January is nearly over. Have you done your retirement review?

Author: Brian J. O’Connor

Date: 30/1/2024

View article on The Seattle Times

The crash diets have crashed, the new budgets won’t budge, and your Peloton is now the world’s most expensive laundry rack. But even if every one of your New Year’s resolutions is toast, there’s still one start-of-the-year chore you would be wise to handle: your retirement review.

This is a perfect time to take stock of where your retirement is heading — whether you’re still on the job or have stopped working and are now collecting Social Security — financial planners say. It gives you nearly a full year of investment returns and personal spending to review, as well as a momentarily fresh perspective on how you want to spend the last phase of your life, and the costs that go with it.

One study, from the Journal of Clinical Psychology, estimates that about 116 million American adults make New Year’s resolutions each January but that more than half will give up on them within six months. At the same time, about 4 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 annuity industry. Nearly all of them will need to support themselves for decades.

Whether you are still working or already retired, reviewing your retirement plan and how it’s shaping up when compared with reality is a crucial step, said Michael Crews, author of the book “Saturday Everyday” and CEO of North Texas Wealth Management in Allen, Texas.

“Most people have never been retired, and if you’ve never been retired, the learning curve is steep,” Crews said. “People think the goal is to get to retirement, but that’s only half the goal. The goal is to get to retirement and not run out of money.”

Here are a few main areas you will want to review.

What are you spending?

January is a good time to collect your annual reports from credit cards, as well as tax documents, any Form 1099 notices for gig workers and freelancers and, if you are paid a salary, your last 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 on a monthly and annual basis so you can figure out where your money is going each month,” he said.

Those numbers are the key to planning the income you will need in retirement and, once you’ve stopped working, determining whether your spending is in line with your budget.

One common piece of advice is that retirees need about 80% of the income they had when they were working. But in the early years of retirement, people will often indulge plans for travel or make large purchases, like a boat or recreational vehicle, and end up spending as much or more as they did when they were still working.

“With inflation, costs are higher, and some people may realize that the number they budgeted as the perfect number for retirement is too low,” Dendy said.

Check your investments

Beyond reviewing the performance of your investments, it’s a good time to examine your asset allocation to make sure that your money is diversified so that you can avoid carrying too much risk. After a big year for stocks — the S&P 500 ended the year up 24.23% — investors will want to make sure that their money isn’t overly concentrated in equities before a market downturn hits. They should also consider whether their mix of investments carries an appropriate level of volatility and risk for people near or in retirement.

“People wait to make adjustments until we have a major market correction, which is the worst time to make a change,” Dendy said, since that translates into real losses. “That’s OK when you’re 30, but when you’re 70, that’s a challenge.”

Investors who started with an appropriately diversified portfolio will also want to check whether their holdings need to be rebalanced to their original investment plan. Some large brokerages offer automatic rebalancing that can be set up online.

Social Security and Medicare

Three to five years before you retire, look at different strategies for collecting Social Security, such as claiming spousal benefits, which can include claims against a former spouse’s benefits if you were married for at least 10 years. The age to collect full benefits is between 66 and 67 for people born after 1954. For those who delay collecting benefits, the monthly amount increases by 8% a year until age 70. Coordinating benefits with a spouse can get complicated. There are online calculators, including those at the Social Security Administration’s website, and a few paid online services; a call to the agency or a financial planner can help, too.

“You need someone who can run those numbers for you and discuss the pros and cons,” said Daphne Jordan, a senior wealth adviser with the Pioneer Wealth Management Group in Austin, Texas, and chair of the National Association of Personal Financial Advisors. “People also may not know the logistics of Medicare and that there can be a penalty if you don’t enroll on time, and whether you’re working or not.”

What’s your tax situation?

How you structure withdrawals from retirement accounts, when you collect pension payments and Social Security benefits and whether you earn any income from working or other sources can have major consequences for your retirement. The bottom line is that the less you pay in taxes, the longer you can make your nest egg last.

Many would-be 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 that, at the highest income level, can bring a premium to $594 a month. If you turn 73 this year, you’ll also face taxes on your required minimum distributions (the dreaded RMDs) from tax-deferred retirement accounts, including individual retirement accounts and 401(k)s.

Some retirees might benefit from taking the tax hit that comes from transferring tax-deferred money in a traditional IRA or 401(k) to a Roth IRA, which makes all future withdrawals tax free. Retirees younger than 73 might want to delay Social Security and pension payments early in retirement in order to deplete IRAs and other accounts before RMDs kick in. Another plan is to send RMD payments directly to charity if you don’t need the income, which can cut your tax bill. In all cases, you’ll need to decide whether to have income tax withheld from Social Security, pension payments and account withdrawals or to 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 somebody calculate your tax projections before you start taking money out of your accounts,” Jordan said. “There are going to be tax considerations.”

Any insurance needs?

During your working years, carrying a hefty amount of term life insurance — enough to pay off your mortgage and other debts and to carry your loved ones for at least a year — is a prudent move. Once you and your partner are in retirement, that coverage can become unnecessary.

“Once you’re retired, the house may be paid off, and there’s not the same level of income loss if you die,” Dendy said. “But now it might make sense to convert a life insurance policy to a long-term care policy, although 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 go without long-term care because they don’t run the risk of spending down all their assets and leaving a spouse nearly destitute. With long-term care costs topping $100,000 a year for those without Medicaid coverage, another option is to consider life insurance or annuities that offer that coverage as a rider. Some combat veterans can qualify for long-term care coverage under the Aid and Attendance benefits paid by the Department of Veterans Affairs, although the process of claiming those benefits can be complicated.

Have a digital estate plan?

As you get close to or enter retirement, it’s a good time to take a comprehensive inventory of what you own, where those assets are held and how your family members or friends can find that information. In addition to investment and bank accounts, pensions, insurance policies, trusts, annuities, deeds, titles and other documents, you’ll also need to compile a list of account usernames, websites and passwords.

Taking pictures or videos of the contents of your home, including jewelry and other valuables, is a good way to catalog your assets. You’ll 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 directives, an updated will and any appropriate trusts.

“It’s a good time to look at your estate plan and to check the beneficiaries on your retirement and financial accounts, as well as insurance policies,” Jordan said. For example, if a former spouse is still listed as the beneficiary on an old bank or 401(k) workplace account, that money passes directly to that person, even if you remarried. “If you’re older, this is a good time to think about whether your children know about your estate plans and where all those documents are located.”

Is your plan really a plan?

“People say, ‘I’m going to work forever,’ but what happens if you’re diagnosed with something,” said Crews of North Texas Wealth Management. “That’s having no plan.”

Planners caution that people can become so focused on the intimidating and complicated financial aspects of retirement that they never consider what their retirement goals, priorities and lifestyle should be.

While many people can handle retirement saving and investing during their working years, the myriad considerations for investing, taxes, health care, benefits, insurance and more in retirement can be beyond the capabilities of even a successful do-it-yourselfer. While not everyone needs a financial adviser to manage it, even an occasional meeting with a fee-only financial or retirement planner can be helpful.

“The biggest thing that people miss is the goal setting and lifestyle for retirement,” Crews added. “In retirement, you still have to figure out what’s really important to you. And people just aren’t having those conversations.”

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