Every retirement plan must include these 5 points

Life expectancy is longer today. Interest rates are low and inflation is on the rise again. Taxes are likely to increase in the coming years. Will the stock market continue its steady climb? You can wait, but who knows? Volatility could be part of that long-term equation.

All of these factors create financial uncertainty in the future and make retirement planning more complex. With that in mind, here are five key components to preparing for retirement:

1. Get an income plan

How much money do you need and where will it come from?

Those are two very important questions. As you enter your best earning years, it’s important to think ahead about how much income you’ll need in retirement. So invest accordingly.

When you’re working, investing is pretty straightforward. All your money has to do is grow. When you retire, your money has to earn income, pay taxes, and grow to support your lifestyle. Investing becomes much more nuanced and even more challenging once you start earning income.

As you approach retirement, here are some steps to get started with an income plan:

  1. List all of your guaranteed sources of retirement income: Social Security, pension, an annuity with a guaranteed minimum amount, etc.
  2. List retirement savings and investment accounts, such as a traditional IRA, 401(k), Roth IRA, or Roth 401(k).
  3. Ask yourself if your projected income will cover your expenses and the kind of lifestyle you want. Remember, a common rule of thumb is that most people need to replace approximately 60% to 80% of their pre-tax, pre-retirement income in retirement to maintain their lifestyle.

2. Maximize your Social Security income

To maximize Social Security benefits for you and your spouse, you need to know which of the 567 estimated separate claim strategies for married couples is right for you. Sometimes it makes sense to start receiving Social Security while you let your savings grow. For others, it makes sense to use investments to allow their Social Security benefits to continue to grow until full retirement age (usually around age 67) or when the benefit amount peaks (age 70) before retirement. claim benefits.

An important note: If you and your spouse were born on or before January 1, 1954, and both reached full retirement age, you can claim spousal benefits and let your own benefits continue to grow. At age 70, you can switch to the higher benefit. The strategy is an option called “restricted filing” and is not available to those born on or after January 2, 1954.

3. Explore your tax strategies

Taxes catch many retirees off guard, because conventional wisdom suggests that with less income than they earned during their working years, taxes would be significantly lower in retirement. Many retirees find that this is not the case. A key part of your planning strategy is reducing taxes on funds withdrawn from tax-deferred accounts, such as 401(k)s or IRAs.

Required minimum distributions for tax-deferred accounts start at age 72, so having a plan in place well in advance is crucial.

One effective strategy is to convert the tax-deferred funds into a Roth IRA or Roth 401(k). While the conversion amount is taxable in the year it is converted, the upside is that these Roth accounts allow your retirement savings to grow tax-free and are not taxed when withdrawn (as long as you have Age 59½ or older and have had a Roth account for at least five years). Don’t let your advance tax bill stop you from moving your retirement funds out of taxable accounts, no matter when you take them out to tax-free accounts. The point is not to be short-sighted at the expense of getting hit with tax time bombs in retirement.

Roth IRA conversions are just a strategy to avoid having your Social Security pay taxes. If your provisional income is between $25,000 and $34,000 (for individual filers) or between $32,000 and $44,000 for joint filers, then up to 50% of your Social Security is taxable. If your provisional income is more than that, then up to 85% of your benefits may be taxable. These additional taxes may force you to take more money out of your savings to support your lifestyle.

4. Forecast your medical expenses

Health care remains one of the biggest expenses in retirement. Many people assume that Medicare will cover all of their health care costs in retirement, but it doesn’t. One way to prepare is to sign up for a health savings account (HSA), which is offered by some employers. By contributing to an HSA, you can save pre-tax dollars (and possibly collect employer contributions), which have the potential to grow and can be withdrawn tax-free in retirement if used for qualified medical expenses. For 2021, the regular HSA contribution limit is $3,600 for individual coverage ($3,650 in 2022) and $7,200 for family coverage ($7,300 in 2022). Medicare enrollees cannot make new contributions to an HSA.

Another way to fill the gap that Medicare doesn’t cover is long-term care insurance. While long-term care insurance premiums aren’t affordable for everyone, an alternative is to purchase a life insurance policy that has the option to add a long-term care insurance rider.

5. Plan your estate

Estate planning isn’t just about how you want your assets distributed after his death. It is about preparing for contingencies if it becomes unable to make their own financial or medical decisions. It is about creating a smooth transition for loved ones in settling their affairs.

Key elements of an estate plan include a will; assignment of power of attorney, which gives the person you name the authority to manage your financial affairs if you are unable to do so; a health care proxy, which authorizes someone you trust to make medical decisions on your behalf; and a living will, a statement of whether you want life-sustaining medical intervention if you are terminally ill and unable to communicate. Eliminate difficult decisions for your children by having them follow the legal directives in the estate plan. Work with an attorney to make sure you get the right estate planning documents for your situation.

For something as important as your financial future, it’s important to work with a financial professional. Everything in the plan must be coordinated: taxes, Social Security, income planning and investments. His advisor needs to understand his complete financial picture, how things like taxes and income generation interrelate, and how they can help him reach his retirement goals.

Dan Dunkin contributed to this article.

These materials are provided for general information and educational purposes. Echelon does not provide legal, tax or investment advice. The information presented here is not specific to any individual’s circumstances. To the extent that this material relates to tax matters, it is not intended or written for use and may not be used by a taxpayer to avoid penalties imposed by law. Each taxpayer should seek the independent advice of a tax professional depending on their circumstances.

Co-Founder, Echelon Financial

Chris Wilbratte has worked in the financial services industry for 30 years and is the co-founder of Echelon Financial in Austin, Texas. He received his BBA in Finance and Marketing from the University of Texas.

Appearances on Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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