The so-called “silver tsunami” of retirees is beginning to peak this year, with a record 4.1 million Americans reaching the age of 65 or older by 2024. Pensions stopped working, and a growing number of college-educated baby boomers wanted to keep their jobs despite being financially able to retire.
Still, as baby boomers reach what experts call the “peak 65 zone,” the number of retirees is expected to jump from about 10,000 per day over the past decade to more than 11,200, according to the Lifetime Income Alliance’s Retirement Income Institute. The surge in retirees is expected to continue until 2027.
While baby boomers have had decades to save, invest and prepare for their next chapter, there are some strategies they may have overlooked. For those approaching retirement, financial advisors offer these five tips to help maximize their money and longevity in their golden years.
1. Consider a Roth Conversion
Most people are familiar with 401(k)s and IRAs, but there are other retirement accounts, such as Roth IRAs, included in your financial plan. Although they are often considered best for younger workers due to the income caps on contributions, you can still receive Roth benefits even if you make too much money through a Roth conversion to contribute directly to a Roth.
As the name suggests, this strategy involves converting your traditional IRA to a Roth IRA. When you make a conversion, you’re essentially moving money from a pre-tax instrument to a post-tax instrument; you’ll now be taxed on the money at your current rate, and it will then grow tax-free.
The benefits are many, consultants say. You’ll enjoy tax-free withdrawals in retirement (assuming you meet other requirements) and no required minimum distributions during your lifetime. This is a great way to add tax diversification to your financial plan and reduce your lifetime tax bill.
2. Optimize your taxable accounts
Speaking of which, tax diversification isn’t limited to 401(k)s and IRAs. Taxable accounts also play an important role, and it’s important to know which account to use first.
“With a 401(k) or IRA, it’s all pre-tax and subject to income taxes, so the federal and state governments probably ‘own’ about 30 to 50 percent of those accounts,” Scott Bishop of Texas (Scott Bishop) said. “The results may be different if the money is deposited into a Roth IRA or taxable brokerage account.”
Taxable accounts do not have the tax benefits of retirement accounts, but they also do not have the limitations that retirement accounts do. It allows you to invest for the future without contribution limits, withdrawal penalties, required distributions, and more.
Having some money in a brokerage account is especially helpful if you’re unsure of your tax bracket in retirement; withdrawals from taxable accounts are taxed at capital gains rates, while withdrawals from 401(k) accounts are taxed at ordinary income tax rates Taxes (may be higher). With taxable accounts, only earnings are taxed, whereas entire withdrawals from a 401(k) are taxed. Having a range of accounts allows you to develop a strategic withdrawal strategy.
“Just as you diversify your investments to help cope with market uncertainty, diversifying your account’s tax treatment can help you cope with the uncertainty of the tax environment,” writes Judith Ward, CFP at T and manage your retirement income.
Of course, you’ll want to set aside a large sum of cash just in case of emergencies. The ideal amount is six months’ worth, says Wes Battle, CFP in Maryland.
3. Delay social security
Although some people can start collecting Social Security benefits as early as age 62, financial advisors say it’s better to delay until age 70, or at least until so-called full retirement age, if possible. This will increase your benefit amount and help lower your taxable income because you’ll be spending some of the savings in other retirement accounts first. “This is one of the most overlooked opportunities in financial planning,” says Andy Baxley, CFP, Illinois.
Full retirement age depends on when you were born. For people born in 1960 and later, the full retirement age is 67. If you were born before 1955, that’s 66 (and you’re already that old). Postponing until age 70 means you can earn “delayed retirement” points, resulting in higher benefits.
Even if 70 is unlikely, delaying it by a few years or months can have a big impact on the amount of the check you ultimately receive. You can check your estimated benefit amount on your annual Social Security statement, which you can view on the Social Security Administration’s website.
4. Fine-tune your budget
Many people (and the financial media) are focused on reaching a magic retirement savings “number,” whether it’s $1 million or $1.46 million or more. But Bishop said the more important number for people approaching retirement is actually the number in their retirement budget. They can be divided into the following categories:
- fixed costs. That’s your mortgage or rent, insurance, property taxes, food, health care, and more.
- discretionary expenses. This includes estimated costs for fun things to do in retirement, including travel, dining out, and more.
- planned future costs. Most of the time, fixed expenses and discretionary expenses may make up the bulk of your budget, but if you don’t anticipate other expenses, such as home repairs, a new car, long-term care costs, etc., you may run into trouble.
Bishop said the budget “needs to be thoughtful and conservative.” An advisor can help you consider contingent costs and develop an option that works for your family.
That said, your budget can change at any time. Sandi Weaver, CFP in Kansas, recommends testing monthly withdrawal amounts for about six months and then readjusting them as needed. Expenses will change in retirement, and your plans can change.
“Don’t sweat the small stuff,” Weaver said. “The retirement phase is long; [potentially] 30+ years, so if your finances go awry within a year or two, you can get it back on track.
5. Develop a “non-retirement plan”
Ultimately, advisors say that while it’s important to have the right financial and tax strategies in place, it’s equally important to make the most of retirement: You have a financial plan, but you also need an overall life plan. How will you stay healthy physically and mentally? Are you interested in volunteering? Would it be better to work part-time? Do you want to help your grandson? Without careful thought, filling your time may be more difficult than you think.
One strategy is to create what is called a non-retirement plan.Peabody Award-winning journalist Mark Walton outlines in his book Not retiring: How productive people live happily, this includes thinking about what fascinates you and what you can spend your time on in retirement. It can be a (full-time or part-time) job, but it doesn’t have to be.
Howard Pressman, a certified financial planner in Virginia, said: “Retirees should remember that those who retire and work in certain jobs are better than those who no longer work in certain jobs. “Twenty-four hours is a long time if you’re just sitting on your porch yelling at your neighbor’s kids to stay off your lawn.”
He suggests asking yourself some questions, including where will you live? How will you stay engaged? How will you stay active? How will you make up for lost social connections at work?
“The clearer the vision, the easier the transition will be,” Pressman said. “There’s a big difference between a financially secure retirement and a happy retirement.”
