Financial Planning for Employees Nearing Retirement Age
As retirement approaches, the financial decisions you make now are more critical than ever. Employees nearing retirement need to fine-tune their strategies to ensure a comfortable and secure retirement. With changes in retirement regulations and shifting economic factors, 2024 brings both challenges and opportunities.
Today, we’re going to walk through some essential steps to optimize your financial readiness.
Key Takeaways
Understanding your future income needs and budgeting carefully is key to a secure retirement.
New rules for retirement accounts in 2024 and 2025 will help you save more for the future.
By adjusting your investment strategy and tax plans, you can maximize your savings and keep more of what you earn.
1. Assessing Your Retirement Readiness
Assessing your readiness for retirement is about more than just determining when you can stop working—it’s about ensuring that you have a solid financial plan that supports the lifestyle you envision.
Calculate Your Income Needs
The first step is to determine how much money you will need to maintain your desired lifestyle in retirement. Financial planners often suggest replacing 70% to 90% of your pre-retirement income. For example, if you earn $80,000 annually before retirement, you might need between $56,000 to $72,000 per year during retirement. This range should cover your essential living expenses, discretionary spending, and unexpected costs.
PRO TIP: When assessing your income needs, never rely on simple “rules of thumb” alone. A personalized retirement budget that accounts for inflation, healthcare, and lifestyle preferences is always more accurate.
Create a Detailed Retirement Budget
Start by identifying your projected expenses, both essential and discretionary. Essential expenses include housing, utilities, healthcare, food, and transportation. Discretionary spending might involve travel, hobbies, and dining out. Don’t forget to account for inflation, as your purchasing power will likely decline over time. Regularly revisiting and adjusting this budget will be crucial as you approach retirement.
Identify Your Retirement Income Sources
Your income in retirement will likely come from multiple sources. Common sources include:
Social Security: Knowing when and how to claim your Social Security benefits is crucial. Delaying benefits until age 70 can maximize your monthly payments, but the right choice depends on your health, life expectancy, and financial situation.
Employer-sponsored retirement plans: These include 401(k)s and pensions. Understand your plan’s payout options — whether you’ll receive a lump sum or monthly payments—and how to coordinate these with other income sources.
Personal savings and investments: Your savings, including IRAs, Roth IRAs, and taxable investment accounts, will form another critical income stream. Deciding how much to withdraw each year is a delicate balance between ensuring you have enough income and making your savings last.
Evaluate Healthcare Costs and Insurance Needs
Healthcare is one of the most significant expenses in retirement. If you plan to retire before you qualify for Medicare at age 65, you’ll need to arrange for interim coverage. Even with Medicare, out-of-pocket costs can add up, so consider whether supplemental insurance or a long-term care policy is right for you. It’s estimated that a 65-year-old couple retiring today might need $300,000 or more to cover medical expenses throughout retirement.
Test Your Financial Plan with a Retirement Calculator
Using a retirement calculator can help you estimate how long your savings will last based on different scenarios. This will factor in:
Varying withdrawal rates
Investment returns
Life expectancies
In many cases, these tools allow you to simulate different scenarios, such as market downturns, inflation, and changes in spending habits to help you to refine your strategy.
2. Maximizing Retirement Contributions
As you approach retirement, maximizing your contributions to tax-advantaged accounts like 401(k)s, IRAs, and other employer-sponsored plans is crucial. The retirement landscape continues to evolve, with new rules and limits introduced in 2024 that can significantly impact your savings strategy.
Take Advantage of Higher Contribution Limits
In 2024, the contribution limits for 401(k) plans have increased, allowing you to save more during your peak earning years. For those aged 50 and above, the contribution limit is now $30,500, which includes the standard contribution plus a catch-up amount.
These catch-up contributions are particularly valuable as they allow you to accelerate your savings in the final years before retirement. Additionally, catch-up contributions for IRAs remain at $1,000, allowing for a total contribution of $8,000 per year.
Plan for the Upcoming Catch-Up Contribution Changes (2025)
Starting in 2025, workers aged 60 to 63 will see a significant boost in their catch-up contribution limits. These limits will be either $10,000 or 150% of the standard catch-up limit at that time, whichever is greater.
This provides an excellent opportunity for those nearing retirement to supercharge their savings during the last few years of their careers. As these new rules take effect, it’s important to plan ahead and adjust your savings strategy accordingly.
Use the New Roth 401(k) Rules
A major change in 2024 is the elimination of required minimum distributions (RMDs) for Roth 401(k)s. Previously, once you reached RMD age, you were required to start withdrawing from your Roth 401(k), even if you didn’t need the income. With the new rule, your Roth 401(k) can now continue to grow tax-free indefinitely, just like a Roth IRA.
