Nobody has to tell you how crucial it is to save for retirement. You may have a healthy balance in your 401(k) or other plan at work, and likely have money in one or more individual retirement accounts. But that doesn’t mean you’re set up for a comfortable retirement.
There’s still plenty you can and should do now to help feather your nest egg, and your IRAs, in particular, may need attention. Here are five good ideas to consider well before you retire.
1. Figure out how far your IRAs will have to go. If you’ll need your IRAs to cover only a small percentage of your retirement needs, you may handle the assets differently than if they’ll play a major role. Start by determining what you’ll likely spend during retirement, and try not to depend on rules of thumb, such as the notion that you’ll need about 70% to 80% of pre-retirement income. Instead, add up what your actual expenses are likely to be, and be certain to include a generous allowance for health care costs. Then, tote up your other sources of income, from a company pension, an inheritance, Social Security, and the like. Subtract that number from your total requirement to see what you’ll need your IRA to contribute. Keep in mind that IRA dollars differ from Roth IRAs and nonretirement accounts because your distributions will be taxed as regular income.
2. Review your asset allocation. Asset allocation within IRAs should be reviewed in conjunction will all your other accounts to ensure a tax-efficient portfolio is constructed and maintained. Broad diversification helps provide steadier returns, with winning investment classes making up for others that may be lagging. But beyond holding several kinds of assets—a variety of domestic and international stocks, several kinds of bonds, and cash—you need to consider what allocation fits your goals and tolerance for investment risk. Recent markets have been turbulent, and that may help you understand how much risk you’re willing to take. If you view the recent downturn as part of a normal market cycle, you may feel comfortable holding mostly stocks in your port-folio, particularly if retirement is still a decade or more away and you need maximum returns to meet your goal. In any case, you’ll likely want to move to a mix that’s less aggressive as your retirement date approaches.
3. Consider a Roth IRA conversion. A Roth IRA has two big advantages over a traditional IRA. Distributions from a Roth during retirement aren’t taxed, and if you don’t need the money and prefer to leave it to your heirs, the government won’t force you to make withdrawals. To gain those benefits, though, you have to pay income tax on the money going into the plan. But if your account balance is reeling from recent losses, you have an opportunity to convert your holdings at a depressed rate and later recover those losses on a tax-free basis within a Roth IRA. Previously, a conversion was possible only if your adjusted gross income was $100,000 or less. But starting in 2010, anyone is eligible to convert to a Roth IRA. (A special tax deferral break was available for conversions occurring in 2010.)
4. Check your beneficiary designations. This may seem like a minor issue, but it couldn’t be more crucial. Even if you have an up-to-date will reflecting how you’d like your possessions distributed after your death, it won’t trump the designations on your retirement accounts. So if an old IRA calls for your ex-spouse to inherit it, for example, that’s what will happen. If you have several accounts, it’s easy to lose track of all the provisions you’ve made, and you could have made mistakes in the paperwork. A careful review to assure that the designations for each individual account correspond to your overall beneficiary goals can help avoid problems when you’re no longer around to fix them.
5. Get help with the whole process. When you were young, with much smaller account balances and decades until retirement, it may have made sense to call the investment shots for your IRAs. But now there’s much more at stake. With the clock ticking, you need to be confident that you’re making all the right moves, saving an adequate amount, and investing your assets in a way that gives you the best chance of meeting your goals. Working with a professional can give you confidence that you’re on track to a satisfying life after work. Please give us a call if you’d like to discuss where you stand and what you’d like to achieve.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.