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by Alicia Adamczyk
August 28, 2018
by Alicia Adamczyk
August 28, 2018
Image: Katherine Hanlon on Unsplash
So, you’ve got a decently-sized nest egg building, your debts are paid off and your estate is more or less in order. You’re approaching the home stretch to retirement.
So let’s not waste any more time—you’ve got money to maximize.
Once you hit 50, you can start making catch-up contributions to your retirement accounts. That means you can add an extra $6,000 to your 401(k)this year and $1,000 to an IRA or Roth. Small business owners, contractors and those with freelance income can potentially save $61,000 in a solo 401(k) (though keep in mind that $61,000 limit is for all of your 401(k) accounts each year). And the extra investments can be a lifeline for a lot of people.
If your kids are out of the house and that house is maybe even paid off (or close to), you can divert some of those extra savings toward your retirement accounts. According to David Rae in Forbes, even that $1,000 extra in an IRA can make a significant difference if you contribute it every year between 50 and 67:
5% annual return: $26,000
7% annual return: $31,000
10% annual return: $41,000
So, how much is enough? “If you have not done any retirement planning with a financial planner, what are you waiting for?” asks Monica Dwyer, an Ohio-based Certified Financial Planner. “Don’t wait until you are ready to put in your retirement paperwork before you have a qualified professional look at your plan.”
To get a rough estimate of where you stand, Dwyer says you’ve got to start working with realistic numbers. Here’s a formula she suggests using to benchmark yourself:
Less any contributions to retirement accounts
Less any expenses that will go away (e.g., parking garage fee you won’t have in retirement)
Plus any additional expenses you will have now that you are retired (e.g,. will you eat out more often or travel more?)
Less taxes (estimate high because taxes are likely to go up, not down)
Total—If this total is far from the budget you have been living on, ask yourself why
And then you can see where to make improvements.
Roger Whitney, a Certified Financial Planner and host of the Retirement Answer Man podcast, says your 50s are crunch time for preparing for retirement. Check to see the mix of tax categories on your investments: Pre-tax, post-tax and tax-free.
“I’ve found that many folks have almost all of their savings in pre-tax accounts, which decreases their flexibility to pay for retirement,” says Whitney. “If you’re like that, consider building up after-tax and tax-free savings so you have more flexibility once you retire.”
That would include a Roth. Consider a backdoor Roth conversion if you make too much to contribute to one outright. If you’re taking qualified withdrawals (meaning the account has been open for at least five years and you’re 59 1/2 or older), then your taxes won’t be affected in retirement, which can be a helpful strategy. Again, speak with a fiduciary for advice on what to do in your specific situation.
“People with a shorter-term investment horizon should consider reviewing their investment portfolios and overall asset allocation,” says Roi Tavor, CEO of Nummo.com, a personal finance management platform. “Depending on one’s individual situation it might be a good time to re-allocate some of the equity investments into treasury or bond investments.” Particularly with a potential trade war on the horizon and increasing inflation rates.
Kevin Ta, Senior Wealth Strategist at PNC Wealth Management, echoes Tavor, advising those nearing retirement to invest in a session or two with a financial planner to figure out what’s best for them and their family.
“Generally speaking, it may be prudent to de-risk the portfolio by transitioning out of stocks into more conservative bonds,” says Ta. “As we anticipate interest rates to rise, investors may wish to consider the benefits of shorter-term bonds.”
You can model “what if” scenarios with your advisor “to compare and contrast between different portfolio allocations and their risks,” he adds.
Parent PLUS loans may seem like an okay idea if your child needs help financing their college education, but they can be detrimental to your financial well-being. PLUS loans have higher interest rates than other loans, fewer repayment options and an origination fee, and parents typically borrow more than students do. If you default, your tax refund and Social Security payments can be seized to repay it. Money Magazine suggests borrowing no “more than you can repay within 10 years or by retirement, whichever is first.”
“Applying for financial aid is always a great option for students making college much less expensive, and always consider taking out a subsidized loan and unsubsidized student loan before you consider a PLUS loan,” says Charlie Javice, the founder and CEO of FRANK, a site that helps students with financial aid. This article from CNBC has info on some other alternatives.
Likewise, while you may want to help a child out with paying for a wedding or the down payment on a house, think about your own financial situation first.
(Mom and Dad, if you’re reading this...feel free to disregard this tip.)
While divorce rates are decreasing for younger couples, so-called Gray Divorce is actually on the rise, according to the Pew Research Center. “Among U.S. adults ages 50 and older, the divorce rate has roughly doubled since the 1990s.” If it happens with you and your spouse, you don’t want to be caught off guard, and you’ll want to take care of it in the most painless way possible.
“Divorce can be financially devastating emotionally and also due to the additional cost of maintaining two households,” says Dwyer.
Any marital assets acquired during your marriage—including 401(k)s, pensions, equity in the home, stock option plans, IRAs, and bank accounts —will be split, and you’ll have a stack of legal bills to face. You can see how that might mess up your retirement plan.
Transferring assets, like an IRA, is no simple task. It needs to be done properly, and mistakes can be expensive and time-consuming to rectify.
You’ve made a will already, but Dwyer says one thing enough people don’t do is title their assets properly.
