It is hard to believe that the new year 2023 is around the corner!
I do not know about you but I cannot wait! Financially, 2022 was a challenging year. According to Goldman Sachs, ‘2022 is likely to end up as the sixth-most volatile year since the Great Depression’. The volatile stock market and the daily reminders of high inflation and rising prices on everything will likely make you worried about the cost of your future retirement.
But the most important lesson I learned over the past years, including the global pandemic, is that there are rewards to being prepared. I truly believe that the year-end retirement planning checklist is a great way to look back at 2022 and make sure you are on the right path to achieve your retirement goals in 2023.
Below is a helpful list of 10 tasks to complete before 2022 comes to a close.
1. Create financial goals for the next year.
Do you know how much money you need to retire? What are you going to do about rising inflation? How is it going to affect your retirement income?
How much will it cost to help your parent’s long-term care needs, pay for your healthcare in retirement, or pay for the vacation you really want?
Maybe none of that applies to you today but you want to know how to project into the future. It is important that you know how much you will need to live the life you want in retirement.
What other financial goals do you have?
2. Set a target retirement age.
Retirement is the one common financial goal we all share. We all need to plan for the day when we can no longer work or are just ready to retire.
The target date is the year closest to the year you plan to retire. Age 65 used to be the magic number, the age at which most people retire. Yet that golden age has changed. Many people are working longer. Even though they may want to retire, it is not always possible because they do not have enough money to retire.
Take some time to set a realistic target retirement date. Based on your estimated retirement income and expenses, you can plan your own retirement strategy.
Looking at your target retirement date and retirement income, you can determine if you have enough money saved for the next 20 to 30 years. If it is not enough for a comfortable retirement, move the date and save more in your retirement funds.
Just remember that where you live and how much you can afford to spend in retirement will impact your retirement lifestyle.
3. Look at your spending.
The end of the year is a great time to look at your personal spending and see where your money is going. This year has been full of change and adjustment. With many people working remotely, there is a good chance your spending habits have changed as well.
How did you do this year? Have you tracked your spending against your budget? Did you get a full picture of your finances and know how much money you have saved (or not) in 2022?
If you have struggled this year, decide how to improve your financial situation for the next year. Are there debts you should be making a priority to pay off? Look at your budget and decide if there were parts that were difficult to stick to.
Look at your credit card and bank statements and see what expenses could be avoided this year. Then set up a budget for the next year and decide on how much money you need to save in 2023 to meet your retirement goals.
4. Get a clear picture of your spending in retirement.
Do you know how are you going to pay for your retirement years?
First, think about your current overall cost of living. Then, think about if you have enough income to sustain your current lifestyle in retirement?
Calculate how much is your nest egg.
When you are near retirement, it is important to know how much money you will need to live comfortably for the rest of your life.
If you still have no idea how much money you will need, look at your current expenses and then evaluate how they might change in the future.
When you retire, you do not need a lot of things that you did when you were working. Generally, the costs of commuting, take-out lunches, and business clothes will go down. However, you might start spending more money on travel, hobbies, and activities.
Calculating your nest egg is easy if you already have a budget and know how much you spend now. The next step is to get a clear picture of how it might change in the future based on your retirement lifestyle.
Another option to figure out how much money you need to retire is to replace 70 to 80 percent of your annual pre-retirement income. For example, if you earn $70,000 per year before retirement, you should expect to live off $49,000 to $56,000 per year.
5. Review the source of your retirement income.
In my year-end review, I always find time to look at our future retirement income.
I usually look at our current Social Security, retirement, and investment funds statements to get a clear picture of our potential retirement income. I wanted to make sure that we are on track to our retirement goals and have enough money to cover our living expenses when we stop working.
When you are working, you typically have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income – Social Security, pension, part-time job, investments, and retirement savings (401k, IRA, Roth IRA, Roth 401k).
