Retirement planning tips for 5 more years after the nest egg cracks

Retirement


It couldn’t be easier to make your retirement nest egg last a lifetime. What if you could use the money you saved for your golden years for five more years with a smart retirement plan?




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If you’re not thinking about making your retirement money last longer, you should. 401(k) and IRA balances are declining. Everything costs more than it used to. It’s because of stock market fainting and income-eating inflation. Rising borrowing costs will also hurt. And don’t forget the fact that people are living longer.

However, there is good news. Pull the economic lever to repair cracked nest eggs or earn more income. And, more importantly, ensure that your retirement benefits last at least five years longer than you originally planned.

Finding ways to earn more after retirement is at the top of every retiree’s and older worker’s wish list. In particular, there are many problems to be solved in order to secure a stable post-retirement life. A recent survey highlights the challenges facing retirement savers.

  • According to the TIAA Institute and the George Washington University Business School, one in four workers say inflation has forced them to cut back on their retirement savings.
  • Personal finance site DollarGeek has revealed that the average American is saving a third less for retirement than they should be under age- and salary-based savings milestones. It says.
  • The average 401(k) balance for Vanguard plan participants at the end of 2022 was $112,572, down 20% from 2021, according to Vanguard data. The median balance also fell 23% to $27,376, meaning half of 401(k) savers are below that amount.
  • According to the National Council on Aging, 80% of people over the age of 60 (47 million) do not have the funds to cover long-term care.

So what should retirement savings people do other than cut back on spending? Here’s a list of essential tips to extend the life of your nest egg by five years.

1. Build a retirement plan to make your cash work harder

It would be a shame to have six figures of cash hidden in a zero-interest checking account. Aggressive interest rate hikes by the Federal Reserve will allow 1-year CDs to earn gains of 5% or more, and in some money markets 4.75% or more, according to Bankrate.

“The first thing I do is get that free cash invested,” said Rian Hogan, CEO of retirement planning firm Silver. “The difference in yield is quite large.”

It’s definitely time to turn dead money into a source of income. Why would you let money stay on the table out of inertia? With a 5% return he stashes $100,000 in a CD for a year, which gives him a profit of $5,000 a year, adding $417 to his monthly income. Move idle cash to high-yield accounts, even if you need to switch banks.

2. Get a raise from Social Security

Everyone loves getting paid at work. But many ignore the 8% pay raise from Social Security. Remember, every time you delay Social Security enrollment until age 70 after you reach full retirement age, the government will increase your Social Security payments by 8%. “This is a pretty compelling risk-free return,” Hogan said.

Suppose you turn 62 this year and are eligible for Social Security, although your payments will be reduced. If you can afford to stop receiving benefits this year and start receiving Social Security until age 70, you’ll receive 77 benefits for the rest of your life, according to an analysis by Wade Fow, author of % higher. Retirement Planning Guidebook: Navigate key decisions for a successful retirement. “

Delaying Social Security until age 70 has two advantages. “Spends after age 70 will be covered more by Social Security, and less will need to be covered by the portfolio,” Pfau said. “It helps your portfolio last longer.” The increased Social Security benefits also act as insurance if you live well beyond your life expectancy.

This strategy also has risks. The fiscal outlook for Social Security is uncertain at best. Trust funds that write checks to retirees will dry up by 2034, as planned, according to a trustee report. Barring government action by then, the fund will allow him to pay less than his 80% of benefits from 2035.

3. Retirement Planning: Consider Converting to a Roth IRA

Another way to extend the life of your retirement egg is to diversify your investments from a tax perspective. Keeping all your money in a traditional 401(k) or IRA is not the most tax efficient strategy. why? Because all withdrawals are taxed at the normal income tax rate, it can eat up a lot of your savings.

To address this, consider converting legacy retirement account assets funded in pre-tax dollars into Roth IRAs, especially if income tax rates are expected to rise in the future. please. Roth comes with two great perks: tax-free withdrawals and no mandatory Minimum Distribution (RMD). You don’t have to pay taxes when you withdraw and you can grow your money permanently without making a withdrawal, so you can make your nest egg last longer.

Of course, the pitfall of any retirement plan is that you will have to pay taxes on the dollars rolled over to the Roth IRA. To minimize taxes, convert over several years to avoid higher taxes on additional income. “I call it quota management,” Hogan said. For example, depending on his income, he can only convert the exact number of dollars into a Roth IRA until he hits the 12% tax bracket or the 22% bracket cap, for example.

“From a tax perspective, diversifying your retirement accounts will allow you to generate tax-free income for yourself and your heirs in the future,” said Rob Leipert, vice president of financial planning at RB Capital Management. said. “Now you have a choice and can draw from different buckets.”