This change provides more flexibility and helps you manage your tax situation in retirement, allowing you to delay withdrawals until it makes the most financial sense.
Leverage Employer Matching Contributions
If your employer offers a matching contribution to your 401(k) or other retirement plan, be sure to contribute enough to take full advantage of this “free money.” Employer matches are essentially a guaranteed return on your investment, and they can significantly boost your retirement savings over time.
In 2024, new rules even allow employers to match student loan payments with retirement contributions, offering additional benefits for those balancing debt repayment with saving for retirement.
Consider a Roth Conversion
A Roth conversion involves transferring funds from a traditional, tax-deferred retirement account (like a 401(k) or IRA) into a Roth account, where future withdrawals are tax-free. While you’ll need to pay taxes on the amount converted, doing so can be advantageous if you expect to be in a higher tax bracket in retirement or if you want to leave tax-free assets to your heirs.
Given the favorable rules for Roth accounts in 2024, now might be an ideal time to explore this strategy.
PRO TIP: If you’re considering a Roth conversion, try to do it in years when your income is lower to reduce the tax impact. This is especially effective during the transition period between full-time work and retirement.
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3. Adjusting Your Investment Strategy
As you approach retirement, it’s crucial to adjust your investment strategy for a new stage of life.
Shift to More Conservative Investments
When you’re younger and have a long time horizon, your portfolio is typically more growth-oriented, with a higher allocation to stocks. However, as you near retirement, your priority should shift from growth to stability. Gradually increasing your allocation to bonds, cash equivalents, and other lower-risk assets can reduce the impact of market volatility.
This transition helps protect your savings from significant downturns, which can be particularly damaging if they occur early in retirement when you start withdrawing funds.
Maintain a Balanced Approach
While it’s wise to reduce risk, it’s also important to avoid being too conservative. A portion of your portfolio should still be invested in growth assets, like stocks, to combat inflation and ensure your purchasing power is preserved over a potentially long retirement.
A balanced portfolio might include a mix of 60% bonds and 40% stocks, though the exact allocation should reflect your risk tolerance, financial goals, and retirement timeline.
PRO TIP: Don’t wait until retirement to adjust your investment strategy! Gradually shifting to a more conservative approach over the last five to ten years before retirement can provide better protection against market volatility.
Protect Yourself from “Sequence of Returns Risk”
One of the most significant risks in retirement is the sequence of returns. This refers to the risk that poor market returns early in retirement, combined with regular withdrawals, can deplete your portfolio faster than expected.
To mitigate this risk, ensure you have a diversified portfolio and consider maintaining a cash reserve or short-term bonds to cover a few years of expenses. This strategy allows you to avoid selling investments at a loss during market downturns.
Regularly Rebalance Your Portfolio
As market conditions fluctuate, your asset allocation can drift from your target mix. Regularly rebalancing your portfolio ensures it remains aligned with your risk tolerance and investment goals. In retirement, rebalancing might involve shifting funds from growth-oriented investments to safer assets or drawing income from overperforming segments of your portfolio.
Get Help from a Pro
Given the complexities involved in adjusting your investment strategy for retirement, consulting a fiduciary financial advisor is always wise. Your advisor can provide personalized recommendations based on your financial situation, risk tolerance, and retirement goals. An advisor can also help you navigate market volatility and make adjustments as needed.
4. Optimizing Your Tax Strategies
When planning for retirement, taxes play a significant role in determining how long your savings will last and how much income you’ll have. A tax-efficient withdrawal strategy can help you manage your tax liability and maximize your retirement income.
Diversify Your Tax “Buckets”
One of the most effective strategies is to diversify your retirement savings across three types of tax treatments:
Tax-deferred accounts (e.g., traditional 401(k) and traditional IRA)
Tax-free accounts (e.g., Roth IRA, Roth 401(k))
Taxable accounts (e.g., brokerage accounts)
This allows you to strategically withdraw funds in a way that minimizes your tax burden. For example, in years when you’re in a lower tax bracket, you might draw from tax-deferred accounts. Conversely, in high-tax years, you can rely more on tax-free accounts like a Roth IRA to avoid additional taxable income.
Plan Your Withdrawals Strategically
The order in which you withdraw from different accounts can significantly impact your overall tax bill. Typically, a common approach is to withdraw from taxable accounts first, followed by tax-deferred accounts, and finally, Roth accounts.
This sequence allows your Roth assets, which grow tax-free, to continue compounding for as long as possible. However, the optimal strategy can vary based on your specific situation, and periodic re-evaluation is essential.
Manage Required Minimum Distributions (RMDs)
Starting at age 73 (under current rules), you must begin taking RMDs from most tax-deferred accounts like traditional IRAs and 401(k)s. Failing to take your RMD results in hefty penalties.
