If you’re planning to retire in 2025, you’ll have several factors to consider, such as whether your assets are properly allocated as you begin withdrawing instead of making deposits.
It’s also time to double-check that you’ve optimized your retirement accounts for tax advantages.
Here’s what to prepare today to retire in 2025.
Start Preparing Now for a 2025 Retirement
It’s not too early to begin your 2025 retirement prep work, experts say. “If you’re eyeing retirement in 2025, start stress-testing your portfolio now,” said Jeff Rose, a Nashville-based certified financial planner and founder of investment blog Good Financial Cents, in an email.
“Don’t wait until you’re on the verge of retiring. See how your investments would have held up during past market downturns,” Rose added.
He pointed out that retirement investing involves more than just the numbers. It’s also about investors’ emotional reactions to market swings.
“If the thought of a 20% drop in your portfolio makes you nauseous, it’s time to dial back the risk,” Rose said.
[What Is the Outlook for Retirement in 2024?]
Consider Whether Your Portfolio Is Retirement-Ready
Proper asset allocation is crucial to generating the return you’ll need in retirement while simultaneously mitigating your risk. After all, the whole point of salting away money was to cover your retirement expenses, so you want to be sure you have enough.
“One of the best ways to understand how to position your assets for use during your retirement is to create a comprehensive cash flow projection,” said Dawn Doebler, a certified financial planner and senior wealth advisor at Colony Group in Bethesda, Maryland, in an email.
That’s the only way to project how income inflows will match the outflows needed throughout a retiree’s lifetime, she added in an email.
Calculate How Much You Should Withdraw in Retirement
Financial planners often use a 4% withdrawal rate as a rule of thumb.
“If an investor has $1 million in their 401(k), that pool of dollars would generate a $40,000 income for the investor during their retirement years and also stay ahead of inflation,” said Sean Casterline, president and senior portfolio manager at Delta Capital Management in Maitland, Florida, in an email.
A retiree who needs a higher income from that portfolio runs the risk of dipping into the principal during their retirement years.
Casterline quoted the late comedy writer Gene Perret, who said about retirement, “It’s nice to get out of the rat race, but you have to learn to get along with less cheese.”
“For many investors who have saved the right way, they shouldn’t have to live without all the cheese they want. But going into retirement and not knowing if you will outlive your investments is the wrong way to start your next chapter,” Casterline warned.
While the 4% rule is a useful baseline, investors nearing retirement can do additional calculations to get a more precise answer to the question of how much is safe to withdraw.
The answer boils down to a simple equation of income needed minus guaranteed income sources, such as pensions, Social Security or annuities, explained Tyler Weerden, financial advisor and founder of Layered Financial in Tolland, Connecticut, in an email.
“If there’s a shortfall between the two, that’s the amount they’ll need to withdraw from their investment accounts,” Weerden said.
[READ: How to Pay Less Tax on Retirement Account Withdrawals.]
Determine What Your Retirement Portfolio Should Look Like
For investors hoping to retire in 2025, organizing retirement investments is crucial.
Once pre-retirees understand how much income they will need from their investment accounts, the next step is to be sure those accounts are wisely allocated.
For example, if an investor only needs the portfolio to earn 3% to cover life expenses, it probably doesn’t make sense to take the extra risk of a portfolio invested 100% in stocks, Weerden said.
“If they need their investments to earn at least 7%, is a 100% bond portfolio appropriate? This is ultimately a question of how much risk do you need to take to meet your required income needs, and which assets are appropriate for that risk level and time horizon,” he noted.
Plan for Taxes in Retirement
When you’re receiving income, plan to pay taxes. Many retirees underestimate how much they’ll owe the Internal Revenue Service and state tax collectors. Investors planning to retire in 2025 have time to pencil in their new tax obligations or speak with a financial planner or a tax professional.
“Many new clients come to us because they bump into tax issues during retirement. And this really surprises them,” Doebler said.
A key reason for the surprise, she added, is that income changes in retirement, and people start drawing down on investments, rather than accumulating.
“Which assets you use impacts your marginal tax rate and that affects how much total tax you pay,” she added. “Navigating these technical decisions on your own can be costly.”
Doebler suggests that pre-retirees ask a series of questions to understand their future tax obligations better.
— How will my income change in retirement?
— Do my spouse and I agree on when we’ll retire?
— Do we agree on what money we’ll use to fund our spending needs throughout retirement?
— How much Social Security will we receive and how might that change our marginal tax rate?
— Have we determined who will decide what assets to use and in what order?
Rose said retirees should understand the distinction between tax paying and tax planning.
“This means strategically splitting investments across different account types: taxable, tax-deferred and tax-free,” he said. “By doing this, you can manage your tax bracket in retirement more effectively.”
Plan for Inflation in Retirement
Until the past few years, retirees weren’t thinking much about how inflation might affect their spending power. However, those considering a 2025 retirement must include inflation in their plans.
“The last couple of years in our world have brought inflation back to the forefront. We were in an uber-low inflation environment for so long, investors basically forgot its relevance,” Casterline said.
However, he added, that rooster has now come home to roost.
“If you’re not paying attention to inflation in retirement and accounting for it in your investments, you run the risk of blowing up your retirement and potentially forcing yourself back into the workforce,” he said.
One common mistake is basing estimates on the cost of living at the time of retirement, Weerden said.
“The power of inflation should not be underestimated. A retiree spending $50,000 a year today can expect to spend roughly $90,000 for the same items in 20 years, assuming 3% annual inflation,” he said.
[How Retirees Can Cope with Inflation]
Invest in Stocks and Real Estate to Outpace Inflation
Retirees can stay ahead of inflation and prevent erosion of purchasing power by investing in stocks and real estate. “Having part of their portfolio invested in low-cost, diversified, tax-efficient, passive mutual funds and exchange-traded funds gives retirees a fighting chance against inflation,” Weerden said.
As companies expand and generate higher profits, stock values tend to rise. Also, many stocks pay dividends, providing an income stream that may grow over time.
Homes and commercial properties can also hedge against inflation, preserving and potentially increasing wealth.
By law, liquid investments like real estate investment trusts (REITs) must pass through at least 90% of net income to investors, making for healthy dividends.
More from U.S. News
7 Lessons From Those Who Retired By FIRE
How to Invest $100K for Retirement
Biden and Retirement: What Has the President Done for Retirees?
If You Want to Retire in 2025, Here’s What You Need to Prep Now originally appeared on usnews.com
