Well, another year is in the history books. Where does the time go? It seems like just yesterday that I was singing along to Prince’s “Party Like It’s 1999” and worrying that my coffee machine was going to be a victim of Y2K and here we are a “Baker’s Decade” into the new millennium.
As the years go by, I, along with millions of others, find the idea of retirement morphing from a vague concept to an impending reality. The signs are subtle at first. An AARP magazine in the mailbox. A “take this job and shove it” daydream at work. A lingering glance at the orange and red sections of the USA Today weather map. If retirement looms large on your horizon, then there’s no time to waste. Below are 7 resolutions for the New Year to make sure that your planning is on track.
Recalibrate after the “Fiscal Cliff.” As the dust settles in Washington, there are several variables in your retirement plan that you may want to review. In particular, any changes in your tax bill can affect everything from your planned retirement date to your distribution strategy. Entitlement reform was delayed (color me surprised!), but any eventual changes to Medicare and Social Security will also affect your retirement. Schedule a meeting with your adviser to factor in these new variables and make sure that your plans are still realistic.
Increase your contributions. Are you getting a raise in 2013? Sure you could use that to upgrade your iPad or buy tickets to the soon to be announced Rolling Stones tour, but a third option would be to route that extra cash into your retirement accounts. Contribution limits for 2013 are increasing to $5,500 (plus an additional $1,000 for those over 50) for IRAs and $17,500 (plus an additional $5,500 for those over 50) for 401(k)s.
Create a debt payoff plan. If you subscribe to the 4 percent withdrawal rule, then for every $1,000 in income you need to generate during retirement, you’ll need $25,000 in assets. Doing some simple arithmetic, it’s easy to see that retiring with a mortgage, car payment or other debts can add hundreds of thousands of dollars to your “Number.” Reduce that burden by committing to a plan to retire debt free.
Get on the same page with your spouse. Try this experiment. At the dinner table tonight say “I can’t wait to retire in 2016 so we can move to San Carlos, Uruguay and I can realize my dream of becoming a real life gaucho.” The response that you get will show you how important it is to be on the same page with your spouse when it comes to your retirement planning. Now that the conversation is going, spend some time talking through your hopes, dreams and plans so that you can iron out any differences and compromise on a plan.
Take a mini-retirement. You wouldn’t want to get all the way to Uruguay only to second guess the whole gaucho thing. As you get closer to retirement, you should start using whatever vacation and sick time you have to test drive your plans. A mini-retirement is a great way to learn more about a place or to experiment with your retirement budget. Use what you learn to refine and improve your plans.
Set aside your first year of expenses. In case you hadn’t noticed, the financial markets have been a bit—what’s the word?—schizophrenic the past decade or so. If retirement is just around the corner, you run the risk of having to withdraw money from your nest egg at a time when your investments are performing poorly. Experts refer to this as sequence risk. To avoid that problem, set aside one year of your retirement expenses in cash. If the markets are doing well, you can draw income from your investments. If markets are doing poorly, you can draw from your cash and give your investments a chance to recover.
Update your estate plan. Estate and gift taxes were scheduled to change drastically in 2013, but got a last minute reprieve with the deal in Congress. The estate tax rate increased to 40 percent from 35 percent, but other than that, most existing estate tax rules were made permanent. Work closely with your attorney and financial adviser to make sure that your plan is up to date and designed to minimize taxes. Also be sure to have a strategy in place to cover any potential liability (e.g. life insurance) and make sure that your beneficiary designations and powers of attorney are up-to-date and reflect your wishes.
That list of resolutions makes me long for the days of simpler goals like “join a gym” or “quit smoking.” But hey, no one said retirement was going to be easy. If it was, the world would have more gauchos.