2019 is already upon us and with every new year comes the resolutions. If you’re on the verge of retirement it is even more important to have your financial house in order. With that thought, I’ve created a list of new year’s resolutions specifically geared to those who plan to retire in 2019. Those of you who are still a few years away from retirement can also use these tips to get a jump start on planning (reminder: the earlier you start planning the easier it will be).
1) TRACK YOUR EXPENSES TO DETERMINE WHAT YOU NEED TO LIVE ON
How much money do you need per month to be comfortable? I prefer people calculate this on a monthly basis since many of us can do this with relative ease. Of course, don’t forget any quarterly or yearly expenses. This is the most important number when it comes to your retirement. It is the most impactful variable of all the financial inputs as you try to figure out if you’re on track for a successful retirement or not. Nobody wants to realize that they miscalculated how much they need after they’ve already retired. Consider using an Excel spreadsheet or Mint.com to track your expenses for 2019, so you have a clear picture of what you spent over the course of a year. Add in any new expenses, such as additional travel, that you expect once you’re retired.
2) DETERMINE WHERE YOU STAND
Now is the time to add up all of the income you expect to receive while retired. How much will your pension be (if you’re lucky enough to have one)? When will you start your Social Security and how much will it be per month? How much can you expect to take out of your retirement savings without running the risk of outliving your money? There has been plenty of academic research on this question and many of the answers depend on how your savings are invested. To be conservative, let’s use a range of 2-3% of the total balance of your retirement savings that can be spent per year. What does all that add up to? Is it more or less than your yearly living expenses estimate?
3) THINK ABOUT TAX PLANNING
The majority of people pay less tax when they retire for a variety of reasons. They are no longer working so their income may be lower. At the most, 85% of their Social Security will count as taxable income. They may be able to live off savings in the bank or brokerage accounts without realizing much taxable income at all. Also, in New York, the first $20,000 per person, per year withdrawn from a retirement account is exempt from taxable income after age 59.5. New York also doesn’t tax Social Security, state pensions, or federal pensions.
All of this change presents opportunity for tax planning! Maybe it makes sense to maximize 401k or traditional IRA contributions this year, if you can simply withdraw them next year at lower rates. Maybe you should try to fund future charitable bequests by setting up a donor-advised fund this year, when the deduction will be worth the most to you. Maybe maxing-out your H.S.A. or selling any investments with tax losses, or delaying your Social Security until next year, are worthy strategies to pursue. The key is to look at this year and compare it to next. If there is a big change, then there is likely opportunity to plan.
4) CREATE A CASH FLOW GAME PLAN
This last resolution is a logistical one. If you’re like most retirees, you have several retirement accounts in different places. You could have two 401ks, one traditional IRA, a Roth IRA, a 457 plan, and a brokerage account, for example. I’ve seen retirees with over 20 financial accounts! If you have several accounts that you can take withdrawals from, then you need to plan to be efficient as you start to live off your savings. There can be an enormous amount of tax savings when you efficiently coordinate your cash flow plan. Research the rules for taxation of Social Security benefits, IRAs, Roth IRAs, capital gains, and income. They all tie together when you formulate a cash flow plan.
With proper planning, you can sail through 2019 and into retirement with no scary surprises. You will be glad you did when the time comes to retire!
Steven Elwell, CFP®
Partner, Chief Investment Officer