“If they have a bank or brokerage account, they can add beneficiaries to that account, called a Transfer on Death, which works the same as adding beneficiaries to an IRA account or a retirement plan,” says Dwyer. “Remember that the beneficiary designation on these accounts is going to override your will so check them every year to make sure that they still align with your goals.” You can read more on Transfer on Death designations here.
Titling your assets is a better option than a will, in Dwyer’s mind, for a few reasons: It allows you to avoid probate (meaning the money won’t go through the court system before it finally makes its way to your beneficiaries), how much money is in the funds remains private and it’s a quicker and cheaper transfer.
Additionally, “if you do not designate whom you would like to act on your behalf for probate, says Dwyer, “the courts will appoint someone and it may not be the person you would have chosen.”
“You can claim Social Security as early as 62,” says Leanna Johannes, Senior Wealth Strategist at PNC Wealth Management. But “if a person thinks they’re going to live past 83 or 84, it’s better financially to delay taking Social Security until you’re 70 because the payout—both the monthly and over time—will be higher.”
Screenshot: Merrill Lynch Investment Management & Guidance
That said, it’s not an option for everyone. New research from the Journal of Aging Studies indicates people who start claiming benefits at 62 (the earliest you can) don’t regret doing so. Ultimately this will be a consideration to make with your spouse, taking into account your plans for retirement and how much you’ve managed to save in retirement accounts, home equity, etc.
Whether it’s downsizing, upsizing or moving to a sunnier locale, you’ll want to think about where you want to live in retirement and what the possible consequences are.
If you’re planning to retire soon, downsizing may not be the financially feasible option you think it is. Inventory is slim right now and prices are high; older people are competing with first-time homebuyers for the smaller houses available. Johannes says retirees may have a hard time finding an institution to give them a mortgage unless they already have a long-standing relationship with that bank or lender.
One thing, in particular, to watch out for: Closing costs. Peter Lazaroff, a Certified Financial Planner, told CNBC that he’s seeing more retirees take withdraw money from their retirement savings to pay for closing costs, fees and moving expenses. But that distribution can end up kicking you into a higher tax bracket, leading to a big tax bill and no discernible savings from downsizing. Make sure you start the process with your eyes open.
Alternatively, you may decide you want to remain in your current home and pay off your mortgage ASAP. You could try refinancing, or accelerating your payments before you retire so that you’re making one less monthly withdrawal from your retirement savings. “You could refinance to a 15-year mortgage, or you could simply make extra payments on your current mortgage,” suggests Kiplinger.
You’ll pay the equivalent of 13 monthly payments instead of 12 by dividing your payment by 12 and adding that amount to each monthly bill. Or you could simply make an extra payment at year-end. On a 30-year mortgage, making an extra monthly payment each year would reduce the term of your loan by about four years.
If you’re thinking of moving somewhere cheaper in retirement but haven’t settled on a location yet, there are a number of resources to help guide your decision-making. If you’re living on a fixed-income, check out GoBankingRate’s list of best places to live. Likewise, Money publishes an annual list based on taxes, housing costs, activities, continuing education opportunities and more.
And one the biggest things to take control of as you consider downsizing or moving to a new place (or, heck, staying in the same house): Getting rid of your stuff.
If you’re a bit of a hoarder, or just have a hard time parting with your belongings, try a Legacy-Based Approach to your stuff, as outlined in Lauren H. Gilbert’s new book, The Stories We Leave Behind (because remember, no matter how much your belongings mean to you, no one else wants them):
Meet at Mom’s place around 8 with donuts and coffee. Reminiscing, laughter, tears, more laughter (probably ’80s dance music in the background). Explore rooms, closets and shelves. Pause to smile or chuckle over a trinket discovered here, a special book found there. Decide which stuff to keep, toss or donate. Angela (the firstborn) would create the list. Go to lunch. Done. Well ok, there’ll be time to box stuff, arrange for pickup and probably mop, but the hard part — identifying what was there and making distribution decisions — was done in a warm, supportive, roughly half-day experience with its own positive, affirming and hope-filled memories; before they got glossy-eyed and grumpy.
As Gilbert tells Next Avenue, tackling downsizing in this way is less about decluttering and more about “embracing the things you want to leave behind.” Your family will thank you.
“When I looked at my stuff through this new lens, I found a lot of boxes in my closets with a lot of things I’ve held on to. For example, my high school theater stuff,” Gilbert continues. “And I thought to myself: ‘If I only have three to five themes for my life, what do I want them to be? Is this one of the main themes I want my family to know?’ The answer was: Nope. My theater stuff became a distraction.”
As you approach retirement, you’ve spent decades thinking about your money and how to make it work for you. “But have you thought about how to spend your time,” asks Joleen Workman, Principal’s Vice President of Retirement and Income Solutions. “Make sure to talk with your family about what retirement will look like as you move in to this exciting new chapter.”
This could mean traveling, picking up a new hobby, doubling-down on an old hobby, working a part-time job, volunteering, spending more time with your grandkids—the options are endless. You don’t have to plan everything out—part of retirement is relaxing, after all—but don’t underestimate how much free time you’ll now have.
And we’re almost at the end of our series, What to Know About Money at Every Age. Are you ready for retirement? Stay tuned.