For many Americans, retirement may look different in 2021 than it has in years past. The severe economic impact of the Covid-19 pandemic could push many people to consider retiring early, with less saved than they may need.
Whether or not your retirement plans are looking secure, the new year is a great time to review where you stand. Regardless of your particular financial situation, the same retirement principles apply this year as always: reduce spending, plan for surprises, make conservative decisions on retirement savings and Social Security, and keep earning income if you can.
Here are 10 tips to help you tune up your retirement planning in the new year. Some might sound familiar; some will sound brand-new, thanks to Covid-19. All of them are essential—as is getting started on them as soon as possible.
1. Be Ready for Early, Unplanned Retirement
It’s a fact of life—many workers are forced to retire before they want to. According to a 2019 Employee Benefit Research Institute (EBRI) survey, nearly half of retirees left the workforce before their target retirement age. Covid-19 has accelerated this trend, says Desmond Henry, a Topeka, Kansas-based certified financial planner (CFP).
“Sometimes it’s involuntarily, due to layoffs, or older workers who are at higher risk not feeling comfortable returning to their offices and potentially exposing themselves to the virus. Unfortunately, no matter what the case, the timing is earlier than many had planned,” says Henry.
That strongly suggests that workers in their 50s and 60s should start making contingency retirement plans. With luck, a vaccine-led economic recovery in 2021 will make jobs easier to find and layoffs less common. But hope is not a plan, so even if retirement seems far off, now is a good time to start making a break-glass-in-case-of-emergency strategy for early retirement.
2. Deal with Your Debt Immediately
The best time to pay off debt is while you’re still working. If you plan to retire within the next 12 months—or even if retirement is a more remote possibility—prioritize eliminating those credit card balances, student loans and car loans, and even mortgages.
The number of 60 and 70-somethings with mortgages, credit card debt, and student loans has skyrocketed. It’s very challenging to pay down debt when you’re on a fixed income, so put in the extra overtime while you can to ease the debt burden later.
3. Prepare a Health Insurance Strategy
Americans are eligible to enroll in Medicare at age 65—there can even be penalties for failing to enroll on time. Make a plan to sign up in the months leading up to your 65th birthday, giving the coverage time to kick in.
Medicare enrollment is only the beginning of your retirement healthcare strategy. Fidelity estimates that a typical American couple will spend almost $300,000 on things like co-pays, additional premiums and other uncovered medical expenses during their retirement years. You’ll probably be paying any out-of-pocket expenses from your retirement savings, so you should factor them into your plans.
If you are forced to retire before age 65, you’ll also need to obtain health insurance on your own until Medicare kicks in. Can COBRA provide a bridge? The Affordable Care Act? Does your company provide some kind of retiree health coverage? Make a plan now, before these choices are forced upon you.
4. Maximize Your Health Savings Account (HSA) Contributions
One way to pay for health insurance premiums in early retirement or other uncovered expenses later in life is with a robust nest-egg socked away in a health savings account. If you started funding an HSA this year, your contributions could grow tax free for up to two or three decades, providing a great pot of emergency cash later in life.
“Health savings accounts offer a triple and sometimes quadruple benefit,” says Liz Weston, a CFP, columnist and author of several books, including The 10 Commandments of Money. “Contributions are tax-deductible, the money grows tax-deferred from year to year and withdrawals are tax free if used for qualified medical expenses. Plus, many employers will contribute cash to the accounts as an inducement to sign up.”
HSAs are generally tied to high-deductible health insurance plans, so they aren’t for everyone. But Weston points out that they are a good option for both consumers who are very healthy, with few healthcare expenses, and for patients who often exceed their annual deductible.
5. Understand Your Retirement Income Options
You can start collecting Social Security benefits at age 62. But should you? You can start taking 401(k) distributions penalty-free at age 59 ½. Is that too early? Many people are better served putting off both for as long as possible. But by age 72, most savers have to start making required minimum distributions (RMDs).
There are some general guideposts for retirement spending, like the 4% rule, but it’s best to make a long-term plan with a financial advisor who understands the nuances of these choices, including the tax and estate planning consequences. It’s best to get started on spending plans well in advance of retirement.
A professional might suggest you spend your last working year converting some of your retirement savings into Roth accounts, for example. You may face extra taxes upon conversion, but you’ll be able to make tax-free withdrawals in the future, which could make sense for your plans.
Even with all this talk of drawing accounts down, you still need to maintain an investing strategy: Retirement can last for decades, so you need to keep investing for the future, even as you begin to spend your savings.
“I like to use a bucketing strategy with my clients, which involves planning your withdrawals with different time segments, or buckets,” says Henry .
