Kayla Thompson, Fall 2023 Intern at Next Bloom Wealth, recently surveyed individuals in the Kansas City Area regarding their primary retirement planning concerns. Survey participants ranged from 1-2 years away from retirement, 3-7 years away from retirement, and 8+ years from retirement. To identify common trends, participants were asked the same set of questions.
This is the second of a three part series focusing on shared worries for those 3-7 years away from retirement. For each set of common concerns, Next Bloom Wealth provides advice on how to tackle them.
Retiring before age 65
Several survey participants shared the desire to retire before the age of 65. Common concerns include planning for healthcare before Medicare and the timing of taking Social Security.
Tackling Early Retirement
Determining whether you can afford to retire before 65 involves a comprehensive evaluation of various financial factors. Here are key considerations to help you assess your readiness for retirement at this age:
- Savings Assessment: Evaluate the amount of money you have saved in retirement accounts, such as 401(k)s, IRAs, and other investment accounts.
- Withdrawal Strategy: Consider a sustainable withdrawal strategy to ensure your retirement savings last throughout your retirement years. The 4% rule is a common guideline, suggesting an initial withdrawal rate of 4% of your portfolio, adjusted for inflation annually.
Other Sources of Income:
- Social Security Benefits: Determine the amount of Social Security benefits you would receive if you were to take social security early. Keep in mind that claiming benefits before your Full Retirement Age (FRA) will result in reduced monthly payments.
- Pension Income: If you have a pension, understand the amount you will receive and the terms of the payout.
- Other Income Streams: Consider any additional sources of income, such as rental income, part-time work, or dividends from investments.
- Health Insurance: If you retire before becoming eligible for Medicare at age 65, assess your options for health insurance coverage. Consider the cost of premiums, deductibles, and out-of-pocket expenses.
- COBRA and Marketplace Plans: Explore options like COBRA coverage from your employer or health insurance plans available through the Affordable Care Act (ACA) Marketplace.
Budget and Expenses:
- Living Expenses: Create a detailed budget that includes all your living expenses, including housing, utilities, groceries, transportation, and entertainment.
- Emergency Fund: Ensure you have an emergency fund to cover unexpected expenses or financial challenges during retirement.
Retiring with Dependents
Several survey participants shared concerns of transitioning into retirement while still caring for dependent children or parents. Participates are aware of the importance of considering the financial impact of caring for dependents, but are less confident in how to measure the financial obligation.
Tackling Dependents During Retirement
Retiring with dependents adds a layer of complexity to your retirement planning. It is essential determine how much financial support you can provide to your dependents without compromising your retirement security. Here are some considerations:
College Age Dependents
- Education Financing: Estimate the cost of your children’s education, including tuition, fees, room and board, and other related expenses. Consider using tools like a 529 savings plan to accumulate funds for education expenses with potential tax advantages.
- Healthcare: Ensure that your college-age dependents have adequate health insurance coverage. This might involve staying on a parent’s health insurance plan, obtaining coverage through the university, or exploring other options.
Special Needs Dependents
- Guardianship & Caregiver Succession Planning: Plan for the long-term care and guardianship of your special needs dependents, especially if they will outlive you. Identify potential caregivers and establish a plan for their transition into a caregiving role.
- Special Needs Trust: Establish a Special Needs Trust to protect your dependents’ eligibility for government benefits while providing for their specific needs. A properly drafted special needs trust can help ensure that your dependents receive financial support without jeopardizing their access to crucial services.
- Critical Legal & Estate Documents: Ensure you have a current power of attorney, wills and updated beneficiary designations, and healthcare proxies.
- Evaluate Living Arrangements: Assess the living arrangements for your dependent parents. Consider whether they will live with you, in their own home, or in alternative housing options.
Tax Informed Savings Strategies
Survey participants during this phase share a common desire to minimize taxes and maximize savings. A common concern among participants was whether they are properly leveraging the accounts available to them.
Tackling Savings & Tax Optimization
Tax optimization is crucial when saving for retirement because it allows you to maximize the growth of your retirement savings and minimize the impact of taxes on your income. Here are several strategies for tax-efficient retirement saving:
Maximize Employer Matches
- Take Full Advantage of Matches: If your employer offers a matching contribution to your retirement plan, contribute enough to maximize the employer match. Employer matches are essentially free money and can significantly boost your retirement savings.
Utilize Health Savings Accounts (HSAs):
- Triple Tax Benefits: If eligible, contribute to an HSA. HSA contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. HSAs can serve as a valuable tool for both healthcare and retirement planning.
- Capitalize on Investment Losses: Consider tax-loss harvesting within your taxable investment accounts. Offset capital gains by selling investments with losses, reducing your overall tax liability.
Consider Roth Contributions:
- Explore Roth: Consider options within retirement accounts, such as Roth 401(k) or Roth IRA contributions. While Roth contributions are not tax-deductible, qualified withdrawals in retirement are tax-free.
Remember that retirement planning is a dynamic process, and your financial situation may change over time. Regularly reassess your retirement plan, especially as you approach retirement, to ensure that it remains aligned with your goals and circumstances. Each individual’s situation is unique, so it’s crucial to tailor your retirement plan to your specific needs and objectives. If you would like a retirement readiness checkup, click here on ‘start here.’
About the author: Kayla Thompson is a senior at Park Hill South High School and is participating in the Professional Studies Program as a Fall 2023 intern at Next Bloom Wealth. She plans to attend Kansas State University and major in Finance.
This article is for educational purposes only. For individualized advice, please contact a qualified financial planner or tax professional.