America’s outlook on retirement is grim. In 2021, 59% of Americans reported they will be working longer than anticipated and a shocking 36% believe they will never have sufficient funds to retire. Preparing for retirement in the throes of a global pandemic proved to be challenging, but as we move to a post-pandemic world, those on the cusp of this new life stage need to be laser focused on their finances. Those where retirement is still a ways off should also begin curating a top-notch retirement plan. 

Retirement planning goes far beyond automatic monthly transfers to your employer-sponsored 401(k). Here we’ve outlined some of the most important areas of focus when preparing for retirement.

Project Future Spending 

Experts estimate that most people will need 80% of their annual income during their retirement. So if you take home $85,000 annually, you’re looking at spending about $68,000 per year once retired. 

This, of course, can vary based on changes to your lifestyle. In retirement you may downsize your home leading to lower overall housing costs or you may be bit by the travel bug and spend far more in your “travel/entertainment” bucket than pre-retirement. 

Projecting your future spending costs starts with understanding what major changes may be coming down the pike. Now is the time to consider whether you’ll snowbird in warmer climates, dedicate more budget to travel, or downsize to a smaller, less costly home.  Planning and making retirement goals will help paint a clearer picture of how much you’ll need to put away for savings each month. 

Tip: Have a pension? If you’re planning to move out-of-state in your retirement, be sure to look up how your new home state will tax your pension.

Pay Down Your Debt

Now that you have keen insight into your retirement’s monthly budget, it’s time to retire your debt. Attempt to settle debt in any shape – credit card, car loan, student loan – before moving onto retirement. Unfortunately, retirees more than doubled their debt in 2020 to nearly $20,000, a 104% increase year over year, during the pandemic. 

Paying off debt can be challenging, but doable. Consider increasing your monthly payments, applying cash back to outstanding balances, or using the snowball method to pay off your smallest balance first and then using that payment towards the next outstanding balance. Once your debt is downsized or paid off completely you’ll be happy to see extra savings each month. 

Diversify Your Investment Portfolio

Having all your eggs in one basket is never thought of as a good trait. The same can be said for having all of your retirement assets in one investment. Diversifying your portfolio means you’ll have a collection of investments in your accounts to help reduce your portfolio’s overall risk. 

Broadly, this can be thought of as having some investments in stocks and some in bonds. Stocks, because they represent ownership in a company, have a greater opportunity for growth but a higher chance of loss. Bonds, on the other hand, are considered less risky because they are loans to companies, governments, or municipalities and represent an opportunity to earn interest income while waiting for the return of principal.

However, diversification works best when the stocks or bonds are not too correlated with each other. For example, an investor who owns both Tesla stock and Tesla Bonds is not diversified, because they have investments in only one company.

This is why investors like to use mutual funds or exchange-traded funds (ETFs), because it allows them to diversify through the underlying stocks or bonds held within the fund.  However, just owning different funds doesn’t necessarily mean a portfolio is diversified either. It’s important to check the correlation between each of the funds you own as some funds may be related to each other in a way that increases your portfolio’s risk. 

Diversify Your Taxation

Another way that an individual can prepare for retirement is by diversifying the way their income is taxed upon retirement. This can be done by funding different types of accounts before retirement.  After retirement, you can withdraw money from these different accounts in a way that reduces your overall taxation. Let’s examine the most popular retirement plans and their tax advantages. 

Pre-Tax Retirement Accounts

Pre-tax retirement accounts are a great way to diversify against present taxation. They allow you to fund retirement accounts with pre-tax dollars with growth that is tax-free. The government only taxes you when the funds are withdrawn from the retirement account, and the income is  taxed at your ordinary income rate.  

These types of accounts include 401(k), SIMPLE IRA, and SEP IRA. Employees whose employers sponsor a 401(k) or SIMPLE IRA plan also have the benefit of employer matching.  If you’re saving for retirement, it’s best to contribute to your 401(k) or SIMPLE IRA in order to take advantage of your employer’s matching policy, otherwise you’re throwing away free money.

If you’re self-employed, these types of accounts are great for you too. Granted you’ll need to contribute to your employee’s retirement plan, but the plans will allow you to store away more money for retirement than you could with a standard individual retirement account. For example, a SEP IRA allows you to contribute 25% of your compensation or up to $61,000 in 2022.  A solo 401(k) is even better as it lets you contribute $61,000 plus a $6,500 catchup if you’re over 50.

You can also open a traditional IRA account even if you have any of the above accounts.  And if your household income is under the IRA deduction phase out limits, you get an above-the-line tax deduction to reduce your current year’s income taxes, while saving for retirement.  Just be sure to contribute to the account before the April 15th tax deadline.

Post-Tax Retirement Accounts

Even if you’re contributing to a pre-tax retirement account, it’s good to also contribute to a Roth IRA. The Roth IRA allows your savings to grow tax-free.  And because it’s funded with after-tax money, withdrawals are non-taxable as long as you follow the withdrawal rules (over 59 ½ and had a Roth account for more than 5 years). Because of these advantages, the government limits the amount that can be contributed to just $6,000 a year for those under 50 or $7,000 a year for those 50 and above. 

It’s important to invest in both pre-tax and post-tax retirement accounts in order to diversify against changes to tax law.  There’s always the chance that the federal government will increase taxes to a much higher rate after you retire, so having money saved in a Roth IRA helps protect against this situation.  If the government reduces taxes, however, you can then withdraw from your pre-tax retirement accounts first (i.e., Traditional IRA, 401(k), SEP IRA, SIMPLE IRA) and take advantage of the better ordinary income tax rates.

Find a Financial Advisor

Creating a strong financial plan to push your funds through retirement often can’t be done alone. An experienced financial advisor can help you define your financial goals and set you up for financial success. 

Just like your annual physical, it’s equally as important to hold yearly financial health check-ups. Your financial advisor will identify areas of weakness and opportunity that can enhance your financial outlook. If you haven’t already started these conversations with your financial advisor, it’s time to start. Schedule an annual account review to talk through goals like retirement, long-term care planning, asset accumulation, and budgeting. 

Begin Estate Planning 

Retirement and estate planning go hand-in-hand. You’ve worked hard to create a strong financial situation for yourself and now it’s time to decide how your assets will be allocated at time of death or incapacitation. 

Leaning on an estate planning attorney is key. They’ll ensure both your tangible and intangible assets are accounted for and will begin the process of establishing a will and trust, if applicable. When developing your estate plan, remember to take inventory of all your assets, including things like:

  • Retirement accounts
  • Personal checking and savings accounts
  • Stocks, bonds, mutual funds
  • Real estate
  • Jewelry and heirloom items
  • Life insurance policies

This is also the time to think through who will be named trustee, who individual assets will be dispersed to, and who will take over as medical proxy or power of attorney (POA).

Related: How to Choose an Advisor When Acting as a Trustee

There is no single recipe for creating a retirement plan, but instead an entire collection of efforts that will put you in tip-top shape come retirement. Leveraging the right people in your corner, like a financial advisor and estate planning attorney, coupled with smart financial decisions pre-retirement will help make for a plentiful season of life.

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Jared Ong

Jared Ong oversees portfolio management, trading and technology. He previously worked at the Capital Group as a business systems analyst where he was integral in improving the trade operations group’s equity, fixed income, and foreign exchange trade processes. A graduate from Brigham Young University, Jared holds a Bachelors in Music. In his spare time, he enjoys composing and arranging music.