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FA Center: Saving enough money for retirement is a big job, but you don’t have to go it alone

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If you’re like millions of Americans who have retired or are approaching retirement, you may be losing sleep over your financial security. The cost of everything from gas to groceries is rising and with the Federal Reserve raising interest rates to stifle inflation, bond prices have plummeted and the stock market is experiencing wild gyrations.

In the midst of all this uncertainty, Congress still believes the best way to solve America’s retirement savings crisis is to revamp 2020’s Securing a Strong Retirement (SECURE) Act. The SECURE Act was originally designed to address an uncomfortable fact. While 68% of workers have access to a retirement plan at work, just 51% participate, according to the U.S. Department of Labor.  

The new update — known as “SECURE Act 2.0” — expands some of its signature benefits for those who are saving for retirement — or want to — and for those who are already tapping their 401(k) and IRA nest eggs or will do so soon.  

SECURE Act 2.0 will require most employers to automatically enroll full-time employees in their retirement plans and automatically increase their contributions every year. It will also enable more part-time workers to participate in their employer’s plans.

But if you’re already saving for retirement at work, these changes aren’t particularly revolutionary. So, how will retire savers benefit? If you’re between the ages of 62 to 64, you’ll be able to add up to $10,000 in annual  “catch-up” contributions. Outside this age range, your catch-up provision will cap at $6,500 in 2022.

The catch? Starting in 2023 all catch-up contributions to 401(k) plans will be treated as after-tax Roth contributions. That means these contributions won’t lower your taxable income. The good news is that you’ll never have to pay taxes when you withdraw these Roth contributions.

The other “big benefit” of SECURE Act 2.0? Beginning this year, you won’t need to start taking Required Minimum Distributions from your 401(k) plans and traditional IRAs until age 73. (The original SECURE Act raised the age from 70 to 72). In 2029, this age rises to 74. In 2032 it rises to 75.

As nice as these benefits are, they aren’t a panacea for solving America’s retirement crisis. The hard reality is that neither the government nor your employer are in the business of ensuring that you’ll have enough money to retire on. That’s why you’ll have to take matters into your own hands.

It’s your job to determine how much money you’ll need to live on during retirement, estimate where that money will come from, and how much you’ll need to withdraw from your retirement accounts each year.

And, if it looks like your retirement savings might be depleted sooner than you’d like, here’s what you may need to do about it:

1. Calculate your retirement expenses: There’s a common cliché that you’ll need 60% to 80% of your current income to meet your expenses during retirement.

Don’t believe this. When you retire you may want to buy a second home. Or travel a lot. Don’t forget healthcare expenses — one year of long-term care could cost $100,000 or more.

So, you’re better off overestimating than underestimating how much money you’ll need. There are many free and low-cost tools that can help you with this. For example, Bloom can help you make better decisions with your retirement plans; You Need A Budget helps you prioritize everyday expenses and become more purposeful about your spending.  

2. Estimating your retirement income sources: Next, you need to figure out whether all the income you receive during retirement will pay for your desired retirement expenses or fall short.

Some of this will come from Social Security. How much? Find out by establishing your own online Social Security Administration (SSA) account. SSA pulls data from tax returns to tell you how much you’d receive every month if you retired before or after your full retirement age (age 66 or 67 for most people).

If you don’t want to work during retirement, the rest of your retirement income will either have to come from a pension (if you’re one of the lucky few who has one) and your bank, 401(k), IRA and taxable investment accounts.

3. How much of your nest egg will you have to spend each year? Estimate how much money you’ll need to withdraw from your nest egg each year, both in terms of dollar amounts and as a percentage of your savings. Assuming that investments will increase the total value of your retirement assets by around 5% per year and that you always withdraw the same amount every year, how long will it take for your savings to be fully depleted? If less than 20 years, you might have to make some tough choices, either now or later.

4. The best solution: maximize contributions: It’s a fact: The amount of money you regularly contribute to any investment account will play a much bigger role in determining how large that account may grow than what your money is invested in.

That’s why if you’ve got a long way to go — a decade or more — before you retire, then the best way to increase the chances of your retirement nest egg lasting longer is to contribute as much as you can to your 401(k) or other retirement plan.

In 2022, you can contribute to up to $20,500 in combined pre- or after-tax contributions to your 401(k). If you’re over 50, you can make an additional $6,500 in catchup contributions. If SECURE Act 2.0 passes in its current form, you’ll be able to contribute $3,500 more if you’re between the ages of 62 to 64, although starting in 2023 all catch-up contributions will be categorized as after-tax Roth contributions.

The more you contribute, the more you’ll benefit from company matching contributions. The more money you have in your account, the more you’ll be able to take advantage of the tax-deferred growth potential of a diversified portfolio of stock and bond investments.

5. Stay invested in stocks as long as possible: There’s an old axiom that says the amount of your portfolio invested in stocks should decrease as you approach retirement, and that you should dramatically reduce your exposure to stocks when you start withdrawing money from your retirement accounts.

But given today’s inflationary environment, that might not be the best strategy. If rising prices means you’ll need to withdraw more money than you originally planned, you might have to actually increase your exposure to stocks. Why? Because, over the long-term, stocks have delivered better returns than bonds or cash. You’ll need this exposure to help your portfolio’s return outpace inflation. This may mean taking on more risk than you’re normally comfortable with.

6. Modify your retirement expectations: Revisit and revise your retirement expectations. Maybe you’ll need to leave your full-time job later than planned. Maybe you’ll need to work part-time during retirement. Maybe you’ll have to live more frugally. Maybe you’ll have to scale back your travel plans or delay major purchases.

Or maybe you should delay taking withdrawals until you have to, at age 72 (73 or later, if Secure Act 2.0 is enacted) to keep your investments working as long as possible.  

You don’t have to make these decisions on your own

If you don’t have the time or the desire to do this yourself, consider working with a fee-only financial planner. These professionals can provide holistic advice to address every aspect of your financial life during retirement.

They can create scenarios showing what your living expenses and income could be if you retired at different ages. They can provide guidance on Social Security and Medicare. They can recommend strategies for reducing the tax impact of RMDs and other withdrawals. They can analyze all of your savings and investment accounts and recommend adjustments that will help to provide the income you need to live on today without putting the long-term viability of your retirement nest egg at risk.

Because these fee-only advisers are paid only by you, you’ll never have to worry about them trying to sell you investment or insurance products to earn commissions.

In the end, the best way to feel secure about your future is to do what you need to make sure that your retirement plan is on track, either on your own or with the help of a trusted adviser. 

Pam Krueger is the founder & CEO of Wealthramp, an advisor matching platform that connects people with rigorously vetted and qualified fee-only financial advisers. She is also the creator and co-host of MoneyTrack on PBS and Friends Talk Money podcast for PBS Next Avenue. 

Also read: Why some boomers now regret downsizing

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