It is hard to believe that 2022 is around the corner! When it comes to finances, 2021 was a challenging year. Many people continued to work remotely, many faced unemployment, and many others were forced to early retirement.
The most important lesson I learned from the global pandemic is that it pays to be prepared. As 2021 comes to an end, I want you to make sure that you take some time and complete your year-end retirement planning checklist.
This is my list of 7 tasks to complete before this year comes to a close.
1. 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 2021?
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 and plan to cut them in the next year.
Keep in mind that balancing your income with your spending is the key to saving more money. Make sure you have a budget set up for the next year and decide on how much money you need to save in 2022 to meet your retirement goals.
2. Look at your retirement planning goals.
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 commute, 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.
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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.
Review your savings and set up goals for 2022.
For many of us, conducting an end-of-year review of retirement savings is the best way to take steps on significant changes before the next year.
The first step is to look at how your retirement saving has stacked up. Have you maximized your retirement plan contributions? Have you increased your retirement contributions if your income has gone up during the past year?
If you have not this year, make it a goal to increase your contributions to retirement plans such as 401(k), IRA, and Roth IRA next year.
The important thing to remember is that retirement plan contributions allow you to save a lot of money on current taxes and not to miss any employer contributions.
When you are a few years away from retirement, being short on retirement savings can be problematic. Many of us spend less money due to the pandemic and working from home. We all spend less on Starbucks coffee, commute to work, eating out, vacations, and more. Stash that money into retirement savings!
Make it a next year’s goal to reduce your current spending, so you can put more money into your retirement savings.
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Check your progress on getting out of debt.
The end of the year is a great time to sit down and check your progress on paying down debt.
When you are working, you have years of earned income to pay a mortgage, credit card, student, or any other kind of loan. But once you retire, you will be living on a fixed income.
When you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.
Being debt-free gives you more freedom and money left in your pocket to enjoy your golden years than struggling to pay the mortgage or other debts.
To pay off all debt including a mortgage might not be realistic for everyone. However, the less debt you have, the better you are prepared financially for retirement.
Recommended Article: How to Pay Off Debt Before You Retire
3. Review your retirement income.
In my year-end review, I always find time to look at our future retirement income.
When we are working, we typically have a single employer and a single source of income – our 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).
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.
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.
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4. Set a target retirement date.
When do you plan to retire? Is it in the next 3 to 5 years? We all need to plan for the day when we are ready to retire or can no longer work.
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 into your retirement funds.
5. Think about the future medical cost.
Health care is expensive. Unfortunately, many baby boomers forget to include it in their financial plans. Medicare will cover most of your routine healthcare costs if you retire at age 65 or older. Unfortunately, it does not pay for all medical bills, and it does not pay for long-term care at all.
Underestimating health care expenses or how to pay for long-term care can be a big financial mistake.
Think about your future medical cost and find ways to protect your retirement savings. Consider buying long-term care insurance because it can help you pay for home health aides in your late years. If you buy long-term care insurance now, your premiums will be lower than if you wait several years.
We have not purchased any long-term care insurance yet, but looking at opening an HSA account. Many financial advisors recommend opening a health savings account (HSA).
The 2021 HSA contribution limits are:
- $3,600 for individual coverage
- $7,200 for family coverage
The money you can contribute to HSA is tax-deductible or pre-tax. And any increase in the value of your account is free from federal taxes. But it has to be used for qualified medical expenses if you do not want to pay additional taxes on your contributions.
You can put money into HSA every year until you enroll in Medicare benefits. After that, you are no longer allowed to contribute. However, money that you do not spend will be accumulating in this tax-free account until you need it in retirement.
6. Rebalance your portfolio.
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.
The important thing to remember is that a well-balanced portfolio will help you weather market downturns. Also, it will generate a retirement income to cover your living expenses when you are not working.
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.
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7. Review your will and living trust.
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.
Looking ahead to the new year
The world is still in the middle of the covid-19 pandemic, but there is an economic recovery. I am not sure what to expect of the upcoming year though I remain hopeful that things will start turning up eventually.
Our retirement goals for the new year should be simple – keep working and saving money for retirement. And for the rest of the world, my hopes are much like everyone else’s – that we get out of this global pandemic soon and get back to our normal life.
What is on your year-end retirement checklist? Have done any year-end review of your retirement goals?
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