Gone are the days when you could retire to a rocking chair at age 65 and live a few more years. Given that lifespans have increased significantly over the past 20 years due to medical advances and improved lifestyles, having a comprehensive retirement plan for living to age 100 should be high on your priority list. No one wants to outlive their assets late in life.
If you’re in your 40s or 50s and starting to think about your retirement, several common retirement planning mistakes can hinder your efforts to realize the type of retirement you’ve dreamt of, which we’ll explore in more detail in this blog.
As Retirement Investment Advisors in Roseville, CA, we aim to help you create retirement plans that focus on what’s most important to you. After all, you’ve worked hard to get where you are. We’re here to help you enjoy the fruits of your labor.
Bulman Insight: All RIAs are fiduciaries. Fiduciary is the highest ethical standard in the financial service industry.
Not Saving Early Enough
Starting to save for retirement can feel like a race against time, but it’s never too late to begin. But remember, as you age, you need to maximize your retirement savings efforts so you benefit from the power of compounding in tax-sheltered retirement accounts. This is one of the best ways to boost your retirement savings, even if you start late.
Not saving enough for retirement in your early years can have dire consequences:
Postponing your retirement until you have accumulated enough to safely retire and live the way you want to live for the rest of your life
Working part-time during retirement years
Reducing your standard of living
Increased financial stress if you have to save more in a reduced period
Less flexibility in managing healthcare expenses late in life
The impact of inflation on your preferred standard of living
Strategies You Can Implement Now to Catch Up on Retirement Savings
Maximize your contributions to your retirement accounts like 401(k)s and IRAs. In 2024, you can contribute $23,000 to 401(k) plans and $7,000 to traditional IRAs. If you are over 50, you can make additional catch-up contributions of $7,500 to your 401(k) and $1,000 to IRAs.
You should review your investments for performance and exposure to market risks at least annually.
Ensure your assets are properly diversified to minimize the risk of large losses. Too much money in one investment can increase this risk.
The years to retirement (time horizon) can help determine your risk tolerance. Your risk tolerance should decline as you get closer to your retirement date.
Consider reducing your discretionary spending to allocate more money to your retirement savings.
Consider working with a team of experienced retirement planning professionals in Roseville, CA, who can guide you through your retirement planning process.
Underestimating Healthcare Costs
Everyone expects to live long, healthy lives. However, as we age, this may not always be the case. Underestimating your healthcare costs in retirement can significantly alter your retirement if you are burdened by additional expenses you did not plan for—for example, Assisted Living, Skilled Nursing, and Memory care.
Bulman Insight: This expense increases when one spouse requires this level of care and one does not.
Tactics You Can Take Now to Plan for Healthcare Expenses in Retirement
If appropriate, consider establishing a Health Savings Account (HSA). Regular contributions to a health savings account (HSA) can accumulate over time, giving you a substantial fund to draw from during retirement.
HSAs offer triple tax benefits:
Contributions are made with pre-tax dollars
Your money grows tax-free inside the account
Withdrawals for qualified medical expenses are tax-free
You can also use HSA funds for various medical expenses, including copays, prescriptions, dental care, and vision care.
Unlike Flexible Spending Accounts (FSAs), HSA funds don’t expire at the end of the year. Unspent balances roll over annually, making HSAs a way to save for future healthcare expenses.
After you reach age 65, HSA funds can be withdrawn for any purpose without penalty, though non-medical withdrawals are subject to income tax, similar to a traditional IRA.
Another way to plan for unexpected healthcare needs is investing in long-term care insurance: This can cover expenses that regular health insurance doesn’t, like extended in-home or nursing home care.
Ignoring Tax Implications
Many people think they will be in a lower tax bracket when they stop working and retire. However, all too often, just the opposite occurs. Here’s why:
When you begin withdrawing funds from tax-deferred accounts like 401(k)s and traditional IRA, these distributions are taxed as ordinary income, which can unexpectedly increase your taxable income if you haven’t planned for it.
Depending on your income level and when you begin taking Social Security, you may have to pay taxes on up to 85% of your benefits. This income can push you into a higher tax bracket.
You may have fewer deductions, such as mortgage interest or dependents, leading to a higher taxable income than your working years.
Starting at 72, you must take minimum distributions from your tax-deferred retirement accounts. These RMDs could be substantial, increasing your taxable income.
Investment Income: Interest, dividends, and capital gains from investments can contribute significantly to taxable income, potentially pushing you into a higher tax bracket.
If you receive pension income, this can also be a source of taxable income, adding to your overall tax burden.
Over time, inflation can erode the value of money. However, if tax brackets don’t adjust accordingly, you may be in a higher bracket with the same or less purchasing power.
Tactics for Retirement Tax Planning
While there are several tax tactics you can use as a part of your retirement planning strategy, the following are three of the more common tax strategies to consider:
Consider a Roth IRA conversion if you know you will be in a higher tax bracket upon retirement. This involves converting a traditional IRA to a Roth IRA. While the conversion is taxable, all future appreciation and withdrawals from your Roth account are tax-free.
Work with a retirement planner in Roseville, CA, to help you develop an asset location strategy. Asset location involves strategically placing investments in taxable or tax-advantaged accounts based on their tax efficiency. For instance, high-growth investments are better suited for Roth IRAs. In contrast, bond investments are held in traditional IRAs.
Many people think that when they turn 65, they automatically will start taking their Social Security benefits, but it may not be beneficial from a tax planning standpoint. If you need the income, then you need to start taking distributions. However, delaying benefits beyond the full retirement age (67) can increase monthly payments by 8% annually until your mandatory distribution date.
Get to Know Bulman Wealth
We’re passionate about helping you live your dream retirement at Bulman Wealth Group. We understand it’s more than saving enough money or picking the right stocks. Sure, that’s important, but there’s more to it than that.
We focus on five crucial areas of retirement planning: investing, income, taxes, health care, and legacy planning. Each of these plays a vital role in crafting a retirement that’s as fulfilling and worry-free as possible.
To learn more about our retirement planning services, connect with us for an introductory call.
