Top 8 Retirement Tips For 2022 – Forbes Advisor – Forbes

The Covid-19 pandemic has triggered lots of anxiety among retirement investors. Economic fallout from the crisis has forced many to reconsider their goals, and you may have even retired early with less saved than you might have planned.

As we head into the new year, it’s a good time to take stock and think about how you can work toward your retirement goals over the coming 12 months. Certain principles never go out of style: Spend conservatively, save as aggressively as you are able and prepare for the unexpected.

Here are eight tips that can help guide your retirement strategy throughout the coming year.

1.  Review Your Retirement Plan

Set yourself up for success in the new year by taking time to review your retirement plan. Talk to your financial advisor, if you have one, about any changes in your financial life over the last year and take the opportunity to consider whether your current retirement strategy still makes sense.

Though they can help you conceptualize and achieve your financial goals, it’s important to have a clear vision of what retirement means for you and to communicate this to your advisor.

“Too many people think in terms of retirement generalities such as travel or spending time with kids and grandkids, but this isn’t how you’ll spend most of your retirement,” says William Chettle, director of experience and engagement at Symmetry Partners in Glastonbury, Conn. “A more revealing question is to ask yourself what you’ll be doing on a typical Wednesday at 11 a.m. after you retire. Being clear on this question can help you plan a more fulfilling retirement.”

If you are ahead in saving for retirement, consider adjusting your portfolio or even retiring earlier. If you’re behind, think about boosting your savings rate, investing more aggressively or cutting your expenses to free up more cash to invest.

2.  Reassess Your Risk Tolerance

It’s only natural to feel a bit battered as we enter year three of the Covid-19 pandemic. In light of the extreme events over the last two years, this could be the right time to think about whether your risk tolerance has changed.

Risk tolerance is how much potential for loss you’re willing to take on for higher possible gains. You can get a sense of your risk tolerance by thinking through how you would react to a significant investment loss or reflecting back on what decisions you’ve made in the past when markets have tanked. Being honest with yourself about your tolerance for risk helps you build a retirement portfolio that makes you feel comfortable when markets inevitably become unsettled.

The rapid stock market crash of early 2020 and the bull market that’s been underway ever since have potentially changed how you view the stock market and risk. Some investors have reacted by becoming more eager to take on risk while others have become more risk averse. How has your risk tolerance changed?

There’s no simple answer to this question. As retirement approaches, risk tolerance generally declines as investors have less time to compensate for portfolio losses, but depending on your broader financial situation, this may apply less to you. Consider where you are in your investment life cycle and how your appetite for risk may have changed. You may need to alter your asset allocation to insulate yourself against large market swings.

3.  Maximize Your Tax-Advantaged Retirement Savings

Tax-advantaged retirement plans are the best tools you have to achieve your retirement goals. As you’re reviewing your financial plans for 2022, make sure you’re taking maximum advantage of your retirement accounts.

The contribution limits for workplace retirement plans have increased for 2022. You may contribute a total of $20,500 to your 401(k) account, up a bit from the 2021 limit of $19,500. Catch-up contributions for savers who are 50 or older remain $6,500. If you’re turning 50 this year, look at your budget and see if you can’t raise your total contributions to take advantage of this higher threshold of up to $27,000.

The 2022 contribution limits remain $6,000 for traditional IRAs and Roth IRAs, and catch-up contributions for people who are 50 or older are still $1,000. If your income is lower or you’ve found yourself in a lower tax bracket, take another look at opening a Roth IRA (or engaging in a Roth conversion) to get tax-free income in retirement that’s free of required minimum distributions (RMDs).

4.  Analyze Your Current Spending to Estimate Retirement Income Needs

Whether retirement is just around the corner or years away, it’s worth getting a clear picture of your spending patterns in the here and now to help inform how much income you’ll need in retirement.

If you meticulously track your expenditures, you might be surprised to discover how you’re actually spending money. When you know where every dollar is going, you can plan a budget that’s free of wasteful spending—and you may even discover that you can boost your retirement savings with little impact on your current lifestyle.

This exercise is about more than just tightening up your current budget, though. You need a clear understanding of your expenses today to determine what your income needs will be in retirement.

One rule of thumb suggests that retirees need to replace 80% of their pre-retirement income. Your personal replacement rate could be more or less that this figure, but first get a handle on your current spending to make informed decisions about retirement income needs.

