7 Year-End Financial Tips Every Retiree Should Know

With 2020 rapidly coming to a close (cue the confetti), you might be ready to finish this chapter and start anew. But before you—safely—ring in 2021, there are some key financial moves you should consider to start the new year off right. Today, we’ll look at seven core financial tips for retirees this year. 

1. Rebalance your portfolio

Rebalancing is about evaluating your asset allocation and making intentional changes to get back to your target. With rebalancing, you periodically buy and sell assets to maintain your preferred level of risk. 

It’s healthy to regularly rebalance your investments because it helps maintain the proper allocation and risk management strategies for your needs. Moving into retirement likely meant you shifted your allocations to more conservative levels. That’s often the best move since you rely on that money for income throughout the year. 

Rebalancing will ensure your strategy moves forward the way you and your advisor planned. It also gives you a chance to sell off any assets that aren’t serving you. Should this result in a loss, you can take advantage of tax-loss harvesting opportunities. 

2. Replenish your emergency fund

Did you have to dip into your emergency fund to cover any medical, housing, or other costs in the wake of the pandemic? Don’t worry, that’s what the fund was there for, but once you take from the fund, it’s critical to make plans to replenish it. 

Emergency funds are just as necessary in retirement as they are in your working years. You may need an extra cushion if your market returns aren’t what you anticipated or your medical bills were sky high from an unanticipated surgery. There are several scenarios in retirement that would require your emergency fund. Be sure to prioritize that as we head into the new year.

Retirees should still keep 3-6 months of living expenses in a liquid and accessible accounts like a high-yield savings account or money market fund. The exact amount you need to save depends on your other income channels, lifestyle needs, current debt, and present circumstances. 

3. Keep an eye on tax-efficiency

Tax efficiency is critical for the longevity of your investments. By employing tax-efficient measures, you can stretch your retirement savings even further. With many retirees concerned about outliving their savings, building the right tax planning infrastructure can prove to be a reliable antidote. How can you bring tax-efficiency to your retirement planning? Let’s look at a few examples.

  • Create a tax-efficient withdrawal strategy. Drawing from the right accounts throughout retirement can keep your taxes at bay and keep your investments compounding.
  • Estimate your taxes (and make sure you pay them). Most retirement income channels like Social Security, pension, annuity, etc. allow you to withhold taxes from your monthly checks. This automation helps ensure you pay enough to the IRS throughout the year. Some retirees also opt for quarterly taxes. Work with your financial team to make a plan that works for you. 
  • Lower your taxable income through charitable giving. 

4. Make a plan for charitable giving

Charitable donations not only further causes you care about, but also provide many tax incentives. Even though this year may change the scope of your gift, it’s good to assess ways to still maintain a giving plan, even if it looks different. Below are a few ideas,

  • Give with a donor-advised fund (DAF). A DAF is a great vehicle for ongoing charitable giving. You can donate to the fund at any point and then select the charities you want to support. DAFs allow family giving and can help establish giving as a tradition. 
  • Use a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from your traditional IRA to a qualified charity. Many retirees use this strategy to donate all or a portion of their required minimum distributions (RMDs) to charity, which lowers their taxable income.
  • Donate with your heart. There are so many charities and people who need assistance during these tough times. See what you can do to bring support to those in need.

5. Contribute to your IRA

Still earning income? The SECURE Act now allows anyone who earns income to contribute to their IRA. This provision encourages additional retirement savings and can lower your taxable income along the way. Keep in mind that if you do contribute to your IRA after 70 ½ and also want to initiate a QCD, there will be a limit to how much of the gift you can deduct. 

6. Consider a Roth Conversion

2020 has been a down economic year for many people, but there is a silver lining. Should you find yourself with less income than usual, you can take advantage of your lower tax bracket by initiating a Roth Conversion. 

A Roth Conversion moves funds from your traditional IRA into a Roth. From a tax perspective, Roth dollars present a lot of flexibility for retirees. Since qualified distributions are tax-free, you can tap that account without worrying about bumping into the next tax bracket.

With a Roth Conversion, you pay taxes now and forego them later. When you are in a lower tax bracket, that ultimately makes a lot of sense because you pay taxes at a much lower rate. 

You will need to pay taxes on the conversion, which could have undue consequences on other aspects of your retirement income plan like the percentage of your Social Security benefits that are taxed as well as your IRMMA for Medicare Part B premium. Be sure to talk with your financial advisor and tax professional before initiating a conversion. 

7. Revisit your retirement goals

The year-end provides a space for reflection. We challenge you to take advantage of that time to look at your retirement goals. Ask yourself,

  • Have you been able to accomplish any of your goals this year?
  • What progress have you made? What is still left to be done?
  • Has this year forced you to re-think any of your goals?
  • What intentional changes can you bring to the new year to support your vision?

Your retirement goals set the stage for your financial plan. The end of the year is a great time to look back with gratitude and look forward with hope. There are many elements of your financial plan to check-in on come year’s end. 

If you have any questions about your plan or if you’d like to talk through any changes you wish to make, set up an appointment today. We can’t wait to help set you and your finances up for a bright new year.

Investment, Retirement Planning, Tax Planning
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