2020 was a challenging year for many Americans. The COVID-19 pandemic made many people reevaluate their retirement plans and consider saving even more than before. Whether or not the pandemic changed your saving habits and your retirement timeline, the new year is always a good time to review your financial plan.
Our team has outlined some of our top retirement tips for 2021. Some of these tips may seem familiar, and a few may be new, thanks to COVID-19. Regardless, all of these are important, and we encourage you to start implementing those that make sense to you as soon as possible.
1. Prepare for an unplanned, early retirement.
Sometimes retirement sneaks up on you before you are ready - that’s just life. In 2019, the Employee Benefits Research Institute (EBRI) conducted a study showing that almost half of the retired employees left the workforce before their target retirement date, and COVID-19 has only accelerated this trend.
Because of this, it is strongly suggested that those in their 50s and 60s should be finding contingent retirement plans. Hopefully, the promise of a vaccine will give the economy the boost we have been waiting for, bringing back more jobs and dropping unemployment. However, hope is not a reliable plan, and being sure you have an “in case of emergency” plan will help ensure a secure retirement.
2. Pay Down Your Debt
The easiest time to pay off debt is while you are still working. If retirement is in the near future for you, focus on paying off as much of your debt as you can before retirement. If you have multiple streams of debt, such as a mortgage, car loan, or credit card debt, focus on eliminating one at a time to lower your debt in retirement.
The amount of debt attached to 60 & 70-year-olds has grown. Between mortgages and student loans, it can be challenging to pay down debt on a fixed income. Put in some extra overtime and work for those bonuses now to ease your debt burden early.
3. Review Your Health Insurance Strategy
Medicare is an easy option for those over 65, and sometimes you can face penalties for not enrolling on time. Make a plan to apply a few months before you turn 65 to ensure there is no lapse in time while waiting for your coverage to kick in.
While medicare is an excellent option for those entering retirement, a study done by Fidelity estimates that retirees will pay up to 300,000 in medical expenses (co-pays, additional premiums, uncovered medical expenses) over their retirement years. These will likely be paid out of retirement income, so be sure to factor these extra expenses into your plan.
If you plan to retire before age 65, be sure to have an insurance plan for your early years before Medicare kicks in.
4. Maximize HSA Contributions
A health savings account is an excellent way to begin saving for medical expenses in retirement before you retire. Starting an HSA now allow your money to grow tax-free for decades, providing a solid cushion for any unforeseen medical expenses in retirement.
But, HSAs are for everyone. They are often tied to high-deductible insurance plans, which may not be in your best interest. Talk to your financial professional to see if an HSA is a good healthcare funding option for you.
5. Understand your Retirement Income Options
Many retirement funding accounts have rules for when you can withdraw your money penalty-free. Social security starts at 62, but you may not need it at that age, especially if you're still working. 401(k) allows for penalty-free withdrawals at 59 ½, but you may not yet be retired. Many people wait until 72, which requires minimum distributions from qualified accounts to withdraw their money.
Investing in a financial advisor that can make a long-term plan is a good decision for organizing retirement income. A financial advisor understands all these rules and regulations related to each account type and the added tax consequences you could incur.
While retirement planning is to ensure a fixed income through all of retirement, there is a chance that retirement can last decades. To be sure you won’t run out of money ten years into retirement, you need to keep investing, even as you begin to spend from your retirement accounts.
6. Practice Retirement Spending
A common rule in retirement is to replace 80% of your pre-retirement income. While this is a good practice, it is somewhat random. A better strategy is to evaluate your monthly spending and create a plan based on spending needs.
Over the next year, track your spending carefully to see what you may need in a fixed retirement income. Be sure to keep a few changes in mind, such as commuting costs that will no longer apply or travel expenses you plan to incur once you retired.
One good thing to come from the COVID-19 pandemic is that savings are at an all-time high due to people staying home. While this is a benefit for many and allows some to catch up on savings they may have missed in earlier years, this year may not accurately depict retirement income needs in the future.
7. Reassess Post-Crisis Risk Tolerance
With the option for a vaccine, it may seem as though we have made it through the worst of the COVID-19 pandemic, and a crisis like this will never happen again. Wrong.
Uncertainty is about the only certainty when it comes to investing and retirement planning. With the unknowns of the future, it can be scary to continue investing in the unknown. However, people will likely experience more than one financial crisis in their future. The good news is that these crises are accounted for with a good financial advisor and a solid financial plan.
While certificates of deposit (CDs) and treasury bonds air on the safer side of investing, they do not always produce the best returns. With a low-rate environment in the investment market, many people are being pushed to take on more risk. Consult your financial advisor to be sure you have a plan if another financial crisis may occur.
If you have questions about any of the retirement planning strategies we have shared, please feel free to contact us. We have a great team of professionals ready to help you!