Certain expenses will go away, like commuting costs, childcare and education spending, but these may be replaced by other needs, like higher medical spending or more leisure costs. Be especially realistic about travel plans and recreation so you can take full advantage of your hard-earned freedom from work.

5.  Be Proactive in Dealing with Debt

You almost always want to grab debt by the horns as the longer balances remain outstanding the more interest you end up paying. What’s more, once you’ve cleared the debt, the money you spend on interest can be deployed in your retirement savings account.

As you get closer to retirement, it’s even more important to tackle debt as payments may become more burdensome when you’re on a fixed income. That’s why many financial advisors suggest bringing down your balances when you’re still working.

Read More: How To Pay Off Debt In Retirement

6.  Refine Your Retirement Health Care Strategy

Ensuring that you’re planning for an adequate level of health care coverage is a key part of your retirement strategy. As you age, your health care needs will increase, and you’ll want to make sure that you’ve saved enough to get covered. A recent Fidelity study found that a couple will spend $300,000 on co-pays, additional premiums and other uncovered expenses during retirement.

These out-of-pocket costs will take a bite out of retirement savings, so it’s wise to prepare. One way you can get ahead of these issues is by understanding your options when it comes to Medicare.

Every American is eligible to enroll in Medicare when they turn 65, and there can be penalties for failing to enroll on time. It’s wise to sign up a few months before your 65th birthday, giving you ample time to meet the deadline and to ensure coverage when you turn 65. Beyond that, you’ll need to decide whether to opt for traditional Medicare or Medicare Advantage—as well as if you want Medigap coverage.

7.  Maximize Your HSA Contributions

When it comes to your retirement health care costs, there’s no better way to financially prepare than contributing to a health savings account (HSA).

You get a triple tax advantage when investing with an HSA: Contributions are made with pre-tax dollars, lowering your taxable income; they grow tax free while they’re in the account; and you won’t owe taxes on any amount you withdraw for qualified medical expenses. And if you do have to make withdrawals for non-medical spending, they’re treated like traditional IRA withdrawals, meaning you only owe income taxes on what you take out, as long as you’re 65 or older.

The main downside to an HSA is that not anyone can open this type of account: They are only available to those covered by high deductible health insurance plans.

If you are HSA eligible, you also need to make sure you use your account effectively if you plan to use it to save for retirement: Less than 10% of current HSA holders invest their funds. Uninvested cash steadily loses value over time as inflation rises, meaning univested HSA dollars may hold a fraction of their current purchasing power when you retire.

“If possible, don’t spend the money in your HSA and cover current healthcare costs from your current income to maximize the power of tax-deferred growth,” says Chettle. If you start contributing to an HSA early on in your career, you may have decades in which to invest for the higher medical expenses you can expect during retirement.

8. Understand Your Retirement Income Options

You should start thinking about your retirement income needs well before you retire. In fact, retirement planning could very well be renamed retirement income planning as the entire point is to establish your post-retirement income stream on a solid foundation.

A core pillar of your retirement income plan is Social Security. Americans can begin taking benefits at age 62, but the longer you delay, the more your monthly payments will be when you do opt into the program. This is just one step you can take to increase your Social Security benefits.

The other big source of income are distributions from your tax-advantaged retirement plans. After decades of making carefully considered contributions, you can start withdrawing money penalty free once you turn 59 ½. It may even be in your best interest to delay taking withdrawals as long as possible and let your investments compound, until required minimum distributions (RMDs) kick in at age 72, depending on how much money you have saved in other places.

If you’re already retired, now is also the right time to map out your 2022 distributions from tax-advantaged accounts. “A top retirement planning tip is to understand opportunities to take withdrawals from 401(k)s and IRAs when your income is low,” says Charles Sachs of Kaufman Rossin Wealth Advisors in Miami. You may want to meet with a tax professional to plan out the best ways to manage your taxable withdrawals.

A Final Word on Retirement Planning

When it comes to retirement planning, the key is to start early and keep your eye on the ball. Retirement planning isn’t a one-time exercise, and monitoring your accounts and implementing strategies that will help you progress toward your goals should be an ongoing process.

Working with a professional financial advisor is one of the best ways to develop a realistic financial plan and investment strategy that will keep you on track to enjoy a financially comfortable retirement.