.
“You need someone who can crunch these numbers for you and discuss the pros and cons,” said Daphne Jordan, senior wealth advisor at Pioneer Wealth Management Group in Austin, Texas, and chair of the National Association of Personal Financial Advisors. “People also may not understand the logistics of Medicare and that there can be a penalty for not enrolling on time, regardless of whether you work or not.”
What is your tax situation?
How you structure withdrawals from retirement accounts, when you receive retirement and Social Security benefits, and whether you earn income from work or other sources can have a significant impact on your retirement. The bottom line is: the less taxes you pay, the longer you can keep your nest egg.
Many aspiring retirees don't realize that about half of all Social Security recipients are taxed on their benefits and that earnings above a certain threshold can result in monthly Medicare surcharges, which at the highest income level can amount to a premium of $594 per month. If you turn 73 this year, you'll also have to pay taxes on your required minimum distributions (the dreaded RMDs) from tax-deferred retirement accounts, including individual retirement accounts and 401(k)s.
Some retirees may benefit from the tax burden of transferring tax-deferred funds in a traditional IRA or 401(k) to a Roth IRA, which makes all future withdrawals tax-free. Retirees under age 73 may want to delay Social Security and pension payments early in retirement to deplete IRAs and other accounts before RMDs take effect. Another strategy is sending RMD payments directly to charities when you don't need the income, which can lower your tax burden. In each case, you must decide whether to withhold income tax from Social Security, pension payments, and account withdrawals, or make quarterly estimated tax payments.
In short, if you think taxes are complicated when you're working, just wait until you're retired.
“It’s important to have someone calculate your tax projections before you start withdrawing money from your accounts,” Ms. Jordan said. “There will be tax considerations.”
What insurance needs do you have?
During your working years, purchasing large term life insurance—enough to pay off your mortgage and other debts and provide for your loved ones for at least a year—is a smart financial decision. Once you and your partner are retired, this insurance coverage may become unnecessary.
“Once you retire, the house may be paid off, and when you die, the loss of income won't be as significant,” Dendy said. “But now it might make sense to convert life insurance to long-term care insurance, even though that won't make sense for a single person. Long-term care can make sense for a couple, but it’s a real shopping event to get the best long-term coverage for your situation.”
Many single retirees can forego long-term care because they don't risk using up all their assets and leaving their spouse virtually penniless. With long-term care costs topping $100,000 per year for those without Medicaid insurance, another option as a rider is to consider life insurance or an annuity that offers this coverage. Some combat veterans are eligible for long-term care insurance through assistance and attendance benefits paid by the Department of Veterans Affairs, but applying for these benefits can be complicated.
Do you have a digital estate plan?
If you are nearing or approaching retirement, it is a good time to take a comprehensive inventory of what you own, where those assets are stored, and how your family members or friends can find this information. In addition to investment and bank accounts, pensions, insurance policies, trusts, annuities, deeds, titles, and other documents, you will also need to create a list of account usernames, websites, and passwords.
Taking photos or videos of the contents of your home, including jewelry and other valuables, is a good way to catalog your assets. You will also need a durable power of attorney (to manage finances) and a health care power of attorney (to make medical decisions), a health care privacy document, any end-of-life policies, an updated will, and any appropriate trusts.
“It’s a good time to look at your estate plan and review the beneficiaries on your retirement and financial accounts and insurance policies,” Ms. Jordan said. For example, if a former spouse is still listed as a beneficiary on an old bank or workplace 401(k) account, the money will go directly to that person, even if you have remarried. “If you're older, this is a good time to think about whether your children know about your estate plans and where all of these documents are.”
Is your plan really a plan?
“People say, 'I'll work forever,' but what happens if you're diagnosed with something,” said Mr. Crews of North Texas Wealth Management. “That means not having a plan.”
While many people can handle saving and investing for retirement over the course of their working lives, the myriad considerations surrounding investments, taxes, health care, benefits, insurance and more in retirement can be beyond the capabilities of even a successful do-it-yourselfer. Although not everyone needs a financial advisor to manage them, even an occasional meeting with a fee-based financial or retirement planner can be helpful.
Planners warn that people can become so focused on the intimidating and complicated financial aspects of retirement that they never think about what their retirement goals, priorities and lifestyle should be.
“The biggest thing people are missing is goal setting and retirement lifestyle,” Mr. Crews added. “In retirement you still have to figure out what’s really important to you. And people just don’t have those conversations.”