Every retirement plan should include these 5 points

Life expectancy is longer today. Interest rates are low and inflation is rising. Taxes will likely increase over the next few years. Will the stock market continue its steady rise? You can hope, but who knows? Volatility could be part of this equation in the long run.

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

1. Get an income plan

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

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

When you work, investing is pretty straightforward. Your money just has to grow. When you retire, your money must provide income, pay taxes, and grow in order to support your lifestyle. Investing becomes much more nuanced and even more difficult once you start earning income.

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

1. List all your sources of guaranteed 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 lifestyle you desire. Keep in mind that a common rule of thumb is that in retirement most people need to replace about 60% to 80% of their pre-tax income before retirement in order 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 separate claim strategies estimated for married couples is right for you. Sometimes it makes sense to start taking Social Security while letting your nest egg grow. For others, it makes sense to dip into the investments to keep your Social Security benefits increasing until you reach full retirement age (usually around 67) or until your retirement age. amount of benefits peaked (70 years) before claiming benefits.

Important Note: If you and your spouse were born on or before January 1, 1954 and have both reached full retirement age, you can apply for spousal benefits and let your own benefits increase. At 70, you can upgrade to the next level. The policy is an option called “restricted deposit” and it is not available to people born January 2, 1954 or later.

3. Explore your tax strategies

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

The minimum distributions required for tax-deferred accounts begin at age 72, so it is essential to have a plan in place well before that date.

One effective strategy is to convert tax-deferred funds into Roth IRA or Roth 401 (k). Although the conversion amount is taxable in the year of the conversion, the advantage is that these Roth accounts allow your retirement savings to grow tax-free and are not taxable at the time of withdrawal ( as long as you are 59 and a half or older and have owned a Roth for at least five years). Don’t let the initial tax bill stop you from transferring your retirement funds from taxed accounts, no matter when you are transferring them to non-taxable accounts. The point is not to be nearsighted at the cost of being hit by tax time bombs in retirement.

Roth IRA conversions are just a strategy to keep your Social Security from being taxed. If your interim income is between $ 25,000 and $ 34,000 (for single 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 require you to withdraw more money from your nest egg to support your lifestyle.

4. Plan your medical expenses

Health care continues to be one of the biggest expenses in retirement. Many people assume that Medicare will cover all of your health care costs in retirement, but that is not the case. One way to prepare is to sign up for a Health Savings Account (HSA), which some employers offer. When you contribute to an HSA, you can save pre-tax money (and possibly collect employer contributions), which have the potential to grow and can be withdrawn tax-free in retirement if used. for eligible 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 for 2022). People enrolled in Medicare cannot make new contributions to an HSA.

Another way to fill the void not covered by Medicare is long term care insurance. Although long term care insurance premiums are not affordable for everyone, an alternative is to purchase a life insurance policy that has the option of adding a long term care insurance rider.

5. Plan your estate

Estate planning isn’t just about how you want your assets distributed after your death. It’s about preparing for eventualities if you become unable to make your own financial or medical decisions. It is about creating a smooth transition for those close to you in settling your affairs.

The key elements of an estate plan include a will; the assignment of a power of attorney, which gives the person you appoint the power to manage your financial affairs if you are unable to do so; a health care attorney, who authorizes someone you trust to make medical decisions on your behalf; and a living will, a statement as to whether you want life-saving medical intervention if you become terminally ill and unable to communicate. Take the tough decisions out of your kids by making them follow the legal guidelines of the estate plan. Work with a lawyer to make sure you get the right estate planning documents for your situation.

For something as important as your financial future, working with a financial professional is important. Everything in the plan needs to be coordinated – taxes, social security, income planning and investments. Your advisor should understand your big financial picture, how things like taxes and income generation relate, and how they can help you meet your retirement goals.

Dan Dunkin contributed to this article.

These documents are provided for general information and educational purposes. Echelon does not provide any investment, tax or legal advice. The information presented here is not specific to an individual’s situation. As 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 advice from an independent tax expert depending on their situation.