Is your retirement within sight? As the timeline toward this goal shortens, it’s a good idea to reevaluate your portfolio risk as well as your investment and savings strategy. How can you continue to accumulate money while still keeping an eye on the future? Consider these strategies before you start daydreaming about your life in retirement.
Reduce Portfolio Risk
As your retirement draws nearer, take stock of the risk your investments carry. Maintaining an aggressive investment strategy with the potential for high returns can be tempting, but it also assumes more risk. If you have more volatile investments at this point in your journey, it can be tough to recoup any losses in the event of a market dip.
Rebalancing and lowering your portfolio’s risk profile could mean that you see lower returns. However, it may also mean more consistency, which is important because you anticipate using the money within a decade instead of multiple decades from now. Bear in mind that if your money is already invested in a target-date fund, the fund automatically makes this kind of readjustment.
To assess your current retirement investments, you can write down each one and categorize them by risk. If you’re in doubt or want assistance in reviewing them in total, we can help.
Play “Catch Up” With Your IRA
As you approach retirement, take advantage of additional tax-free benefits. People age 50 or older can make additional IRA contributions. Instead of the standard $6,000 a year contribution limit, those ages 50+ can contribute an additional $1,000 each year.
Investors over 50 are also generally permitted to make catch-up contributions to their employer-sponsored 401(k)s or self-employed SIMPLE-IRAs.
Maxing out contributions to these retirement accounts and taking advantage of their tax benefits can be effective ways to grow and compound investments quickly. Compounding is when you earn money on your original investment and on any earnings from that original investment.
Invest in the Right IRA for Your Retirement Strategy
While you’re looking into additional contributions to your IRA, make sure you’re picking the right type for your retirement strategy.
These guidelines can be a general rule of thumb:
A Roth IRA could be the right fit if you’re in a lower tax bracket and anticipate your income (and tax rate) will go up before retirement.
A traditional IRA could be just the ticket if you think your tax rate will be lower than its current rate when you’re ready to withdraw the investment.
Choosing between the IRA types depends on where you are now, how you anticipate your income may grow, and when you plan to retire or begin withdrawing from your retirement accounts.
Don’t Forget Your HSA
With your risk rebalanced and retirement contributions maxed out, it may be time to take a look at funding a Health Savings Account (HSA) if you have a high-deductible health plan, which allows you to have this type of account. An HSA can be used immediately to cover medical expenses, but it’s also a great tool for future retirement, since it offers tax benefits.
It’s important to know that the final benefit changes as you age. At age 65, you can use any remaining funds in your HSA as retirement income, not just medical expenses. HSA contributions don’t count against other retirement account limits and can grow tax-free.
Your HSA contributions are tax-deductible, have tax-deferred earnings and offer tax- free withdrawals as long as you use the funds for a qualified medical expense. And individuals age 55 and over can make catch-up contributions to their HSA.
Avoid Withdrawing from Retirement Accounts
Once investors hit 59½, they may breathe a sigh of relief. That’s when they can officially withdraw from retirement plans and IRAs without penalty. However, if you can avoid withdrawing from those accounts immediately, you’ll give them more time to grow and be part of your plan for helping make your money last as long as you need it to.
You may want to continue to add to these retirement plans as long as you’re still earning income and live off your income instead of retirement funds.
The SECURE Act has changed the way investors are required to take money from retirement funds. Before the SECURE Act, investors were required to take minimum distributions from their traditional IRA and non-Roth retirement accounts at 70½. Now, required minimum distributions (RMDs) don’t start until 72. That means that investors have more time to grow their retirement funds before taking RMDs.
You’re still allowed to start getting money from your retirement accounts at 59½. But to maximize your investment, you might consider living off your regular paychecks or other incomes as long as you can.
Plan to Wait for Full Benefits
If you stay in the workforce a little longer, you may take advantage of more Social Security benefits. According to the Social Security Administration’s benefits, people born after 1960 reach “full retirement age” at 67 and receive 100% of their benefits at that age.
If you apply for your Social Security benefits just five years earlier, at age 62, you’ll receive around 30% less of your benefits. Wait until 70 to apply for Social Security? You’ll actually get 24% more benefits than you would at 67.*
Depending on your investment strategy, waiting to apply for benefits to maximize pension or Social Security could lead to significantly more.
As you get closer to retirement, reconsidering risk and making an effort to max out tax-advantaged accounts may help you save more before reaching the retirement finish line.
Retirement Benefits, (taking early) ssa.gov/benefits/retirement/planner/agereduction.html, (delaying) ssa.gov/benefits/retirement/planner/1960-delay.html, both accessed May 2020.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.