November 01, 2017 Feature

8 Things to Do Now for a Better Retirement

By Stephanie Bruno

Take these essential steps to ensure you’re building a strong financial future for the rest of your life.

It's never too early and never too late to begin planning for your retirement. In fact, now is the time to begin planning for retirement, no matter how far away your retirement is from today.

Making informed choices during this time is key since it can impact your success in retirement. Here are essential actions you should be aware of before you step into retirement, as well as a few strategies beneficial for you to consider while you're still working.

1. Set up your financial plan—When you’re a few years away from retirement, the most important thing to do is to understand if your resources will be enough to sustain you in retirement. Working with a financial planner will help you understand how your investment accounts, 401(k)s, IRAs, pension, and Social Security benefits are turned into the income you need to support your lifestyle and other goals.

Many people retire and then realize they need to resume working to allow more money flexibility. It's better to know this ahead of time so you can understand your retirement income options at various ages.

Because we're living longer, you may also opt to do a partial retirement where you slow down your work but don't stop completely. A good plan will allow you to look at these options and understand the best fit for you. It should be a tool to help you make good decisions and not constrict you.

2. Carefully estimate Social Security—When you're planning for your retirement, be careful in estimating your Social Security retirement benefits. You've likely looked at your Social Security statement and seen your estimated benefits. If not, you can create an account at www.ssa.gov/myaccount.

The estimated benefits assume that you're working at the same income level through that benefit date. If you retire at 62 and wait to receive benefits at your full retirement age of 66 or 67, you may receive less than the benefits listed on your statement for your full retirement age. If you have 35 years of work experience, however, retiring early may not have a large impact.

The Social Security Administration can provide you with a more detailed estimate based on your exact retirement situation, and so can an advisor who specializes in Social Security benefits.

If you do retire early, there can be an opportunity to defer your Social Security earnings until age 70 if you have other assets you can draw upon. This is an individual decision based on health and personal life expectancy, but you can receive up to an 8 percent increase in lifetime benefits if you wait until age 70. Your work history will still be a factor in determining what that increase will be.

If you're married and one spouse is healthier than the other, the one who's healthier can defer Social Security benefits, and the other can take the benefits at the normal retirement date. At this point, that's 66 or 67 for those born in 1960 or later.

3. Apply for Medicare even if you're working—Three months before you turn 65, you should apply for Medicare Part A, which is hospital coverage. This is true even if you haven't retired. You can defer signing up for Medicare Part B if you or your spouse is still covered under a group health plan. You'll just want to make sure you enroll once you're no longer covered.

There's also an option for Part D prescription drug coverage. The Medicare supplement plans can be confusing, so work with someone qualified to help you sign up for the correct coverage.

Also, know that you can be required to pay an income-based adjustment for Medicare Part B if you're married and filing jointly and have modified adjusted gross income of $170,000 or more. Medicare will base this on your prior year tax return. So usually the year after you retire, you'll pay higher premiums if you were a high earner.

This can also apply if you have investment or capital gains income. For instance, it can apply if you sell a piece of real estate or make changes to your investment portfolio that creates a large capital gain.

4. Wisely handle 401(k)s and IRAs—While you're still working, you can maximize your contributions to retirement plans by making catch-up contributions. This means in addition to the normal $18,000 limit on deferring salary, you can contribute an additional $6,000 each year from age 50 until you're no longer working. For IRAs, you can contribute an additional $5,500 over and above the $5,500 limit.

When you're not working and not collecting Social Security, you'll need to figure out how to sustain your lifestyle until you begin collecting Social Security. This is an ideal time to begin withdrawing funds from IRAs or 401(k) accounts. Working with your tax advisor, you can consider withdrawing as much from these accounts to fully take advantage of your lower tax brackets. Withdrawals can be used for living expenses or, if you don't need them, you can convert these dollars to a Roth IRA, which will grow tax free.

When you retire, you'll have the opportunity to roll over your 401(k) or other retirement account to an IRA. Be careful in deciding whether to do this or to keep your investments in your 401(k) plan. Most IRAs have broader investments to choose from, so this can be an advantage. However, IRAs can also be more expensive, but not always. Be sure to understand all costs that would apply to your IRA account.

If you're working with an advisor, have her do an analysis of the quality of the investment versus the costs. The lowest-cost option isn't necessarily the best. For instance, your advisor may charge a higher fee to manage your IRA, but that may come with financial planning services you wouldn't have otherwise received. It may also come with more direct investment oversight over the account.

The goal is to compare the difference in cost, the quality of investments, and the value of any additional services provided to make an informed decision.

