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4 Action Items If Retirement Is On The Horizon

Retirement looks different for each person. Some people wish to retire early whereas others work as long as they can. No matter what path you are on, it is important to be financially prepared when you do decide to retire. 

Retirees face a myriad of challenges, but one of the most significant is having a strong financial plan to help support their goals and vision for retirement. Retirement has a significant impact on your finances which is why it is important to prepare as much as possible. 

Here at FPC, we are invested in helping our clients see and use the value of their finances to support their retirement. While there are many steps on the path to retirement-readiness, we wanted to share a few important ones with you today. 

Know Your Goal Posts

Here at FPC, it is our mission to help you reach your financial goals. For retirement specifically, take some time to think about what those goals look like and how they may shift from where they are now. 

  • What specific goals do you have for retirement?
  • How will your lifestyle inform and respect those goals?
  • In what ways will your values shine through these goals and actions?
  • What do you need to financially support those goals?

Start by taking a look at what you have saved so far for retirement. Include funds from your 401(k) (traditional or Roth), IRAs (Traditional, Roth, SEP, etc), mutual funds, real estate, investment portfolio, cash, and other assets. What do those numbers add up to? Will that number be able to support your retirement lifestyle and are you happy with the number you have?

One good way of thinking about this is coming up with a “magic” number you would like to have before you retire. It can be really overwhelming to think about this, and we are here to help you figure out what that magic number is for you. Knowing your “magic” number will help make a plan to financially support you through retirement including your living expenses, trips, hobbies, charitable giving, and taxes. 

We are big believers in helping you reach your magic number and using that as a starting point for informing your saving and investing strategy moving forward. Having a number to reach gives you a strong goal and can help keep you motivated on your savings journey no matter where you are at in the process. 

Organize Your Assets

One way to help you reach your magic number is by employing an efficient tax-strategy around your assets. This starts with knowing how your retirement accounts and other savings vehicles are taxed. 

For example, while your contributions to a traditional 401k or IRA are before-tax, all distributions are taxed as ordinary income. With many people reaching a higher tax bracket as they near retirement, retaining most of your assets in these accounts could raise your retirement tax bill significantly. 

That is why it is also important, if you are able, to fund a Roth IRA because even though contributions are made with after-tax dollars, the distributions remain tax-free. For those who surpass the Roth IRA income threshold ($193,000 for married filers and $122,000 for single filers in 2019), you can look into rolling your funds over from a traditional IRA into a Roth IRA through a Roth IRA conversion. 

Another account to keep on your radar is a Roth 401k. A Roth 401k operates in a similar manner to both a traditional 401k as it is an employer-sponsored account and a Roth IRA as it is funded with after-tax dollars. A significant benefit of using a Roth 401k is that qualified distributions aren’t taxed in retirement which is helpful to many people who are in a higher tax bracket when they retire. Unlike a Roth IRA, a Roth 401k doesn’t have income restrictions to contribute, just a $19,000 annual contribution limit. 

But retirement-specific savings vehicles are only part of the equation. You may have other investments in stocks, mutual funds, etc. that also require attention. It is important to save money outside of your 401k (traditional or Roth) and IRA. With proper management, these are important funds that can be used alongside your retirement-specific savings to help fund your lifestyle and help mitigate taxes in retirement.

Prepare for a Health Care Scare

Retirees spend a significant amount of their budget on their healthcare. Healthcare costs have skyrocketed over the past decade, reaching an average lifetime amount of $285,000 for a healthy couple in 2019 according to a Fidelity study

It is important to look at your healthcare spending in a holistic fashion and take into account additional expenses such as premiums and out of pocket expenses. Especially for those who retire before 65, premiums will be a lot higher for health care. Picture this: if you are under 65 and you have a spouse and kids you could be looking at over $30,000 per year in premiums and out of pocket medical expenses. This expense varies on a number of factors, which is why our team uses a robust calculator to help you plan for your healthcare expenses. 

As you think about the age you want to retire, make your healthcare a significant part of that conversation. 

Get A Retirement ‘Bonus’

Remember that “magic” number from before, and how that number included the expenses to give you the retirement you want? Let me ask you this: does that number also include ‘extras’? This could be anything from springing for 1st class on your next trip to donating to your grandchild’s education to building your dream kitchen. 

Your goalposts are set up to cover your basic expenses to give you a great life in retirement, which differs for everyone but often comes out to 3%-6% of a portfolio. Your percentage is more of a guideline for the amount of money that you will withdraw from your retirement accounts on an annual basis to cover your living expenses. We like to take a twist on that classic tale and in addition to that, monitor your portfolio each quarter for extra performance and pull that money out as a bonus. 

This strategy allows us to dollar-cost averaging, in other words providing you a bonus in retirement. We love this strategy because it gives you a bit of excitement and variety in your retirement budget. 

Retirement comes at a different time and looks different for each person who experiences it. No matter when you retire, we want to help you get ready for it.