One of the hardest conversations financial advisor Robert L. Casey has with new clients is about what will happen if they can’t retire when they want. This is why he says he can’t stress early planning enough. It is crucial to avoid surprises to avoid thinking you’re ready to turn in your two weeks, then realizing you can’t due to lack of funds. When preparing for retirement, there are five things he encourages you to consider to set yourself up for success — and two things he would avoid.
Consider These Major Factors When Saving For Retirement
These are big, broad categories, but they can’t be ignored and could be detrimental to your retirement planning. Let’s tackle them one by one.
1. Inflation
The goal in planning is to calculate worst-case scenarios for inflation. You and your planner should consider past market history and what works in hyperinflationary times.
Hyperinflation is when inflation rates exceed 50 percent. There is debate as to whether we are headed in that direction. Casey’s recommendations for how to invest during high inflation are commodities (agriculture, energy, and metals) and high-value dividend-paying stocks.
Historically, these tend to do well during high inflation. You also want to limit exposure to long-term bonds. He suggests shortening their duration so they are less affected by rising interest rates
2. Social Security
When and how to take Social Security is a big question for many of Casey’s clients. They want to know when to delay, who should withdraw first, and if it can be paused.
You can start withdrawing as early as 62 and you must start by age 70. You can also begin collecting and then pause it. Each plan is tailored to a specific client’s need, but in many cases, Casey recommends waiting until 70 for the older spouse.
While the younger spouse may be a little more flexible and could vary between their full retirement age or 70 years old depending on the age gap between the two.
3. Healthcare
Calculating healthcare prices and trends is instrumental in any retirement plan. Casey advises separating out this goal in your plan to be able to really look closely at potential costs and anything unexpected.
There are many factors to consider:
- Medicare Premiums for Parts B and D
- Out-of-pocket costs for copays
- Deductibles
- Premiums for your Medicare supplement
- Long-term care insurance
- Costs associated with long-term care itself
- Retiring before Medicare begins at age 65
Pro Tip: Learn more about navigating Medicare in retirement here.
4. Catch-Up Contributions
Once you reach 50, the government allows you to contribute extra savings into your retirement accounts, like your 401ks and IRAs. The IRAs allow for an additional $1,000 per year while your 401k will allow for an additional $6,500 per year. This rule is the same for Traditional or Roth IRAs and 401ks. In most cases, he does recommend utilizing catch-up contributions. Of course, you will need to discuss your personal plan with your financial advisor.
Pro Tip: If you are a high-income earner making more than $200,000 Adjusted Gross Income annually, Casey does not recommend catch-up contributions as the first option. It could make more sense to only contribute to a qualified account up to your match or income limit rather than adding additional contributions into a taxable brokerage account. This could help avoid long-term capital gains tax and could net you a higher return.
5. Health Savings Account (HSA)
A health savings account (HSA) is a pre-taxed savings account that lets you put aside money to pay for qualified medical expenses. This is not a “use-it-or-lose-it” type of account. With the current tax laws, he suggests anyone and everyone have an HSA. It will save you from paying ordinary income tax on the dollars saved. And it could make a difference of 5 to 18 percent in taxes, depending on your tax bracket.
Things To Avoid When Saving For Retirement
Now that you have a sense of how the five major factors above stand to affect your retirement, Casey advises you to avoid the following (and why).
1. Annuities
These are fixed amounts of money, received yearly for the rest of your life. It’s a contract between you and an insurance company. The insurer makes payments to you, either immediately or in the future. These are commission-based products.
Casey advises his clients against taking out annuities. He believes that there are better and less expensive options to achieve their retirement goals. Annuities also come with restraints: long-term contracts, low or no interest earned, high fees, and loss of control over your investment. Note that the age for withdrawal is 59.5.
2. Cash-Value Life Insurance
Casey says he knows this is a hot topic and that many retirees do use this option. However, he doesn’t typically recommend this because most people become self-insured as they age. You also pay high fees because it’s an insurance product. Many clients could take that cash and invest in options that would yield higher results with fewer handcuffs.
Pro Tip: There is one exception. If you or a loved one has immediate health issues and the policy has a death benefit, this type of life insurance policy could ease the burden on your family.
Planning For Retirement
Casey tells his clients, “If you fail to plan, then you plan to fail.” This may sound harsh, but he says he’s seen it happen over and over. If there are shortfalls in retirement savings, the earlier we know them, the better. A well-thought-out plan helps determine what levers need to be adjusted if anyone gets off track.
His final piece of advice: Never work with an advisor who does not understand your goals and is not keeping track of whether those goals are being met. Just like you wouldn’t let a doctor cut you open without an MRI or CT scan, don’t entrust your financial future to an advisor who hasn’t built a financial plan with your goals at its center.
This material was prepared by TravelAwaits and does not necessarily represent the views of the presenting party, or their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, including the loss of some or all of your investment. Past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
