The halfway point of the calendar year is an ideal time to assess where you are and the direction you are headed. It is enough time to recognize your patterns, but should provide you with enough time to change your final outcome. On a road trip, knowing you are halfway makes the rest of the trip seem easier. Likewise, midyear is the time to review your financial plan. Let’s take a closer look at what you should be reviewing at three critical age brackets: your 40s, 50s and 60s.
Your 40s
If you are in your 40s, you are at another halfway point. Your children may be closer to their college years than kindergarten. You are also closer to retirement than an entry-level position. Your 40s can be a critical point in your financial future. You need to balance competing goals with a finite amount of money: saving for your children’s education; paying your mortgage and for your children’s soccer lessons and ballet classes, and saving for your own retirement. Midyear checkups during your 40s can help ensure you are not sacrificing one financial goal for another.
This is the decade to define your goals. You cannot race to the finish line if you do not know how far you have to run. You should set your end goals, and then determine how to pace yourself to get there without sacrificing your strength along the way.
You can research online or through school counselors to get an estimate of how much college should cost for your child. You can then set a target for your savings. You may want to decide now if your child will contribute to their education with earnings from a part-time job or with student loans. With a goal in mind, then you can determine how best to save. 529 plans usually offer generous tax-advantaged savings for education expenses.
Your 40s are also a time to evaluate your household budget. Your earning potential is still increasing, which may result in more monetary commitments than ever. Your children may be participating in multiple extracurricular activities, or you are considering buying an additional car or vacation home. Your best moves during this decade are to pay off your unsecured debt and prepare for that rainy day. While you may consider beefing up your emergency fund, you should definitely consider protecting your earning power with disability and life insurance. Any setback that jeopardizes your future income could significantly derail your financial plans.
We’re not done yet, as you still need to save for your own retirement. Your children can borrow money for education. You can likely get a loan to help in an emergency. You cannot borrow money for retirement. As your 40s are potentially your top earning years, you may want to save as much as you can. Contribute enough to your deferred benefit program to receive your employer’s match. This is free money someone is willing to give you. Since deferrals are pre-tax, contributing to your 401(k) will lower your taxable income for the year. If you are eligible, consider contributing to a Roth IRA to provide you tax-free withdrawals in retirement. Once you maximize your Roth IRA contributions, consider maximizing your 401(k). You can defer up to $17,500 to your 401(k) in 2013.
Your 50s
Once you are in your 50s and retirement is within sight, you should test drive your retirement plan. During your mid-year financial checkups during your 50s, determine if you can live comfortably on your retirement income sources. The process is much like creating a household budget in your early years. You first list your mandatory expenses, such as, mortgage or rent, car payments, health insurance and average utility bills. Then list your discretionary expenses, like travel, entertainment, golf or tennis clubs and dining out. Your third list will be your sources of retirement income, which may include Social Security benefits, pensions, company-sponsored retirement plans, annuities, and your own investment or savings plans. Compare your spending needs to your desired withdrawal rate. Keep in mind, you may live 20 to 25 years in retirement.
If you see a point where your funds may fall short, you should still have time to adjust your plan. In your 50s, you can make additional catch-up contributions to your 401(k) and your IRA. In 2013, you are allowed to contribute an additional $5,500 to your 401(k), meaning you could save up to $22,500 this year alone. If you were able to save $22,500 for the next 10 years before you retire, assuming a 7% return, you could add more than $310,000 to your retirement nest egg. If you are working with a financial adviser, your adviser should be able to run multiple scenarios, taking into consideration market performance and may suggest areas where you can trim your expenses.
While you may be keenly focused on saving since retirement is imminent, you should also review you liquidity needs. Your first year of retirement may be less than 10 years away. Now may be the time to begin shifting some assets in your portfolio to fixed-income investments. This should provide you with the liquidity when you need the money. You may consider laddering bonds that mature close to your retirement date and the years thereafter. Many financial planners recommend planning for liquidity needs five to 10 years before you need the money to help minimize the risk of having to sell investments in a down market.
Your 50s is also the decade to evaluate your estate plan and insurance needs. Since you are already planning your retirement spending, you should consider how you would pay for nursing home or in-home care should you need it. Many insurers offer discounts to those in good health. Generally, those discounts are locked in for as long as you hold the policy. Your mid-50s may be an opportune time to purchase your long-term care insurance.
While you should already be reviewing your will and overall estate plan every two to five years, your 50s is a good time to make sure your affairs are in order. You may consider reviewing your health care directives and financial powers of attorney should you become incapacitated. You may have named your spouse in the past, in your 50s, but you may want to consider younger relatives.
Your 60s
In your early 60s, during your mid-year review with your financial adviser, you should discuss your Social Security strategy. While you can apply for benefits early at age 62, your benefits will be reduced by 25%. The early benefit reduction decreases as you get closer to your full retirement age. For every year after full retirement age you delay collecting Social Security, your benefits increase by 8%. If you are able to delay receiving benefits until age 70, you could increase your monthly benefit by 32%.
One of the most overlooked strategies is optimizing the spousal benefit, which allows you the option to claim a benefit based on your spouse’s earnings. You may be eligible to receive up to 50% of your spouse’s benefit, which may be enough to allow you to go from working full-time to part-time. This in turn may make working beyond full retirement age less daunting—and remember, every year you delay Social Security, you get an increase in your benefit amount. Working longer may pay off in the long run.
You also want to file for Medicare at age 65; however, you may want to wait to enroll in Medicare Part B if you have not retired and are still covered by a group plan at work. Your financial adviser should be able to help you review your benefits.
In your 60s, when you transition from working to retirement, you should also frequently review your withdrawal strategy with your adviser. Some advisers suggest that you can spend an inflation-adjusted 4% of your retirement assets each year, but do not confuse this with how you pull your money out. If you have $1 million in retirement assets, using the 4% spending guideline means you can spend $40,000 a year. Let’s assume you planned for 10 years of liquidity, meaning $400,000 is in fixed income investments, with the remaining $600,000 in growth investments.
Assuming relatively conservative numbers, let’s say you could earn 2% in interest a year on your fixed investments and about 8% on your growth—5% coming from capital gains and 3% from dividends. With these rates, you should be earning $18,000 a year in dividends and $8,000 on your fixed income investments. That is $26,000 before taxes. Now, assuming a 33% tax rate, you are earning just under $17,500 a year. If your spending goal is $40,000 in your first year of retirement, then your portfolio is earning you 43% of the amount you need. Of course, this does not include your Social Security benefits or a pension.
By earning nearly $17,500 on your portfolio, you should only have to draw the difference of $22,500 from your fixed income investments—2.5% of your total portfolio. By continuing to work with your financial adviser through retirement, you should know if you have to adjust your withdrawal rate to account for market performance and can avoid spending too much too quickly.
At Henssler Financial we believe you should Live Ready, which includes knowing that no matter your age, your portfolio and financial plan needs monitoring. If you have questions or would like a mid-year financial checkup, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
