If ever there was a year that offered retirees the opportunity to get a gut check on their finances, this is it. For many people, their lives, finances and their spending habits were all changed in dramatically – and some say permanently – by the pandemic. In addition, there were changes in tax laws affecting retirees and retirement accounts.
“Build a plan that plans for the worst.”
“Build a plan that plans for the worst,” says Kristian Finfrock, founder and financial advisor with Retirement Income Strategies in Madison, Wis. “If 2020 taught us anything, expect the unexpected. The fallout of covid, the economy was shut down, the political unrest on streets, and a very divisive presidential election, caused people to take reactionary measures. You should make changes that are proactive.”
Steps retirees should take to prepare financially for the new year include:
Take inventory of all your accounts
“…you are already thinking about taxes,” says Finfrock. “Take inventory of everything you have – bank accounts, income if you are working, if not working Social Security and pensions, real estate, investments, and retirement accounts.”
Do a budget
Look at your income and expenses. Do a zero-based budget to determine where your money is going. Is there more room for savings and investments, or are you spending more than you are earning? “This year, lot of people didn’t spend money,” says Ben Fuchs, founder of Fuchs Financial in Hartford, Conn. “Ask yourself, ‘was my life worse without these pieces and can I continue with them? Maybe I can allocate more money to something else.’”
“If you have debt and credit card debt, do a deep dive into what you are doing, but be practical about it, and give yourself a fun budget,” Fuchs says. “When I ask clients what they are spending, they give me a budget and it’s usually 98 percent wrong. Look at what you spend for the entire year. Then look at where you can cut back and focus on those specifically. If you spent $500 on restaurants last month, do $300 this month.”
Review taxes and Required Minimum Distributions
The SECURE Act changed the beginning date for Required Minimum Mistributions (RMD) from 70 ½ to 72. (The IRS requires you to begin RMD withdrawals from 401(k)s and IRAs to, in effect, force you to pay taxes on deferred accounts.) The CARES Act suspended mandatory RMD for 2020.
For people who suspended their RMD, it may offer the opportunity for Roth conversions or “discretionary withdrawals,” says Chris Chaney, vice president and financial consultant at Fort Pitt Capital Group in Pittsburgh, Pa. Taxes are at historic lows, and it may make sense to do the conversion and pay the taxes now before the Tax Cut and Jobs Act expires. The reduction in business taxes is permanent, but the cuts in individual and estate tax rates expire in 2025.
Rebalance your portfolio
“We’ve had a year of wildly varying returns,” says Chaney. “There was a 30 percent or greater gap between the performance of growth stocks and value stocks. Growth stocks have done extremely well. It’s a good time to take some profits off the table and rebalance to assets that have underperformed.”
Review your beneficiaries and update your estate plan
If the pandemic has told us anything, it’s that things can change suddenly and quickly. Make sure your beneficiaries are up to date. Make sure you and your spouse or partner have power of attorneys and advanced health care directive. And determine if you need a will vs. a trust. With a will your estate will likely go through probate.