However, with proper planning, you can reduce the impact of RMDs by converting portions of your traditional accounts to Roth IRAs before you reach RMD age. Since Roth IRAs do not require RMDs, this strategy can help minimize forced withdrawals and associated taxes later in retirement.
Consider Tax-Loss Harvesting
If you have a taxable investment account, tax-loss harvesting can be a powerful strategy to offset gains and reduce your taxable income. This involves selling investments that have lost value and using the losses to offset gains from other investments.
You can also use up to $3,000 of excess losses per year to offset ordinary income. This strategy allows you to keep your tax bill lower while maintaining your desired asset allocation by reinvesting in similar investments.
Make Qualified Charitable Distributions (QCDs)
If you’re charitably inclined and older than 70½, consider using qualified charitable distributions (QCDs) to satisfy your RMD requirement. With a QCD, you can donate up to $100,000 per year directly from your IRA to a qualified charity, and the distribution isn’t counted as taxable income.
This strategy reduces your taxable income while also giving you a chance to help others and make the world a better place.
Factor in State Taxes
Don’t overlook state taxes, which can vary significantly depending on where you live. Some states don’t tax retirement income, while others may have high taxes on pensions, 401(k) distributions, and other income sources. As you plan your retirement location, consider the state tax implications on your income and overall financial plan.
Work with a Fiduciary Financial Planner
Given the complexity of tax rules in retirement, consulting with a fiduciary financial advisor who specializes in retirement planning can be invaluable. They can help tailor a tax strategy that fits your specific needs, goals, and financial situation, ensuring that you make the most of your retirement savings while minimizing your tax liability.
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Retirement Planning: A Decision Worth Making
Planning for retirement is one of the most important financial steps you’ll take. As you near retirement age, the choices you make now will have a lasting impact on your financial security and lifestyle during your golden years. Every decision counts.
If you would like help planning your future and securing a comfortable retirement, TrueWelath can help!
At TrueWealth Financial Partners, we understand the complexities of retirement planning and are here to help you navigate these critical decisions with confidence. Our fiduciary financial advisors are here to give you personalized guidance tailored to your unique needs and goals.
Whether you need help with refining your investment strategy, creating a tax-efficient withdrawal plan, or planning for healthcare costs, we’re here to support you every step of the way.
Ready to take control of your retirement journey? Schedule a FREE consultation with TrueWealth Financial Partners today, and let us know how we can help! We’ll be happy to help you build a retirement plan that will make your golden years truly golden.
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FAQs
When should I start adjusting my investment strategy as I approach retirement?
It’s typically recommended to start adjusting your investment strategy five to ten years before retirement. During this period, gradually shift from aggressive growth investments like stocks to more conservative options like bonds and cash equivalents to reduce risk. The exact timing depends on your financial goals, risk tolerance, and the stability of your retirement income.
What are the benefits of delaying Social Security benefits beyond full retirement age?
Delaying Social Security benefits beyond your full retirement age increases your monthly payout. For every year you delay benefits up to age 70, your payments increase by about 8%. This strategy can be beneficial if you have other income sources to cover your expenses while delaying Social Security and if you anticipate a longer lifespan.
Should I consider working part-time after retirement to supplement my income?
Working part-time during retirement can be a good way to supplement your income and delay tapping into your retirement savings. It also allows you to maintain a sense of purpose and stay socially active. However, be mindful of how additional income might impact your Social Security benefits and tax bracket.
What are required minimum distributions (RMDs)?
Starting at age 73, you must begin taking RMDs from most tax-deferred retirement accounts like traditional IRAs and 401(k)s. The amount you must withdraw is based on your account balance and life expectancy. Not taking RMDs results in substantial penalties, so it’s important to plan accordingly. However, new rules in 2024 eliminate RMDs for Roth 401(k)s, offering more flexibility in managing withdrawals.
How much should I save in an emergency fund as I approach retirement?
It’s recommended to have an emergency fund that can cover three to six months of living expenses. In retirement, you may want to increase this cushion to one to two years of expenses to protect against market downturns and avoid having to sell investments at a loss. Some employers now offer emergency savings accounts within retirement plans, which could be an additional resource.
Should I adjust my estate plan as I approach retirement?
Yes, retirement is a good time to review and update your estate plan. Ensure your will, trusts, and powers of attorney are current. Consider strategies to minimize estate taxes and think about how you want your assets distributed. Discussing your estate plan with your beneficiaries and involving a financial advisor or estate attorney can help ensure your wishes are honored.
What role does inflation play in retirement planning?
Inflation reduces your purchasing power over time, so it’s critical to include inflation protection in your retirement plan. Invest in assets that historically keep pace with inflation, like stocks. Consider inflation-adjusted annuities or Treasury Inflation-Protected Securities (TIPS). Regularly updating your retirement budget to account for inflation is essential to ensure your savings last.
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