Retirement and Investments

Retirement and Investments

Retirement can be an exciting time in life, but it also requires some planning to make sure your finances are in order. With people living longer than ever, retirement can last 20-30 years or more, so you need to make sure your savings and investments will provide enough income. This article will go over some key things to think about when planning for retirement.

Determine Your Retirement Income Needs

The first step is figuring out how much income you’ll need each year in retirement. Financial advisors often recommend around 70-80% of your pre-retirement income as a starting point. But your specific needs will depend on factors like:

• The lifestyle you want – Will you travel a lot, live in a high cost area, etc?
• Healthcare costs – Medicare doesn’t cover everything so you may need savings for deductibles, premiums, dental, hearing aids, etc.
• Housing – Will you downsize, move locations, or stay put?
• Supporting others – Do you need to provide for a spouse, parents, etc?

Use your current spending as a baseline, but think about how it might change in retirement. Once you have an estimate, you can determine if your projected retirement income from things like Social Security, pensions, and savings will be enough to cover your needs.

Max Out Retirement Accounts

Contributing to tax-advantaged retirement accounts like 401(k)s and IRAs is usually a smart move. Here are some key points:

• Contribute enough to get any employer match – otherwise you’re leaving free money on the table
• Max out annual contribution limits if possible – $20,500 for 401(k)s and $6,000 for IRAs in 2022
• Use pre-tax dollars if you can – reduces your taxable income now
• Consider a Roth for tax-free growth – earnings are tax-free in retirement

Even if you’re behind on retirement savings, contributing as much as you can now makes a difference. Catch-up contributions allow people 50+ to put in even more.

Determine Your Investment Strategy

Your investments need to balance generating returns with managing risk. Here are some tips:

• Have an appropriate asset allocation – stocks for growth, bonds for stability
• Diversify your holdings – don’t put all your eggs in one basket
• Rebalance periodically – to maintain your target asset allocation
• Reduce risk over time – get more conservative as retirement nears

Target date funds automatically adjust your asset allocation over time, making them a simple option. But you can also create your own diversified portfolio. Just be sure to regularly review and rebalance your holdings.

Have Sufficient Cash Reserves

It’s important to have some cash savings readily available, for things like:

• Short-term emergencies
• Major purchases – car, home repairs, etc.
• Gaps in income
• Unexpected healthcare costs

Financial experts suggest having at least 3-6 months of living expenses in cash. Money market funds or online savings accounts are good options.

Consider Annuities for Guaranteed Income

Annuities allow you to convert a lump sum into a guaranteed stream of fixed income for life. They provide income security and can cover essentials if you’re worried about outliving savings. But they also have high fees and less liquidity, so do your research.

Delay Social Security to Increase Payments

You can start claiming Social Security as early as 62, but your benefits increase about 8% per year if you delay. Many advisors recommend waiting to age 70 if possible. This ensures you get the maximum amount. Spousal and survivor benefits also increase if you wait.

Consider Working Part-Time

Many retirees find they enjoy working part-time. Reasons include:

• Extra income
• Healthcare benefits
• Social interaction
• Keeping busy

Just be mindful of how earned income affects your Social Security benefits if you claim before your full retirement age.

Have a Withdrawal Strategy

You need a plan for generating retirement income from your savings. Some options include:

• Taking required minimum distributions (RMDs) from retirement accounts
• Following the 4% rule – withdraw 4% of savings each year, adjusted for inflation
• Using a cash reserve “bucket” for first few years, then tapping investment accounts
• Building a portfolio of stocks and bonds that generates dividends/interest

Work with a financial advisor to develop a tax-efficient withdrawal plan that meets your needs and lasts through retirement. Be prepared to make adjustments along the way.

Have a Healthcare Plan

Don’t underestimate healthcare costs in retirement. Develop a plan that covers:

• Medicare – understand what’s covered and gaps
• Medigap and Part D plans – supplement Medicare
• Long-term care insurance – covers assisted living, nursing home care
• Health savings accounts (HSAs) – tax-advantaged for medical costs

Also factor in dental, hearing, vision, and other expenses. Getting the right insurance coverage reduces surprises.

Consider Relocating

Could you live somewhere more affordable in retirement? Things to evaluate include:

• Cost of living
• Housing expenses – buy or rent
• Weather and amenities
• Proximity to family and friends
• Tax environment

Run the numbers to see if moving makes sense financially and aligns with your lifestyle goals.

Protect Your Nest Egg

It’s important to implement strategies to make your savings last. Tips include:

• • Naming beneficiaries on all accounts
  • Having powers of attorney in place
  • Creating a revocable living trust