If there has ever been a year that offered retirees the chance to get their finances under control, this is it. For many people, their lives, finances and spending habits have been radically – and some say permanently – changed by the pandemic. In addition, there were changes in tax law regarding retirees and retirement accounts.
“Make a plan that takes the worst into account.”
“Build a plan that prepares for the worst,” said Kristian Finfrock, founder and financial advisor of Retirement Income Strategies in Madison, Wisconsin. “If 2020 taught us anything, expect the unexpected. The effects of covid, the economy shut down, the political unrest in the streets and the deeply divisive presidential election caused people to take reactionary measures. You need to make changes that are proactive. “
Steps retirees should take to prepare financially for the New Year include:
Make an inventory of all your accounts
Make a budget
Look at your income and expenses. Use a zero-based budget to determine where your money is going. Is there more room for saving and investing, or are you spending more than you earn? “A lot of people haven’t spent any money this year,” said Ben Fuchs, founder of Fuchs Financial in Hartford, Conn. Maybe I can spend more money on something else. ”
“If you’re in debt and credit card debt, dive deep into what you’re doing, but be practical and give yourself a nice budget,” says Fuchs. “When I ask customers what they spend, they give me a budget and that’s usually 98 percent wrong. See what you spend all year round. Then see where you can cut back and focus on those specifically. If you spent $ 500 on restaurants last month, you’re doing $ 300 this month. “
View taxes and required minimum distributions
The SECURE Act changed the start date for Required Minimum Mistributions (RMD) from 70½ to 72. (The IRS requires you to start with RMD withdrawals from 401 (k) s and IRAs to effectively force you to pay tax on deferred accounts The CARES law has suspended the mandatory RMD for 2020.
For people who have their RMD suspended, this can provide the opportunity for Roth conversions or “ discretionary withdrawals, ” said Chris Chaney, vice president and financial adviser at Fort Pitt Capital Group in Pittsburgh, Pennsylvania. The taxes are at historic lows, and want to do the conversion and pay the taxes now before the Tax Cut and Jobs Act expires. The corporate tax cut is permanent, but the individual tax rate and estate tax cuts will expire in 2025.
Rebalance your portfolio
“We’ve had a year with hugely variable yields,” says Chaney. “There was a difference of 30 percent or more between the performance of growth stocks and value stocks. Growth stocks have performed extremely well. Now is a good time to take some profit off the table and rebalance to assets that have underperformed. “
Review your beneficiaries and update your estate plan
If the pandemic has told us anything, it is that things can change suddenly and quickly. Make sure your beneficiaries are up to date. Make sure you and your spouse or partner are authorized and have an advanced health care guideline. And determine whether you need a will or a trust. With a will, your estate will likely go through probate.
Rodney A. Brooks writes about retirement and personal financial matters. His column is currently coming in US News & World Report. He has written columns on retirement for The Washington Post and the US TODAY. He has also written for National Geographic, Next Avenue and Black Enterprise magazine. He retired as deputy editor / personal finance and retirement columnist USA TODAY in 2015.
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