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Retirement Countdown: 5 Things to Consider Before Your Next Life Stage

When you’re approaching retirement age, it can be easy to daydream about what life after work could be like, if you decide to retire at all. Will you play more golf? Take up crafts? Travel? Start a business? The choices may seem endless, but their likelihood of their coming true only gets greater with proper planning. If you’re within five years of when you plan to retire, now is the time to start thinking ahead. We offer five tips to help you get started:

1. Revisit your goals with your financial adviser.

It used to be that retirement was a given, and that on a certain day, we’d leave the workforce with a pension, and maybe even a gold watch to commemorate our long-standing service to our employer. Now, people are less likely to stay in one job for their entire careers, and company pensions are no longer common. In fact, because so many Americans are behind in saving for retirement, many have no plans to retire at all.

A major worry among retirees is whether they’ll outlive their savings. That’s where a financial adviser can help. Based on your savings and sources of income, your adviser can project how much you need to live comfortably in retirement, and help you plan to get there. If you already work with AMDG Financial, let’s check in to make sure your goals or timeline haven’t changed. We can also discuss the tax implications of your withdrawals in retirement and map out a strategy around which of your accounts or investments to withdraw from first.

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2. Take advantage of “catch-up” provisions in your defined contribution plan.

If you haven’t already done so and you are over the age of 50, you should be taking advantage of the opportunity to make catch-up contributions to your IRA or 401(k). Since the IRS has delayed the 2020 tax filing date to May 17, 2021, you still have time to max out your 2020 contribution. For 401(k)s, the maximum contribution (for 2020 and 2021) is $19,500, and anyone over 50 can make an additional catch-up contribution of $6,500. If you have an IRA, you can contribute up to $6,000 for 2020 and $6,500 for 2021, and catch-up contributions for 2020 and 2021 can be up to $1,000.

Beyond the pre-tax contribution levels, you can also make post-tax contributions to 401(k)s and traditional IRAs; however, this requires keeping track of the after-tax contributions on form 8606, which is a cumulative form showing total after-tax dollar contributions over the years. This is important information for your heirs to have if you die, so keep a copy with your will.

3. Contribute to a Health Savings Account (HSA).

Health care is one of the largest expenses you will face in retirement. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple who turned 65 in 2020 could need approximately $295,000 (after taxes) to cover their health-care expenses in retirement. One way to help offset those costs is by contributing to a Health Savings Account, or HSA. If your employer offers an HSA option as part of your health-care coverage, it may make sense to use such an account to squirrel away funds you can use to pay for health care in retirement. HSAs combine a high-deductible insurance plan with a tax-free health savings account. Some employers contribute to HSAs on behalf of their employees, and employees can contribute a certain amount each year.

In 2020, account owners could contribute up to $3,550 for self-only, and $7,100 for family coverage. Since the IRS has extended the tax deadline, you still have time to make a 2020 contribution until May 17. For 2021, individuals can contribute up to $3,600 and families can contribute up to $7,200. Catch-contributions for those aged 55 or older were $1,000 for 2020 and they have not changed for 2021.

The beauty of an HSA is that contributions are tax free, and so is the interest you earn on your contributions (in most states). However, you can’t contribute to an HSA if you are enrolled in Medicare, so if you intend to keep working past 65 and want to keep contributing to your HSA, you should postpone applying for Medicare and Social Security when you become eligible. Once you go on Medicare, you can draw on your HSA, but you cannot contribute to it anymore.

4. Review your debt and anticipate any major purchases.

If you’re planning to retire, it makes sense to do it with as little debt as possible, since you will be spending down your savings and want the money to last. Now may be a good time to decide whether to pay off your mortgage, cars, credit cards, student loans or other debt and plan accordingly. If you have a lot of debt, look for ways to consolidate it at a lower interest rate so you can maintain your cash flow. Your financial adviser can help you determine your cash-flow impact and the best course of action for your situation.

While you may not have much debt now, you should try to anticipate any major purchases you need to make (such as a new car, if yours is on its last legs, or a major repair). If you can afford to make the purchase and pay it off before you retire, your cash flow in retirement could be in a better situation.

5. Review and stress-test your estate plan. 

Whether or not you intend to retire, it’s always a good idea to review your estate plan regularly to update beneficiaries and executors as needed, or to consider the impact of taxes or changes in the law. As you near retirement, however, it’s important to make sure your estate plan will perform to your wishes if you pass away. Your estate planning attorney and financial adviser can help you understand and change ­­— if necessary ­­— your plan to ensure your beneficiaries do indeed benefit from your generosity without facing a tax burden, unintended delays, or a mix up resulting from improper recordkeeping.

Ideally, planning for retirement should start early in your career, with updates made as your goals change or as you get closer to retirement day. But it’s never too late to start. If you anticipate retiring within the next five years, it’s time to start getting your financial house in order. If we can be of assistance, please don’t hesitate to contact us. We’d be glad to help you with these five tasks, as well as the many other considerations you’ll need to make in the future.

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