To make your assets last through the next 20 or 30 years, use the rule of thumb to withdraw 4 percent of your retirement money annually. For example, if you have $500,000 in retirement funds, you can spend roughly $20,000 ($500,000 x 0.04) per year when you retire. Add this number to your Social Security, pension, and other savings, and calculate if it is enough to support the retirement of your dreams.
- 3 Best Ways to Generate Retirement Income
- What is the Source of Your Income in Retirement?
- 5 Best Ways to Withdraw Money From Retirement Savings
6. Check your progress on paying down debt.
The end of the year is a great time to sit down and check your progress on paying down debt.
Ideally, you should be entering the retirement debt-free, but in the real world that is not always achievable. So, it may be okay for you to retire before you pay off your big debt like a mortgage, cars, and student loans.
Just make sure you understand the implications of retiring with debt because big withdrawals from retirement funds could push you into a higher tax bracket.
Yet, if you have several years before retirement, try to reduce your debt so you will have more money available for your lifestyle in retirement.
Pay off all credit cards and personal loan debt.
When it comes to debt, plan to pay off high-interest rates debt first. Credit card APRs have increased this year with the average rate around 19 percent. A credit card debt has become the most expensive debt for many people.
By reducing the existing debt and limiting new debt you can minimize the amount of retirement income that you will spend on interest payments. For example, if your monthly retirement budget includes a $350 car payment and a $700 credit card payment, you will obviously be able to spend $1,050 a month less than someone without those bills.
If you pay off a credit card that charges 19 percent interest, it’s like earning 19 percent on a risk-free investment.
Once, you paid off your credit card debt, start planning on paying off your mortgage. If you have a low-interest rate, you can plan to pay off the mortgage early by making “extra” mortgage payments each month.
With a mortgage paid off before retirement, you will have the extra money you need to travel in style or spoil your grandkids for years to come. Just remember that taking large withdrawals from your retirement accounts to pay off your mortgage could throw you into a higher tax bracket.
7. Review your savings progress.
Did you spend less money this year due to the fear of covid? Did you spend less money on eating out, vacations, or concerts? Did you buy less gas because you worked remotely?
If yes, stash those funds into retirement savings. If you are still working, try to boost your savings rate. It is never too late to increase the size of your nest egg. If you are in your early 50s, you still have close to 15 years of working to save for your retirement.
You should save at least 15 percent of your gross income in retirement accounts such as 401(k), IRA, Roth IRA, or Roth 401(k).
A key factor in any retirement plan is having enough savings to last for the next 20 to 30 years.
8. Check your readiness for unexpected expenses.
Another important key factor in any solid financial plan is having enough savings to fall back on during emergency. To be prepared, put it on your checklist to have two funds – a rainy-day fund and an emergency fund.
Typically, a rainy-day fund is smaller, up to $2,500 for smaller expenses. An emergency fund can be as much as 9 or 12 months of living expenses – $10,000 to $50,000 or more depending on your expenses.
Whichever way you build your financial cushion, be sure you do it. There is no better way to have peace of mind than knowing you have funds to cover expenses when you need them.
9. Review your asset allocation and simplify your portfolio.
As you are getting closer to retirement, it is important to have a clear and accurate picture of your complete investment portfolio.
If your portfolio is spread out among several investment companies, it will become difficult to keep track of all that information. Think about consolidating all your accounts in one place like Vanguard. So, you will get simplified reporting, low costs, and low fees.
The financial markets have fallen sharply this year. Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth. You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals.
It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds. But stocks provide growth and investing for growth is important. If you retire at 65 and spend 20 years in retirement, you need to have enough growth in your portfolio to make money last that long.
10. Keep will and trusts up to date.
Another important part of your year-end retirement checklist is the status of your will and/ or revocable living trust.
Keep them up to date and make sure you have suitable executors, trustees, and guardians in place. Additionally, you will want to make sure your list of beneficiaries is up to date as well. If you have welcomed a grandchild to the family do not forget to add his/her name to the list. Also, if there has been a change in the family such as a marriage, divorce, or death, make sure to update your beneficiary list.
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