4. Combining Social Security Increases with Roth IRA Conversion

By combining the two and three tips above, you can get more out of your retirement planning. Pfau advises adopting an aggressive Roth IRA conversion strategy between the ages of 62 and 70 while delaying his social security enrolment. Rolling over a traditional his 401(k) or IRA to a Roth IRA is a way to lock in tax-free withdrawals for life.

So why would combining these two strategies work best? If you’re over 62 and retired and don’t have Social Security yet, you probably don’t have much other income. And it matters. why? This is because the value of all assets rolled over from a 401(k) to a Roth IRA will be taxed at your normal income tax rate.

So the lower your income (although it would be less if you didn’t have a social security check), the less tax burden you would have on conversion. However, if you are still working, this strategy may not work as your taxes may be higher.

“The idea is to start triggering taxable income at a stage where tax rates are still relatively low,” Pfau said. A lower rollover tax amount means you have more money in your pocket. And that will increase the growth and compounding potential of the tax-free Roth IRA. Spreading your Roth equivalent dollars over several years may also save you tax money.

5. Earn money on your retirement plan covered phone

One conservative stock option strategy that creates a steady stream of income (and captures upside in stock prices) is a covered call strategy, Leipert said. A call gives the buyer the right to buy the stock at a set price and time. A “covered call” is when you sell a call on a stock you own. Each contract is worth 100 of his shares.

Here’s how Covered Call works and how it can increase your nest egg income stream. Suppose you own 100 shares of him. apple (AAPL), which trades at $170 a share, doesn’t think the stock has much upside this summer due to market headwinds. Apple-covered calls expiring on August 18th can be sold at a strike price of $180 (the price he agrees to sell) for $5.55.

When you sell your options, you get an immediate premium of $555 (100 shares x $5.55). “You always get a premium,” Leipert said, no matter how the stock performs. Once the stock hits $180, you can either sell it and take advantage of the nearly 6% gain or buy back the covered call. Of course, if you’re wrong and Apple bounces well past $180 to $200, you’re missing out on $20 per share.

The purpose of creating a covered call is to use the premium to generate reliable income, much like clipping coupons on bonds. “Retirees may be limiting their share price gains, but they still get guaranteed premiums (or income) on top of their share price gains,” Leipert said.

6. Invest outside your retirement account

There are no laws against retirement savings other than 401(k)s and IRAs. “But that’s where most people’s savings end,” says Leipert.

If you have cash flow and are maxing out your retirement account, keep investing in your taxable securities account. Not only will your retirement wealth grow, but you will also have the flexibility to withdraw in the most tax-efficient way possible.

Capital gains tax rates on assets held for more than a year peak at 20%, but according to the IRS, most people pay 15%, and some pay zero if their income is low enough.

Investing in a health savings account is one savings tool you should consider. With HSA, you can save tax-free dollars, defer taxes for growth, and withdraw money tax-free. “That’s a triple tax benefit,” Laipert said. (For more on medical savings accounts, see IBD’s list of the 13 Best HSA Accounts of 2023.)

Your distribution must be used for approved medical expenses, but less money must be withdrawn from your 401(k) to pay your medical bills.

7. Maximize your 401(k) contributions and play catch-up

Many people think they are getting the most out of their 401(k). However, this is not always the case. When the IRS raises the contribution cap, many are unable to increase the percentage of payroll deductions that go to his 401(k).

For example, you can put $22,500 into your 401(k) this year, an increase of $2,000 over 2022. Similarly, the catch-up contributions for people over 50 increased by $1,000 to his $7,500.

And don’t forget that you can save even more with a non-deductible IRA. These are not deductible at the time of donation, but can defer taxes on earnings.

8. Get professional retirement planning help

According to Vanguard research, looking at your portfolio holistically and executing your plan with the help of a financial advisor can increase your net income by 3% annually. This approach includes using low-cost funds, regular portfolio rebalancing, behavioral coaching from advisors, the right mix of taxable and tax-deferred investments, and knowing when and how to withdraw your funds. It all comes down to doing the basics. Minimize tax resistance.

“Even a small change in net income can be meaningful and could increase your retirement savings,” said Matt Fleming, senior wealth manager at Vanguard.

9. Avoid unforced errors

Don’t shoot yourself in the foot while planning for retirement, says Lamar Viller, a portfolio manager at investment firm Viller & Company. Force majeure errors to avoid include overspending, panicking and selling at the bottom of the market, and not having a financial plan to follow through. Turbulent times.

“What can be controlled must be controlled,” Mr. Viller said.

10. Move to a cheaper place

A big expense after retirement is living expenses, including housing. “Where you live affects how long your savings last,” says Hogan. If you want to extend the life of your nest egg, consider moving to a cheaper part of the country where real estate is cheaper, taxes are cheaper, and medical costs don’t weigh on your budget.

“It could be the difference between whether the money lasts until you’re 90 or 100,” Hogan said.

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