7 Financial Tips to Prepare for Retirement if You’re Over 60 Years Old
by Magdalena G. Johndrow, M.Sc., CFS®, CDFA®
If you’re in your 60s, retirement may be only a couple years— or even months— away.
Below are provide 7 suggestions on what you should do to prepare for retirement, when you’re so close you can almost taste it!
Run a comprehensive financial plan.
Pre-retirees should first run a financial plan. This could be a simpler plan which looks at your expected cash flow versus your income and assets or something more complex which includes your goals within retirement, like traveling, moving your residency, buying a new home, spending more time with grandchildren, etc. Either way, you should look to find the answer:
Will I run out of money in retirement given various market conditions?
In order to run a financial plan, first you must understand what your cash flow is going to look like in retirement. Some expenses will be reduced or go away entirely—such as payroll taxes or perhaps your mortgage. While other expenses may increase, such as travel and dining-out budgets, all depending on how you want to spend your retirement. I suggest a thorough budget analysis by category, but if someone is looking for a quick understanding of a retirement budget, a rule-of-thumb is to reduce your current expenses by 15%-20%. This is at least a good place to start for understanding your retirement budget. Use this budget to also build at least a 3-month emergency fund, which should be kept in a savings or high yield savings account.
Still unsure of what a comprehensive retirement plan looks like? Watch our 1-minute video below and then contact us by clicking here for more information on how to run your personalized plan.
2. Understand your guaranteed income sources in retirement.
Next you must understand your income in retirement. Many retirees will have Social Security income, so I would first log onto www.ssa.gov to obtain a statement outlining your monthly social security benefits. Determine whether or not you plan on taking Social Security early, at full retirement age, or waiting until age 70. Remember: each year that you wait to take Social Security, you have a guaranteed 8-percent increase in benefits until 70 years old, so for many waiting to start benefits can be very beneficial!
And, holding off on collecting benefits doesn’t mean you have to work until 70 years old; it simply means you can delay benefits in order to increase your monthly amount! Then you must understand if you have any other guaranteed sources of income such as a pension or an annuity. There are many important questions surrounding pensions and annuities in retirement including but not limited to:
Do I have different options on how to take my pension – joint and survivor, lump sum, or straight life—and which is right for me? When should I start my lifetime income draw on my annuity, if that is applicable?
3. Create a plan to fill in any income gaps with your retirement savings from accounts such as a 401K, IRA, ROTH, etc.
One you understand your income needs are in retirement and what guaranteed income you may have, then you need to fill any gap between income and needs with your investment and retirement savings accounts. Here it is important to plan which accounts you withdrawal money from. For example, withdrawals from pre-tax retirement accounts will likely increase your ordinary income, whereas withdrawals from your non-qualified brokerage investment account would likely leave your ordinary income unchanged, if you’ve held your investments for over one year. That said, you will have to pay capital gains tax on any long-term gains in non-qualified brokerage accounts. It is important to create a meeting with both your financial advisor and your tax-accountant to understand the various options you have to withdrawal money in your retirement. Here too it’s best to create a comprehensive retirement income plan in order to avoid surprise tax bills.
4. Keep your future Required Minimum Distributions (RMDs) top of mind when planning.
Not only is planning for current withdrawals important, but also planning for future withdrawals, as you will have to start taking the IRS-mandated Required Minimum Distributions (RMDs) from your pre-tax retirement accounts such as a 401K and IRA at age 72 years old. Again, RMDs will likely increase your ordinary income in retirement, which also may have an impact on Medicare premiums in the future. There are ways to minimize your future RMDs. For example, you can facilitate a ROTH conversions and/or withdrawing money from your pre-tax account prior to 72 years old.
5. If you’re still working, take advantage of catch-up options available to you.
In 2022, individuals under 50 years old can add a maximum of $20,500 annually into their 401K/ 403B / 457 accounts through their employers. Similarly, if you’re under 50 years old you can add up to $6,000 per year into your IRA accounts.
In both cases, however, if you’re 50 years old or older you receive a “catch up” option where you can add more to your retirement accounts.
The key here is that you need earned income, which typically means you are still working. If you are able to still put money into these retirement accounts your catch-up is an additional $6,500 for employer-sponsored retirement plans and an extra $1,000 for individual retirement accounts (IRAs). This means if you’re 50 years old or older, you can add up to $27,000 per year into your 401K/ 403B/ 457 (if your employer permits in the plan documents) or up to $7,000 per year into your IRA.
6. Speak to a Medicare Professional
As you near 65 years old, chances are you’ll be enrolling into Medicare for your health insurance benefits in retirement. You have a 7 month window to enroll into Medicare when you are eligible. This window is called your “Initial Enrollment Period.” You can enroll into Medicare 3 months before you turn 65 years old, during the month you turn 65 years old, and then 3 months after the month you turn 65. So if my birthday is November 15th my Medicare enrollment process is August through February. This “Initial Enrollment Period” is important because if you do not enroll on time, you will suffer a penalty.
Beyond enrolling in basic Medicare Part A, you also may need to enroll in Medicare Part B and Part D or perhaps a Medicare Advantage plan. Understanding what suits you can be complex and even confusing at times, which is why we always suggest working with a Medicare specialist. A Medicare professional will shop around plans for you to get you your desired medical coverage, work with your desired medical professionals, and try to get you the lowest price possible while not giving up quality of care.
Need to speak to a Medicare professional? Click here to schedule a free consultation!
7. Emotionally prepare for retirement!
While many are concerned about not outliving their savings in retirement, many also forget to think about how they’re going to spend their retirement! Someone once told me that they would golf every day in retirement. Indeed, they did golf every day … but only for one year. After a year they were BORED! Joni Youngwirth who works with our partner and broker-dealer, Commonwealth Financial Network, writes extensively about this issue. The rule of thumb is to have 3 ways to fill your time each week. It may be golf, volunteering at a museum, and watching your grandkids once a week. As someone who has work 30+ years, people need a reason to wake up, something to create their schedule around, and something to look forward to!
Remember: a body that is in motion, remains in motion!
As you can see, income planning and cash management can be tricky in retirement because of all of the moving parts, so this is why it’s important for many people in their 60s planning to retire to contact a financial advisor for assistance!
Presented by Magdalena G. Johndrow, M.Sc., CFS®, CDFA®
Maggie’s career in finance started with a degree from the London School of Economics and some time working at Wall Street banks in NYC. She joins Lori as partner of Johndrow Wealth Management to marry her financial skills with her passion for helping clients achieve their financial goals.
