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If you’ve put in decades of hard work and are now only a year away from retirement, you’ve probably been planning this transition for years. Even so, you’re going to want to sprint to the finish line without making a mistake. Thanks to the economy, the pandemic, and all the other forces bracing for 2022, you’ll want to make sure you have your ducks in a row before you jump into your golden years.
Are you planning to retire at the end of 2022? Here’s what the experts want you to focus on over the next 365 days.
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Be aware of the “catch-up” contribution limits in 2022
If you plan to make additional contributions to your pension plans this year before you start cashing out, be aware of the limits for 2022.
“Special catch-up contributions are allowed for people aged 50 and over to help them build up their retirement savings as they approach their retirement date,” said Jay Shah, president of Personal Capital.
In 2022, the contribution limit for 401 (k), 403 (b), most 457 plans and savings plans will increase from $ 19,500 to $ 20,500. The catch-up contribution limit for these accounts remains unchanged at $ 6,500, meaning those 50 and over can contribute up to $ 27,000 in total. IRA contributions are still capped at $ 6,000 with a catch-up contribution limit of $ 1,000, and SIMPLE plan catch-up contributions will remain unchanged at $ 3,000.
Aim to save 10 times your pre-retirement income
There isn’t a single amount of money to save that is right for everyone, but if you’ve got a decade off your paycheck, you’re in good shape.
“The amount you need to have in retirement savings will vary depending on your lifestyle expectations and living expenses, but as a general rule, aim to save 10 times your pre-retirement income when you retire.” , said Melissa Ridolfi, senior. Vice President of Retirement and Cash Management at Fidelity Investments.
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Your budget should include discretionary spending
You want to be able to enjoy your golden years, so make sure your budget includes wiggle room for “fun” expenses in addition to basic essentials, like accommodation, medical bills, and food.
“Try to quantify what you think you need for retirement and don’t forget to include discretionary elements like travel,” said Daniel Fan, senior managing director and head of wealth planning at First Foundation Advisors.
Check that you actually have enough resources to retire
You might think you’re ready to retire, but it’s important to double-check your finances and your retirement plan to make sure you’re truly financially ready to exit the workforce.
“Typically, you don’t want to withdraw more than 4% of your accounts in order to meet your retirement goals, so determine if that’s possible,” Fan said. “The best way to determine if you have enough resources and how much you may need to save is to have a financial planner create a cash flow analysis for you. “
Remember that retirement planning is not linear
When planning for retirement, plan to adapt and change from year to year, whether you plan to or not.
“A linear approach to calculating finances ignores the real complexity of topics such as inflation and investing behavior which can change dramatically over time,” said Daniel Ruppel, senior financial planner at TIAA. “A financial plan must consider how these things can change from year to year and how a family’s goals can be affected. For example, a series of negative investment returns in the early years of retirement can have a big impact. An approach that even assumes a conservative positive return every year is unrealistic. “
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Pay your debts first
Ideally, you will retire debt-free.
“The more debt you put into retirement, the harder it will be to meet your retirement goals, so try to pay off as much debt as possible,” Fan said. “If you have a large mortgage, you might want to consider downsizing to pay off the mortgage as much as possible. “
Have a spending strategy
When you first start out, 10 times your paycheck might seem like all the money in the world – but without a plan, big piles of money have a way of turning into little piles of money very quickly.
“It’s important to have a strategy to spend your savings wisely,” said Amy Richardson, CFP, financial planner at Schwab Intelligent Portfolios. “A good rule of thumb is to use guaranteed income – social security, retirement payments, annuities, etc. – for essential expenses such as housing, car loans, food and utilities. Pay for optional expenses like vacations or gifts to grandchildren with less reliable sources of income like stock dividends and distributions from mutual funds and ETFs.
Consider medical expenses before taking early retirement
While it may be attractive to leave the workforce before you turn 65, it can come at a significant additional cost.
“If you want to retire before age 65, make sure you have enough resources to pay for medical insurance because you won’t be eligible for Medicare yet,” Fan said. “These costs can be substantial, especially if you have to pay for coverage for other family members.”
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Know your minimum distribution requirements
You may have enough money to keep your 401 (k) growing, but you are required by law to start withdrawing money at a certain age.
“The minimum required distribution rules vary depending on your date of birth,” said Barbara Friedberg, MBA, MS, founder of Robo-Advisor Pros. “Familiarize yourself with them, because the penalties are severe for those who do not meet the deadlines. Also check out IRS.gov’s COVID information to determine if this will impact your RMD. “
Have a plan to claim social security benefits
Another great choice is when, exactly, you plan to apply for Social Security – just because you’re eligible to start receiving checks doesn’t mean you shouldn’t wait if you can.
“It is important that people approaching retirement understand the impact that certain social security decisions can have on retirement preparation,” said Ridolfi. “For example, the longer you can wait to claim Social Security, the more time you have to save. If you can afford it, waiting until you are at least entitled to full Social Security benefits – between the ages of 66 and 67 – can help increase your monthly benefit. If you can delay applying for Social Security benefits until age 70, your benefits may increase by 30% of what they would have been if you had applied at age 65.
Review your designated beneficiary designations
A new change in the law makes planning even more important for your beneficiaries, especially if you have heavy assets.
“Investors who are saving for retirement or those who are already retired should be aware that the recently passed SECURE law changed the laws regarding distribution options for named beneficiaries on retirement accounts,” said Leslie Geller , Wealth Management Strategist at Capital Group. “Beyond making sure you’ve named the beneficiaries, now is the time to review those designations due to the new 10-year distribution rule for Inherited IRAs that apply to most beneficiaries other than the spouse. This is particularly relevant for investors who have large retirement assets. “
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Make sure you are mentally prepared to retire
You might have all of your financial troubles in a row, but it’s just as important to be mentally prepared for what this transition means.
“Since most of us derive the social and psychological benefits of work, before we retire, carefully consider how you will meet these important needs after retirement,” Friedberg said. “You might not be ready to retire if you don’t have some ideas on how you’ll be spending your time in retirement. Since jobs for older Americans can be hard to find, take your time before deciding to retire and consider taking a month or two of vacation and trying out your retirement lifestyle.
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Andrew Lisa contributed to the writing of this article.