Retirement Planning Late in the Game

Posted on Thu, Sep 26, 2019 ©2019 Drucker & Scaccetti

MATT WALKER - OFFICIAL - 2016By: Matthew Walker, CPA

 

Every day you put off funding your retirement is another day your nest egg could be growing. Starting late may seem like a tall task, but it is still possible to set aside enough for a comfortable retirement if you begin the process now, rather than later. It is first imperative that you develop a plan, set goals and begin action. The longer you wait, the harder it will be to catch up. Here are some tips to help…

 

How much do I need to retire?

It is impossible to plan for the future unless you have a clear picture of your current financial position.  You should start by preparing a list with all your assets and liabilities, as well as a list of your sources of income and your annual expenditures. A general rule of thumb is that you’ll need 85% of your pre-retirement income to maintain your current lifestyle. However, retirement is different for everyone.

Some of the questions to consider are:

  • Will you spend more or less in retirement?
  • What will be your housing needs in retirement?
  • To what age will you continue to work?
  • Does your spouse work and are they funding for retirement?
  • Is your spouse close in age to you and, therefore, retiring at the same time?
  • Will your health be a factor in determining how long you will be able to work?
  • Will your children be independent when you retire?
  • Do you wish to travel more in retirement?
  • Do you wish to leave an inheritance to your descendants?
  • What will your taxes be in retirement?
  • How likely is a future inheritance?

Finding “Your Number” should be a collaborative effort that includes honest discussions with a team of advisors who have planning, legal and tax experience. Many experts agree you should withdraw no more than 4% of your savings during your first year of retirement, and then adjust in subsequent years. To apply the general rule, simply take your income needed from savings and multiply it by 25. Don’t forget to take other sources of retirement income into consideration (i.e., 401(k)s, IRAs , 403(b)s, pensions and Social Security benefits), as well as adjusting for inflation.

 

EXAMPLE: John is 50-years old and plans to retire at 65. His current income is $90,000 a year. Using the 85% rule, John will need $72,000 a year. He expects $20,000 a year from Social Security. Therefore, John needs $52,000 per year from his retirement savings. Assuming he will take 4% out per year, he should shoot for $1,300,000 ($52,000 / 4%) in savings… in today's dollars. To adjust for inflation using a 3% inflation estimate, take 1.03 and raise it to the power of how many years you have left until retirement.) Since he plans to retire in 15 years, multiply this amount by 1.56 (1.0315 = 1.56). This implies that in 15 years, his retirement target balance should be approximately $2.03 million.  Ouch!! John better get started!

 

What is the most efficient way to reach my retirement number?

Choose a retirement savings plan. The most common way to save for retirement is through an Employer Sponsored Plan, such as a 401(k) plan. If your employer matches contributions, you're leaving free money on the table if you’re not participating. If your company doesn’t offer a plan, you can also set up an Individual Retirement Arrangement (IRA). You should also consider starting your own business. This would not only allow you to add more to a SEP IRA retirement accounts, it could also create additional disposable income. You should also note that IRAs and some 401(k)s have a Roth option, which means your savings will be taxed now as opposed to when you withdraw them in the future.  Generally, the younger you are, the better served you will be by choosing a ROTH option.  Another factor in choosing a ROTH is whether you expect to be in a higher or lower tax bracket in retirement than you are now.

 

 

Plan

 

Contributions

Tax Deductible

 

Distributions

Roth IRA

After-Tax

No

Nontaxable

Traditional IRA  

Pre-Tax

Yes

Taxable

Roth 401(k)/403(b)                

After-Tax

No

Nontaxable

Traditional 401(k)

Pre-Tax

No

Taxable

SIMPLE IRA

Pre-Tax

No

Taxable

SEP IRA

Pre-Tax

Yes

Taxable

 

Talk to a financial advisor. Don’t try to make up for lost time by gambling on high-risk investments. Cash flow is a top concern for retirees. Those worried about having enough might choose to place much of their portfolio in stocks and higher-yielding bonds. This increases portfolio risk and should be discussed thoroughly with a reputable investment advisor.  Completing a long-term cash flow and tax projection can help identify tax saving opportunities.

 

Most importantly, push yourself to max out your contributions! Below are the maximum contributions per plan.

 

 

Plan

2019 Contribution Limits

Additional “Catchup” Contributions for people over 50

Roth IRA

$6,000

+ $1,000

Traditional IRA  

$6,000

+ $1,000

Roth 401(k)        

$19,000

+ $6,000

Traditional 401(k)

$19,000

+ $6,000

SIMPLE IRA

$13,000

+ $3,000

SEP IRA

25% up to $56,000

n/a

 

If you are behind in starting your retirement funding, you may need to make serious current cuts in your budget and give up some things you love. You may need to pick up a side hustle to make more cash, but your future self will thank you for every extra dollar that will fund your golden years. There are many other issues to consider in retirement and facing them head on will help to ensure your financial security.

Topics: Roth IRA, retirement, IRA, 401(k), SEP IRA

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