How to prepare for retirement and help protect your lifestyle dreams

This article will:

• Explain how to plan for basic expenses as well as big ticket items in retirement.
  
• Describe some of the effects of Secure 2.0, new federal legislation related to retirement savings. 
  
• Outline questions and considerations to include in your planning

As you prepare for retirement there are standard expenses to include as you create a master spending plan—things like housing, health care, food, medications, and hobby and leisure spending. There are also larger purchases you may encounter. Some of these larger purchases will be related to necessary health or daily activities—such as a mobility aid or new vehicle—while others may be related to goals you have—to purchase a vacation home or perhaps a financial product to align with your financial goals. Including the possibility of these larger purchases in your planning now will allow you to afford them without sacrificing the quality of your lifestyle. 

Creating a master spending plan might be daunting at first, but there are guidelines that can help you think into the future and plan accordingly. A good starting point is to estimate how much income you will need in retirement. A common guideline is to plan for 70% of your current income. That means that if you earn $100,000 while working, you might estimate a retirement income of $70,000 per year. From here you can start to create a master spending plan and budget. A financial professional is your best ally in making a master spending plan, but you can also do some preliminary research using retirement estimate calculators such as this one provided by the Social Security Administration.

Fixed and changeable expenses

There are many expenses that will likely stay relatively stable during your retirement; things like groceries, utilities, leisure activities such as gym or club memberships, insurance, and Medicare premiums. Other expenditures may change. You may pay less in transportation costs if you are no longer commuting, or require a smaller clothing budget if you no longer need new professional attire. You will want to carefully consider potential changes in your lifestyle at this stage too: Will you be traveling more? Do you plan to relocate? Are there hobbies or other activities you might like to spend more time and money on?

Perhaps the biggest unknown cost is that of health care needs over time. While you may be in good health and physical condition now, we know that with increasingly advanced age new challenges and needs may present themselves. While Medicare will cover many healthcare-related expenses, it is important to familiarize yourself with potential costs which may be out-of-pocket or require supplemental coverage, such as for long-term care. Beyond potential supplemental coverage, understanding that health-related expenses often become larger in later years can inform how specifically you save and allocate funds. 

Defining your retirement priorities

As you understand the fundamental aspects of your retirement and get a sense of your expected income, you will have a clearer sense of your needs. From there you can start to think about your priorities overall and how these might inform your ongoing planning, saving, and investing. Some questions you might ask yourself include:

• What is my ideal housing situation? Will I stay in my current home or downsize?
• Where is my ideal living situation? Do I want to move to another area for climate reasons, health considerations, or desire to be closer to family?
• Is it more important for me to pursue travel or other life experiences or would I prefer to prioritize protecting and growing assets to pass on as a legacy?
• Am I willing or able to continue working in some capacity, even after retiring from my current career?
• What role will my extended family play in my retirement? Will they be potential caretakers? Might I be asked to provide financial support for my children or grandchildren?
• What events or circumstances might alter my priorities right now and how should they inform my planning?

Recent legislative changes to retirement investing and saving

With an understanding of your basic needs and expected income, and a better view of your priorities in terms of lifestyle and desired experiences, you can begin to make sure your current retirement strategy is adequate to support them all. If you are like most workers, you have likely been saving for retirement through either an employer-offered pension, 401(k), 403(b) or through an IRA. Federal legislation in the form of the Secure 2.0 act, can have a significant impact on current retirement savings plans and expands their availability to more workers than ever before. 

With Secure 2.0 you will see, among others, the following changes:

• Increased “catch-up” contributions: right now, once you reach age 50, you are allowed to contribute an extra $7,500 to your 401k annually. Under Secure 2.0 that amount increases to $10,000 for anyone aged 60 - 63.
• Emergency savings provision: instead of facing a penalty for withdrawing funds from your retirement account, Secure 2.0 allows up to $1000 to be withdrawn for emergencies penalty free. 
• Increase in amount contributed to qualified longevity annuity contract: now you can allocate up to $200,000 from your retirement account to a Qualified Longevity Annuity Contract (QLAC).
• Increase the age for required minimum distributions from 72 to 73 this year and 75 by 2033 while also reducing the penalty for not taking required minimum distributions.

Each of these modifications and the other expansions in the bill speak to the changing realities of retirement for many workers in the context of economic fluctuations, lifestyle considerations and increased longevity. Wherever you are in your retirement saving journey you will likely see benefits from Secure 2.0 and can learn how to make them work to your greatest advantage by discussing with an experienced financial professional, tax professional or estate planner.

Strategies and guidance

Given all this foundational information you are probably thinking in even more detail about how to plan for large purchases you have decided to prioritize. These could fall into the category of leisure goals such as purchasing a vacation home, dream car, or planning extended travel. Large expenses can also be related to family priorities: perhaps you would like to fund your grandchildren’s college education, or help an adult child buy a home. Additionally, you might decide a more substantial financial product could be a wise, but significant expenditure. For each of these potential purchases there may be unique considerations to discuss with a financial professional, but there are also some basic strategies that can help you plan and save:

• Recognize your retirement will have different phases and needs. 
  
  In the first phase you will hopefully have continued good health and physical wellness and be able to spend money and time on experiences you may have put off during your working years. As you age, you may find your energy and physical capacity is more limited and your priorities might shift to making sure your living space and situation is set up to accommodate changing needs. In your most advanced years, you will want to consider the expenses that might come with long-term care needs as well as the legacy you might want to leave behind. 

• Consider investing in necessary home improvements before retirement. 
  
  If you plan to stay in your current home, it is a good idea to evaluate where expensive updates could be needed. A new roof or kitchen renovation now can be a good use of funds that also pays off if you decide to sell and downsize. Additionally, taking care of expensive maintenance while you are still working, can prevent you from facing those costs during retirement when your financial situation may be more fixed. 

• Boost your emergency savings fund.
  
  If you don’t already have one, you should prioritize setting up a separate account to which you make automatic contributions. There are various savings funds out there, such as High-yield savings accounts, money market accounts, and certificates of deposit (CDs) are all options to protect emergency savings.*
  
  * CDs and money market deposit accounts are generally FDIC-insured up to $250,000 per depositor, per insured bank.
  
  
• Maximize assets and optimize your portfolio.
  
  Home prices are still high in many regions.  If you are planning to downsize, you might consider using the profits to purchase an appropriate investment product that aligns with your risk tolerance that can be used to supplement your income in the later phase of your retirement. You could also think about keeping your current home, but renting it out for more income. Many people find that there are lifestyle and financial benefits to relocating. Places like Costa Rica and Mexico are increasingly popular with retirees seeking tropical climate and lower cost of living. 
  
  
• Set new goals. 
  
  With your needs and priorities clearly defined you will be able to see where you might need to increase your savings and/or investing. The provisions of the Secure 2.0 act may allow you to contribute more money to your retirement savings account than you have been allowed so far. You may also find that there are strategic moves in terms of your mix of investments that might be made to support specific goals. 

Each of these points can be brought to an experienced financial professional who will likely provide great value and perspective. They can evaluate your current situation, discuss your short- and long-term goals, and provide options and advice that you may not be able to discern on your own. Wherever you are in your planning journey, and whatever your goals for retirement might be, the right choices now, combined with professional guidance, can help you ensure you are supported through each phase of this next stage of life.