Whether you are approaching or already in retirement, taking stock of your financial situation on a regular basis is an important element of staying on track. There are some items that need to be completed before the end of the year, while others can wait until January.
If you are still working, planning for retirement is essential.
“Investing for any goal without a plan is akin to throwing money at a problem and hoping for the best. Having the resources to live on after retirement is too important of a goal to ignore,” says Tyler Landes, a fee-only certified financial planner and founder of Tandem Financial Guidance, based in Kansas City, Missouri.
Here’s are steps to take to nurture your retirement nest egg:
Rebalance accounts. If you haven’t looked at your retirement accounts lately, there have been some big market moves and your stock and bond allocations may be out of whack with your intended percentages. “It’s easy to get scared and sell when the market is going down, or to get excited and buy when the market it going up,” Landes says. “This behavior leads to buying high and selling low, which is not a sound strategy. Rebalancing back to your prescribed allocation on a set schedule, once or twice per year, is an easy way to remove the emotion from the equation.”
[See: 13 Ways to Take the Emotions Out of Investing.]
Increase 401(k) contributions. Investors should consider increasing contributions to their 401(k) or retirement plan by 1 percent per year, says Ann Minnium, a certified financial planner and principal of Concierge Financial Planning in Scotch Plains, New Jersey. “It will cause a relatively small decrease in the paycheck but can make a significant difference in retirement savings over time, especially if the contribution is matched,” she says.
Here’s how the power of compound interest can help over a time.
“If Kate is 25 and earns $52,000 per year and wasn’t contributing to her 401(k) at all, a 1 percent increase would reduce each of her 26 paychecks by $14. But by the time she is 65, those annual savings of could be worth $72,000 assuming a 7 percent return,” Minnium says. “This does not include any employer match; it’s just the future value of all of those $14 contributions.”
If you are older than 50, you can contribute even more — an extra $6,000 to workplace retirement plans and $1,000 to traditional and Roth IRAs, says Danielle L. Schultz, a fee-only certified financial planner at Evanston, Illinois-based Haven Financial Solutions.
Take required minimum distributions before the year ends. Once you reach 70.5, individuals are generally required to start taking withdrawals from individual retirement accounts. “Their financial institutions can help facilitate this,” Minnium says. “If they fail to take the distributions on time, the penalty is a fine of 50 percent of the amount they were supposed to take out. For example, if they were supposed to take out $2,000 then the fine would be $1,000.”
Think through plans for old age. Living on your own in your 70s is one thing and very different from solo living in your 80s or 90s. “If their assets could not cover several years of nursing home or care in their homes, they should evaluate long-term care insurance,” Schultz says. “Be sure to check out any workplace options — some employers offer more affordable group plans. The more you need it, the less available it is.”
Review asset allocation. Many people choose target date retirement funds. It’s important to remember that these get increasingly conservative as time passes, Schultz says. “If a person has a good pension or Social Security benefits, they may not need to be quite so conservative as target funds become,” she says. “They may need to change their asset mix to get a little more growth if they can tolerate more risk because they have good guaranteed income.”
[See: How to Save for Retirement On Less Than $40,000 Per Year.]
Don’t forget that HSA. A health savings account is much more than a savings account and offers tax deductions for those who are eligible. In order to contribute to an HSA an individual must have a qualifying high-deductible health plan.
Check with your health insurance company to confirm that your plan qualifies even if you do have a high deductible. Individuals can contribute up to $3,350 or $6,750 for a family plan and an extra $1,000 if you are older than 55, Landes says.
“If you’re in a high-deductible health plan, a well-funded HSA should certainly be considered part of your retirement strategy,” Landes says.
There are several benefits to an HSA.
“You get a tax deduction for your contribution, your money earns interest and can be invested after a certain level, and distributions to pay for health care expenses now and in the future are tax free,” Landes says. “It’s one of the only truly tax-free savings methods, and the account stays with you through retirement.”
Look for tax-loss harvesting opportunities. If an investment is in a non-retirement has declined in value, you can sell it to reduce taxes on realized capital gains from winners. “I had a client who had both a loss and a gain. He was able realize the gain without having to pay taxes on it due to the netting the loss,” Minnium says. “The client then reinvested his funds.”
There are rules to follow to harvest the loss and avoid the tax.
“One must be careful not to run afoul of the wash sale rule, which disallows a loss if the proceeds are reinvested in the same or substantially the same security within 30 days,” Minnium says.
Reviewing your allocation and rebalancing on an annual or semi-annual basis is a best practice, Landes says.
[See: 10 Financial Perks of Getting Older.]
“The end of the year serves as an excellent reminder to complete these maintenance items,” he says. “It’s also a good time to take stock of your lifestyle and goals and make portfolio adjustments for the New Year.”
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7 Steps to Protect Your Retirement Fund originally appeared on usnews.com
