By Carl Trevison and Stephen Bearce
Manage Your Finances as You Near Retirement
As your target retirement date gets closer, what was once an abstract concept may now feel more like a reality. This life event can provoke different feelings for different people. While some might feel excited about the possibilities the non-working years might bring, others may be anxious and fearful.
Regardless of your emotions, now is the time to stay focused on maximizing your retirement savings while also looking ahead to develop a retirement income plan that supports your vision of retirement. The following are some tips you may find helpful.
If you are age 50 or older, one way to help maximize your retirement savings is to take advantage of “catch up” contributions. The “catch up” contribution provision allows you to make additional contributions to your 401(k) or other employer-sponsored retirement plan. If you’re unable to do this, try to contribute at least as much as the employer’s match – otherwise, you’re leaving money on the table.
Open an IRA
If your employer doesn’t offer a retirement plan or you’re self-employed, consider opening an IRA. Even if you already participate in a 401(k) or other plan at work, an IRA can help supplement those savings and help you gain access to a potentially wider range of investment options. Keep in mind you are still eligible to contribute to an IRA whether you contribute to an employer-sponsored plan or not. You can also make catch up contributions to an IRA if you are age 50 or older.
Convert to a Roth IRA?
An often overlooked retirement planning strategy is the Roth IRA conversion. A Roth IRA conversion occurs when you take savings in a Traditional, SEP, or SIMPLE IRA, or employer sponsored retirement plan, and move the assets into a Roth IRA.
You will owe federal and possibly state income tax on the before-tax amounts in your employer plan or IRA converted to a Roth inthat tax year, but not the 10% IRS early distribution penalty. Once you settle that bill, though, you’ll be able to withdraw all the money in your Roth IRA during retirement without owing any tax or penalty, provided: (1) the Roth IRA has been open for at least five years and you are age 59 ½ or older; or (2) the distribution is a result of your death, disability, or using the first-time homebuyer exception.
The benefits of tax-free distributions in retirement may justify the conversion costs and allow for flexibility to manage taxable income in retirement. Converting to a Roth IRA is not appropriate for everyone. Some factors to consider include your tax bracket now and expected tax bracket in retirement, availability of funds to pay taxes due on the conversion, and your time horizon. Talk to your Financial Advisor and tax advisor to discuss your specific situation before you convert.
Develop a retirement income plan
Now may also be a good time to develop a retirement income plan. A retirement income plan helps make the transition from accumulating assets in your portfolio to determining how you will use all of your various sources of income to cover your living expenses when you’re no longer working.
It’s critical to start the retirement income planning process before you retire. If your planning process determines there’s a gap between your desired expense projections and your required income, you still have time to make some adjustments. These can include retiring at a later date, working part-time in retirement, increasing your current savings, or reducing expense projections. You may want to begin the process with the following:
Analyze your essential and discretionary expenses and create a realistic budget. This process will help you identify all of your sources of income, including Social Security, retirement savings, pensions, investments, etc. A Financial Advisor can help you determine when and how to take withdrawals and build an investment strategy that generates income in retirement while still giving your investments the opportunity to grow.
Consider Social Security. For married couples or divorced individuals, there are numerous options regarding when and how you elect to take your Social Security. Your choices can have a significant impact on the total benefits you receive over time. Your Financial Advisor can help you analyze the Social Security benefit options available to you and help you evaluate which one best fits your personal circumstances.
Think about longevity. Americans are living longer and more active lives, which can translate into two or three decades of living in retirement. This affects not only how much you will need to save but also how much you’ll need to budget for health care expenses. You are eligible for Medicare when you turn age 65. If you retire before age 65 and don’t have health care through your former employer, you will have to purchase your own coverage. And, while Medicare will help cover hospitalization costs and doctor visits, you’ll probably want to secure supplemental coverage. Additionally, you should consider long-term care insurance – the younger you are when you purchase long-term care insurance, the less expensive it is.
Nearing retirement can bring excitement – and also anxiety. But some careful planning now can help ease any anxieties you might experience down the road. You might want to enlist the help of a Financial Advisor to review your investments, help you develop a retirement income plan, navigate the complexities of evaluating your Social Security benefit options, and plan for health care expenses. Now is the time to evaluate where you stand financially and determine what steps you need to take to help ensure you’re able to live out your unique vision for retirement.
Wells Fargo Advisors is not a legal or tax advisor.
This article was written by/for Wells Fargo Advisors and provided courtesy of Carl M. Trevisan, Managing Director-Investments and Stephen M. Bearce, First Vice President- Investments in Alexandria, VA at 800-247-8602.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.
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