4 Tips For Your Retirement Planning As A New Year Brings New Hope By Albert Lalonde
COVID-19 took a heavy toll on the U.S. economy in 2020, causing millions of job losses and forcing many businesses to close. It also affected lots of retirement plans in the process.
A survey by the Pew Research Center found that 36% of Americans who save regularly are saving less because of the pandemic, and one-third said they’ve had to dip into their retirement savings to pay bills.
This is unsettling news, but as we gratefully flip the calendar to 2021, there is good news. Vaccines for COVID-19 bring hope for a return to a more stable world. The economy has shown signs of recovering. While much economic uncertainty remains in the months ahead, there are some important things you can do in the new year to help your retirement savings:
• Customize your budget for life: Adjust your budget and remember to pay yourself first. At a minimum, be sure to have three things within your budget: how much you’re taking in after taxes, how much you’re spending, and how much you’re saving.
If you’re not sure where your money is going, track spending using a spreadsheet or an online budgeting app for 60 days. Determine how much money you need to cover your fixed monthly expenses and how much you’d like to put away for other goals such as retirement. The rule of thumb is to save 10–15% of pre-tax income, including any match from an employer, starting in your 20s for retirement. If you delay, add about 10% for every decade you delay saving for retirement. Remember to re-evaluate your emergency funds and make sure to have four to six months’ worth of essential living expenses set aside in a savings vehicle.
• Manage your debt: For most people, some level of debt is a practical necessity; however, problems arise when debt becomes the master, not the other way around. To stay in charge, keep your total debt load manageable. Don’t confuse what you can borrow with what you should borrow.
Keep the monthly costs of owning a home (principal, interest, taxes and insurance) below 28% of your pre-tax income and your total monthly debt below 36% of your pre-tax income. Eliminate high-cost, non-deductible consumer debt and avoid borrowing to purchase depreciating assets. Try to pay off credit card debt and consider consolidating your debt in a low-rate home equity loan or line of credit (HELOC).
• Optimize your portfolio: We all share the goal of achieving better investment results. Research, however, shows timing of markets is difficult and can be counter-productive. Create a written plan that will help you stay disciplined in all kinds of markets. Focus first and foremost on your overall investment mix.
After committing to a savings plan, how you invest is your next important decision. Have a targeted asset allocation — that is, the overall mix of stocks, bonds and cash in your portfolio — that you’re comfortable with, even in a down market. Make sure it’s still in sync with your long-term objectives, risk tolerance and time horizon.
Diversification can help reduce risk and can be a critical factor in helping you reach your goals, but make sure to consider taxes. Place relatively tax-efficient investments, like ETFs and municipal bonds, in taxable accounts, and put relatively tax-inefficient investments, like mutual funds and real estate investment trusts (REITs), in tax-advantaged accounts. Tax-advantaged accounts include retirement accounts, such as a traditional or Roth individual retirement account (IRA). If you trade frequently, do so in tax-advantaged accounts to help reduce your tax bill.
• Protect your estate: An estate plan may seem like something only for the wealthy, but there are simple steps everyone should take, especially after a year we just went through. Without proper beneficiary designations, a will and other basic steps, the fate of your estate or minor children may be decided by attorneys, probate courts and tax agencies. Make sure to review your beneficiaries, especially for retirement accounts, annuities and life insurance.
The beneficiary designation is your first line of defense. Therefore, keep information on beneficiaries up-to-date to ensure the proceeds of life insurance policies and retirement accounts are consistent with your wishes, your will and other documents. Update or prepare your will, and remember that a will isn’t just about transferring assets. It can provide for your dependents’ support and care, and help you avoid the costs and delays associated with dying without one (intestate). When writing a will, we recommend working with an experienced lawyer or estate planning attorney.
Keep in mind, your beneficiary designation trumps what’s written in a will so be sure all your wishes are aligned. If your estate is large and complex and you want to spell out how your estate should be used in detail, consider a revocable living trust. The cost for a revocable living trust is typically more expensive. Therefore, it is highly recommended to talk with a qualified estate planning attorney to see which estate plan makes the most sense for you. Next, have in place durable powers of attorney for health care or patient advocate assignments. In these documents, appoint trusted and competent individuals to make decisions on your behalf if you become incapacitated. Make sure they understand your medical wishes. Lastly, take care of important estate documents. Make sure a trusted and competent family member or close friend knows the location of your important estate documents. You may even want to consider uploading your estate documents in a digital format for easier access. Remember you don’t have to do everything at once. There’s a lot you can do to improve your financial health. Take one step at a time and constantly make small improvements throughout 2021.