5. Know this exception—There's a little-known exception to the early-withdrawal penalty that could be beneficial if you're an early retiree invested in a 401(k) plan. Usually when you withdraw retirement funds before age 59.5, a 10 percent penalty will apply to the withdrawals (exceptions are made for disability, higher-education expenses, first-time homeownership, and a few other reasons).

However, if you leave employment at age 55 or later, you're allowed to withdraw funds without the penalty. You'll still have to pay ordinary income tax, but that applies whenever you withdraw funds from a pre-tax 401(k). If you roll the funds over from your 401(k) to an IRA, you lose the ability to escape the 10 percent penalty.

Consider this scenario: You retire from your practice at age 55 and would like to start an encore career. If you're just starting out in your encore career, you may not have much income and could then withdraw funds from your 401(k) for living expenses.

This is a win-win because although you're paying ordinary income tax on these withdrawals, you'll likely be in a lower tax bracket than when you were working. The same would apply if you just retired outright.

6. Understand non-deductible IRA contributions—Contributing to a Roth IRA can be beneficial while you're still working. However, if you have taxable income of $132,000 ($194,000 if you're filing jointly), you can't contribute to a Roth IRA.

You can still, however, convert your traditional IRAs to Roth IRAs since the income limits for conversions have been removed. If you exceed the income limits, you can consider contributing to a traditional IRA and not deducting the contribution, meaning it provides no tax benefit in the current year.

The amounts will still grow tax-deferred, and when you go to withdraw funds, you'll pay tax only on the earnings and not on the amount you originally contributed. You can then, in later years when you retire or are earning less, convert these non-deductible IRAs to Roth IRAs, and you'll pay tax only on the earnings.

You’ll want to let some time pass between the contributions and the conversions. Also, when you make the non-deductible contribution, you’ll need to file IRS Form 8606 and file it with your taxes to track it. It’s very important to keep these records. Additionally, your Roth IRA account must be set up for five years before you can begin withdrawing from it, so don’t put off setting up this account.

7. Evaluate how to tap pension accounts—Most companies have discontinued their pension plans, but some people are still lucky to have one. When you retire, most plans will allow the option of taking an annuitized payment over your lifetime (if you’re married, it’s over both of your lifetimes) or taking your pension in a lump sum.

Most people won’t want to take the pension lump sum outright since it’ll all go into ordinary income for the year of your withdrawal. You can, however, roll the pension balance over to an IRA. There are pros and cons to rolling over your pension balance, so you’ll want to make a careful decision. Pension annuity payments will stay the same for your lifetime, so as long as the plan is funded, you’re guaranteed to receive the same monthly payment for your life; if you’re married, it’ll be for life of your spouse.

Why consider rolling over your pension? You may want to name a different beneficiary for the funds; for instance, if you and your spouse already have enough income and you want to leave the funds to your children. If you’re not married but have a partner, you may want to leave part of the balance for your partner, which isn’t an option for the pension annuity payments.

Additionally, some people feel they can earn a higher return by investing part of the pension balance in equity investments. Keep in mind that the investments are no longer guaranteed once you move them out of the pension account.

Also, be careful if you do select the pension annuity option. Some people are tempted to select a single life annuity because it’ll result in a higher payment than the joint payout over both spouses’ lives. However, if the person holding the pension account passes away, the spouse will receive no benefits. The spouse must also sign a spousal consent when that’s done, but I find that often people don’t realize what they’re giving up.

8. Adjust your investment allocations cautiously—Often the closer people get to retirement, the more sensitive they are to market fluctuations. It makes sense that, when you’re closer to the time you’ll be withdrawing these funds, you’ll be more concerned that their value may decline.

However, keep in mind that you’re likely to be in retirement for 30 years, so most of us will need some level of exposure to equity investments. One way to reduce the anxiety of investing in equities is to have three to five years of income in cash or other stable investments.

It’s also important to understand your risk profile and how much exposure to more volatile risky investments you can tolerate in your overall allocation. Over the long run, equity investments have historically had higher returns but can fluctuate widely on a year-to-year basis. Your financial plan should be based on your targeted allocation for funds in retirement.

9. Make your life easier—In addition to these planning strategies, I recommend that you simplify your investments as much as possible both now and in retirement. For instance, if you have multiple IRAs, consider whether you can combine them into one account. If you have a separate taxable investment account, consider moving it to the same place that holds your IRAs.

A lot of energy goes into keeping up with and managing investments. If you can move them all to one provider, you can simplify the management aspects while still being able to maintain a broadly diversified portfolio.

Stephanie Bruno

Stephanie Bruno, AIF®, CFP®, CPWA® owns Stephanie Bruno Wealth Advisor in Denver. Advisory services are provided through Dynamic Wealth Advisors.