One bucket might be for the next couple of years, which you’d accordingly invest very conservatively. “This ensures that (retirees) have a ‘war chest’ of safe money to survive a market downturn without having to sell their stocks at the lows,” Henry says. Another bucket might be intended for spending after 2030, so it can be put into riskier investments.
6. Practice Retirement Spending Now
A common guideline you’ll hear is that retirees should be prepared to replace 80% of their income in retirement. Rules of thumb can be useful, but this one is fairly random. It’s better to develop a plan around real spending needs.
Over the course of the next year, meticulously track your spending to provide yourself a realistic picture of your income requirements in the first year of retirement. Make adjustments as needed—you might not spend as much on commuting costs when you aren’t working; perhaps you’ll spend more on travel—but you’ll find this to be a good guide to what life may cost during early retirement.
On this front, there is a silver lining to the Covid-19 crisis. “One positive I’ve seen from the pandemic is that discretionary spending has decreased because people are staying at home, and the savings rate is at an all-time high,” says Henry. While this may help those behind on retirement savings catch up some, keep in mind that it may also mean spending during the coming year may not be a good metric for estimating future spending patterns.
7. Did You Take Out a Coronavirus Hardship Withdrawal?
The Coronavirus Aid, Relief and Economic Security Act (CARES) Act eased the rules for taking early withdrawals from tax-advantaged retirement accounts. People who were impacted by Covid-19 were permitted to withdraw up to $100,000 from retirement accounts like 401(k)s and IRAs. CARES waived early withdrawal penalties, but you still owed any applicable income taxes on the amount—although you had the option to spread the tax bill over three years.
Liz Weston advises you to pay the tax bill all at once, if you can.
“If you took the withdrawal because you lost your job but you’re re-employed by the time your taxes are due, you might want to go ahead and pay the whole tax bill when you file your next return. That’s because your tax bracket is likely to be lower in 2020 than afterward” due to your temporary loss of income, says Weston.
Savers also have three years to repay the money into their retirement accounts, which prevents you from owing any taxes and, even more important, allows that money to get back to work compounding your investment returns for retirement. If you are planning to retire soon, you should focus on replenishing early withdrawals.
8. Reassess Your Post-Crisis Risk Tolerance
We’ve all been through a major trauma in 2020, and that included watching our retirement savings swoon. That’ll never happen again, right? Wrong, according to Bobbi Rebell, CFP and host of the Financial Grownup podcast.
“Be really honest about whether you could—and how you would—course correct if another ‘surprise’ like a pandemic impacted your income streams,” says Rebell. “I would proceed cautiously and with a big safety net.
Desmond echoes the same concerns. “We’ve always faced uncertainty and that’s not going to change. It’s almost inevitable that a recent retiree will have to withstand multiple financial crises during their retirement, which is why it’s so important to prepare for them.”
How can retirees and those approaching retirement plan for risks like this? It’s not easy at the moment. Old-fashioned safe retirement tools like certificates of deposit (CDs) or Treasury bonds offer paltry returns, thanks to the historically low interest rates. That’s probably not going to change any time soon.
“This makes it tough for those trying to preserve wealth or generate income from their investments,” says Henry. “It’s an even bigger problem for those retirees who don’t have enough money saved for retirement and pension funds without enough capital to cover their obligations.”
He believes the low-rate environment is pushing people to take on more risk, which could lead to some “interesting asset allocation decisions” in the years ahead.
9. Consider Part-Time Work for Retirement
Whether you’re already retired or you’re making plans for retirement, now’s a good time to think about how you might earn additional income in retirement by taking a part-time job.
If you are planning to retire in the next 12 months, you should be forging relationships that might lead to occasional consulting gigs down the road or negotiating some form of part-time work wind-down.
“Are you going cold turkey or keeping some part-time work options?” asks Rebell.
Another option: Get to work figuring out how a hobby or skill might turn into extra income. The gig economy, for all its flaws, also offers retirees plenty of choices to earn a few extra dollars. Now might be the time to turn the basement into an Airbnb rental or to try out a ridesharing service.
Remember, every extra dollar you earn is a dollar that can keep gaining value in a retirement account for another 10, 20 or even 30 years.
10. Should You Postpone Retirement?
Lists of retirement tips like this one might make you gun-shy about leaving the workforce in 2021. That’s OK. Given all the economic uncertainty facing the United States and the world, it could be wise to temporarily postpone your retirement plans.
“If you haven’t saved enough for retirement, the harsh reality is you might need to consider delaying it, even if it’s for a year or two,” says Henry. “If you’ve been laid off, try finding any work, even part-time work, that can help postpone the time when you start your Social
Security benefits and begin tapping into your retirement savings.” Then you can save all the thinking you did today for 2022 or 2023, so you’ll be even more ready when the time comes.
-Bob Sullivan & Benjamin Curry | Forbes