If you are from 55 to 72 years old, you might want to hear what financial planner Anthony D. Criscuolo has to say. He wants you to stop for a moment and to think carefully about what you are doing to prepare financially for your retirement.
Here’s why: Retirement, he explains, is a new chapter in our lives, a stage of life if you like, rather than a finish line. Given today’s trends in longevity and health, many of us can expect that chapter to last for 20 years or more. In addition, we might well be in good health and active for much of that time.
Two decades or more is a long time to be self-sufficient financially. It is crucial, therefore, that we take steps—particularly during the ages of 55 and 72—to prepare for how we are going not only to survive financially but also to live comfortably during that chapter of our lives.
If you have failed to start preparing yet, you still have time to ensure your retirement plan is in order, Crisculo points out. After all, saving in your fifties and sixties is better than failing to save at all.
Steps you can take
Criscuolo, a widely published certified financial planner, outlines steps that you can take to prepare for the next chapter of your life in an article for Palisades Hudson Financial Group in Atlanta, where he is senior client service manager.
Here they are:
• Consider increasing your monthly savings.
Chances are you will be enjoying more cash flow as your adult children set off on their own, you reach the top rungs of your working life, and you pay off your mortgage.
The amount you set aside will vary depending on your individual situation, but a good rule of thumb is to save 20% of your income in the final years during which you intend to work. The ideal amount will depend on how much you already have saved and how you plan to live in retirement.
Should your fifties and sixties be your peak years of earnings, as they are for many, it also is likely that your marginal tax bracket will be higher than it will be in your retirement years. It makes sense, therefore, to defer your taxes by using your savings to contribute more to your 401(k), individual retirement account (IRA), or any other plan in which you can benefit from a tax deduction now.
The amount you can contribute to an individual IRA each year is limited by the Internal Revenue Service; it is set at $6,000 for 2022. People older than 50, however, can contribute an extra $1,000 a year. Similarly, the maximum tax-deferred amount you can contribute to a retirement plan through your employer, such as a 401(k), is also capped. That figure for 2022 is $20,500, but if you are older than 50 you can contribute a maximum of $27,000.
• Consider changing a traditional IRA to a Roth IRA.
A traditional IRA allows you to defer your taxes now, but you will need to pay taxes on the income that you withdraw from the account in retirement. A Roth IRA means you pay tax on the amounts you contribute now, but your income from the account will be tax free in retirement.
Changing makes sense if your taxes today are likely to be lower than those you might incur in retirement, Criscuolo explains. Remember that converting to a Roth now will mean you will not be faced with higher tax rates should they be raised in the future.
Another benefit of a Roth account is that you do not have to take required minimum distributions in retirement as set by the IRS.
On the other hand, conversion is not a good idea if you do not have the funds available outside your IRA to pay the tax on the Roth account now. Paying the taxes due out of the funds you want to place in your IRA means you will have a lower balance in your Roth account. Also, not only will you be pushed into a higher tax bracket, but you also will not be able to get back the taxes you will need to pay when you convert the account.
• Avoid being too conservative in your investments.
Understandably, you will want to protect your money by moving it into investments that are less volatile, Criscuolo says. You should, however, not move away from stocks entirely. If you do, inflation is likely to eat away at your investment.
Consider a conservative portfolio, such as investing 45% in stocks, 5% in cash and 55% in bonds, Criscuolo suggests. Such a mix is just an example. The best balance might be different for different people, he adds.
It is important to realize, however, that you should not be so conservative that your funds are eaten away by inflation. In short, being too conservative is as risky as being too aggressive.
• Conduct a cash flow analysis of your retirement savings.
Check whether the amounts you are projected to receive in retirement will support the lifestyle you would like during your retirement years. A financial adviser will help you to conduct such an analysis.
Remember that planning for retirement is understanding what the possible scenarios are for your retirement under a variety of situations. That is the reason cash flow planning is helpful.
Remember, too, Criscuolo suggests, that you cannot predict your long-term care needs or future health. Avoid budgeting as though you and your spouse, if you are married, will always be in good health.
