5 Essential Planning Tips for Retirees

Most people crossing the retirement threshold today might agree that this is not their father’s retirement anymore. It is a much different retirement than the time when retirees were able to set it and forget it a few decades ago. The days of guaranteed pension plans are nearly gone, leaving most retirees to shoulder the responsibility of providing for their retirement needs. Low interest rates and stock market volatility adds to the angst felt by many retirees as they confront the challenge of making their income last another 25 or 30 years. Today, most retirees need to keep a constant vigil over their finances to ensure they are optimizing all of their opportunities for retirement success. Here are five essential planning tips to consider.

Monitor and Adjust Your Spending Plan

A sound retirement plan includes a spending plan based on projected expenses and cash flow generated from your investments. However, things can change on both the expense and cash flow sides of the ledger. Healthcare costs can vary widely from year-to-year as can general living costs. Your income can vary if any portion is generated from an investment portfolio. You should review your spending plan at least annually to see if it is still tracking your spending goal, making adjustments as needed.

Wait (if you can) to Claim Social Security

If you have yet to file for Social Security benefits, you might want to consider delaying them until age 70. On average, your payout increases by about 8% each year when you’re not receiving it after your full retirement age, which is the best-guaranteed return on your money available. For example, if your expected monthly benefit amount is $2,000 at your normal retirement age, it would increase to $2,640 at age 70. Of course, if you need the payout to meet your current expenses, you may not have a choice. Another reason for taking them earlier is if your health or your family’s health history indicates a likelihood of not living past your life expectancy.

Rollover Your 401k Plan

Most retirees leave their retirement assets in their 401k plan when they stop working. If you retire after age 59½, your best strategy might be to roll it into an Individual Retirement Account (IRA), where you can monitor and manage it more closely. The two biggest reasons for doing so are to save on account management fees and to create a more diversified investment portfolio. Most 401k plans have higher investment and account fees than many low-cost IRAs, especially if they utilize actively managed mutual funds. By investing in your own IRA, you can move your money into low-cost index funds or exchange-traded funds (ETFs), saving you as much as 1 to 2% in fees each year. You may also be able to create an asset allocation that is more directly aligned with your investment objectives and risk profile.

Consider a Roth IRA Conversion

If a large portion of your retirement assets is held in a 401k or traditional IRA, your withdrawals will be 100% taxed as ordinary income. By converting at least a portion of your 401k or IRA into a Roth IRA, you won’t pay taxes on your withdrawals. You will need to pay current taxes on the amount you convert, but you spread the conversion over several years or wait to do it when your taxable income declines. The additional advantages of a Roth IRA are the withdrawals don’t count toward the Social Security earnings tax, and a Roth is not subject to required minimum distribution (RMD) rules.

Perform Basic Maintenance on Your Investments

Most retirees enter retirement with a set asset allocation for their investment portfolio based on their income needs and risk profile. However, portfolio allocations do change because of the fluctuations in the markets. It is essential to review your portfolio at least annually to ensure it still reflects your investment objective and risk profile. Following market fluctuations, portfolios should be rebalanced by selling securities that performed well and buying underperforming securities. This keeps the portfolio within range of your target asset allocation. Doing so will create a tax consequence of securities sold for a gain. However, because you will also be selling securities at a loss, they will offset each other.