1. PLAN FOR A LONG(ER) LIFE AND HOW TO DO IT WELL (PART 1)

The longer you live, the longer your investments must last
At least one member of a 65-year-old couple has nearly a 50/50 chance of reaching 90 and a one-in-five chance of turning 95 or older. Living longer affects key retirement decisions such as how to make the most of your time, how to invest, when to claim Social Security and whether you might need long-term care.

Some are likely to live much longer: more than 1 in 10 women and 1 in 20 men are projected to make it to 100 or older if they self-report non-smoking and excellent health. And keep in mind that with new medical advances, family history is not destiny, so you may live longer than you think.

Accordingly, your retirement plan should account for 35 or more years of living expenses. That means your investments need to continue growing long after you stop working to keep pace with inflation and reduce the risk of outliving your money.

1. PLAN FOR A LONG(ER) LIFE AND HOW TO DO IT WELL (PART 2)

How you spend your time will make a difference for your financial plan and for your life satisfaction.
As social and leisure activities expand, a successful retirement depends on the “PUSHES”; having a sense of purpose, using time to participate in activities or work, socializing, healthy behaviors, experiencing gratitude, and focusing on strengths.

2. CREATE THE PLAN YOU NEED FOR THE RETIREMENT YOU WANT

Define your goal and craft a plan

A retirement plan doesn’t have to be daunting—it’s important to just get started. This chart can help you determine if you are generally on the right path using the assumptions outlined on the right side of the page. The next step is to develop a plan that will take your own situation into account. Once you know where you’re heading, a comprehensive retirement plan is like any good GPS. It helps you get and stay on track to your destination—even as your life, the markets and the economy change.

The retirement savings checkpoint tells you how much you should have invested today to be on pace toward maintaining your current lifestyle through 35 years of retirement. If you’re below your checkpoint today or have a different vision for your retirement, you may need to work with a financial professional to adjust your plan. Be sure to review and update it regularly.

Save, save, save

A key factor in achieving a successful retirement is to save as much as possible during your working years. Your checkpoint assumes that you save 10% of your gross annual income —nearly twice the average annual savings rate in America. The good news is that you are in complete control of how much you save, and your employer may help with a company match, so make savings a priority.

3. MAKE AN INFORMED DECISION ABOUT SOCIAL SECURITY

Social Security pays you more for waiting

Social Security benefits are calculated based on your 35 best earning years. You are eligible for 100% of your benefit at your Full Retirement Age (FRA). Individuals born in 1960 and later have an FRA of 67. Claiming at 62 will permanently reduce your benefit by as much as 30%. Waiting to claim after FRA gives you an 8% increase each year in your benefit amount for a maximum of 124% or more.

Times they are a-changing

Individuals turning 62 in 2022 will have an FRA of 67 as a result of the Social Security Amendments Act of 1983. This Act moves FRA 2 months each year for those born between 1955 and 1959. An FRA of 67 results in even less if you claim early and not quite as much at age 70.

4. UNDERSTAND HEALTH CARE COSTS (PART 1)

Plan on rapidly rising expenses

Medical expenses tend to rise sharply throughout retirement as we grow older and require more care at higher prices. Out-of-pocket costs for an average 65-year-old retiree on traditional Medicare are projected to almost triple from around $500 per month this year to nearly $1,500 in today’s dollars by age 95.

These costs are averages per person and do not include most long-term care. Costs may be much higher if you have expensive prescriptions.

Include health care costs as a separate expense in your retirement plan and assume a 6.0% annual growth rate to be conservative. You may want to assess your long-term care alternatives when you are healthy, or as early as age 50, when the most options are likely available to you.

4. UNDERSTAND HEALTH CARE COSTS (PART 2)

Be aware of possible Medicare surcharges

Discuss the possibility of higher Medicare premiums with your financial professional

You’ll pay more in Medicare premiums if your Modified Adjusted Gross Income (MAGI) is above certain thresholds, starting at $91,000 filing single or $182,000 filing jointly. MAGI is Adjusted Gross Income (AGI) plus tax-exempt interest for this purpose.

And understand that for all but the top category, the income thresholds for singles are half that for couples, making widows and widowers more likely to have to pay extra. A large Roth conversion in one year, a large asset sale or even Required Minimum Distributions (RMDs) can push some individuals over the thresholds, so you may want to get some advice from a financial or tax professional.

5. MINIMIZE TAXES TO MAXIMIZE YOUR RETIREMENT

4 Ways to pay less in taxes and keep more for retirement

1. Optimize savings vehicles by opening tax-advantaged accounts (401(k)s, IRAs, HSAs) and consider diversifying across pre-tax/deductible and Roth options if available to you. As a general rule, saving into a Roth when income is relatively low and shifting as your income rises may result in lower taxes overall.

2. Consider deferring income when you are in your peak earnings years until you are in a lower tax bracket in retirement. However, if you are already concentrated in tax-deferred accounts, contributing to a Roth may help you diversify your retirement tax picture.

3. Work with your accountant and advisor to actively manage your tax picture throughout retirement. Higher incomes can also affect your Medicare premiums and taxability of Social Security benefits. Consider proactive Roth conversions in years when your tax rate is low.

4. Maximize your after-tax return by holding your highest-taxed investments (those generating ordinary income or short-term gains) in tax-advantaged accounts, after funding your emergency reserves. Look to offset gains with losses when rebalancing your portfolio.

6. ALIGN YOUR INVESTMENT OBJECTIVE WITH YOUR DESIRED OUTCOME

Understand the trade-offs of different approaches

Some individuals can increase their wealth in retirement; many of these households will have pensions, low expenses and/or a substantial amount saved and invested. For many this is unattainable or would result in overly constrained spending.

Others may want to preserve principal which can curb overspending, but also may result in increased risk if there is a stretch for higher yielding investments.

There is no shame in spending principal. If you are considering this approach, you might want to seek advice from a financial professional who can help you with a sustainable retirement plan that may include a spending policy and/or protected lifetime income.

7. UNDERSTAND LOSS AVERSION AND STAY INVESTED

Plan to stay invested

During periods of extreme market declines, a natural emotional reaction can be to "take control" by selling out of the market and seeking safety in cash. This is due to “loss aversion” - or the fact that losses hurt more than gains feel good. The action not only locks in losses but often results in missing some of the best days that closely follow that are key to a portfolio’s recovery.

Staying the course with a diversified long-term investment strategy is likely to produce a better retirement outcome.