The Ultimate Year-End Retirement Checklist
As we put a strange year firmly behind us, those of us saving for retirement can now begin anticipating 2022.
If your retirement saving game plan needs some guidance, in this article we’re going to share five “checklist items” to consider adding to it before the year is over.
So without further ado, let’s get down to business with the first item to consider putting on your list by December 31st.
Max out your retirement plan contributions
If it’s possible, it’s a good idea to consider maxing out your annual 401(k) contributions to stuff as much money into your retirement account by year’s end.
That’s what John Roland suggested recently. He is a certified financial planner, partner and private wealth advisor at Beyond Financial Advisors, an affiliate of Northwestern Mutual Private Client Group.
It’s an opportunity you can’t get back. If you turned 50 this year, you may not have even thought about signing up for the additional $6,500 catch-up contribution. It’s not too late.
Most employers will allow you to adjust that contribution rate per paycheck. Lower it back down in January to smooth out your contributions for 2022.
After you’ve considered John’s advice, then it’s time to consider the next item on this retirement saving checklist.
Make Roth IRA conversions
Converting some of your assets into a Roth IRA is another move to consider before the door closes on 2021. A CNBC article explained why rather nicely:
Unlike traditional individual retirement accounts and 401(k) plans that are funded with pretax dollars and taxed at your ordinary income tax rate when you make withdrawals, Roth accounts are funded with after-tax money and grow tax-free, and you pay no taxes when you take out the money. Many financial advisors are recommending clients make IRA contributions and conversions now.
In fact, Denise Appleby, CEO of Appleby Retirement Consulting called IRAs the “best thing since sliced bread.”
But the main takeaway here is to consider converting now, because time is running out on a popular Roth tax-reduction strategy that might be closing next year.
And that brings us to the next item on this checklist…
Take advantage of a “backdoor Roth” (while you still can)
Here’s how CNBC’s Greg Iacurci explained the situation:
House Democrats passed the legislation in November; Senate Democrats hoped to pass it by year’s end. But Sen. Joe Manchin, D-W. Va., scuttled those plans on Sunday, announcing that he won’t back the measure in its current form. Manchin’s vote is crucial to pass the bill due to unified Republican opposition.
The delay means the prohibition on the backdoor Roth strategy won’t kick in at the beginning of 2022 as planned
We described the backdoor Roth IRA strategy as: “away for high-income earners to allocate capital into a Roth account, whose income exceeds established limits and aren’t eligible to contribute. The backdoor strategy is a means for these individuals to still fund their Roth retirement account legally.”
Even though it’s sometimes described as a “loophole” or a “tax shelter” that’s far from the truth. Both these methods are perfectly legal. Their primary advantage is to convert pre-tax retirement savings into after-tax dollars. By paying the taxes up front, as Forbes explains, “these contributions grow tax-free, and you don’t pay a dime in oncome tax on qualified withdrawals in the future.”
One way to think about this legal retirement strategy being taken away is to think of it as a backdoor “tax hike” by Congress, so the IRS can collect more revenue from retirement savers.
Thankfully, Manchin closed the door on it. For now.
It’s a good idea to consider these strategies while you still can, at least to learn enough about it to decide whether or not they’re appropriate for you.
Then, consider the next strategy on this checklist.
Safeguard your savings against inflation with these assets
Unless you have been hiding under a rock, at minimum you’re feeling the effects of inflation at the gas pump, the grocery store, and on your energy bill.
Inflation isn’t “transitory” any longer, and it doesn’t seem like Powell has a good handle on it (after all, we’re seeing the highest inflation in four decades across the terms of five different Fed chairs). That means it’s time to consider guarding your retirement savings against inflation – if you aren’t already.
Series I bonds are issued directly by the U.S. government and purchased via TreasuryDirect.gov. They have a fixed interest rate and a variable interest rate based on inflation.
This means they are practically guaranteed by the government to grow at the same rate as inflation. But they also have limits, including a $10,000 cap and the fact they are calculated using the CPI inflation method. That means the bond’s interest rate might not account for your personal inflation (similar to the COLA for Social Security). That will be especially evident next year if inflation continues to spiral out of control.
And that brings us to the last item on this checklist…
Rebalancing your retirement savings
Christine Benz, Morningstar’s director of personal finance, recently shared the main benefit of rebalancing your savings:
The main benefit from rebalancing comes in the realm of volatility reduction — taking risk out of your portfolio. And that gets more important as we get close to our retirement date. There is also a benefit in my mind to retirees from rebalancing in that they’re able to harvest their cash flows by selling appreciated positions. [emphasis added]
You can think of rebalancing as “risk optimization.” Regular, disciplined rebalancing forces you sell a portion of your high-performing investments and add buy more of the lower-performing (and likely better value) assets. Although this “sell high, buy low” strategy offends many investors, the Securities and Exchange Commission (SEC) recommends it:
By rebalancing, you’ll ensure that your portfolio does not overemphasize one or more asset categories, and you’ll return your portfolio to a comfortable level of risk.
For example, you could take some gains from your paper assets like stocks and convert those gains into physical precious metals like gold or silver. That would be one way to consider rebalancing your portfolio. Such a strategy tends to “take some money off the table” when stocks soar, and provide a ready supply of “dry powder” for emergencies or reinvestment when more volatile assets offer good value. And since precious metals (especially gold) have historically performed well during market turmoil, in today’s chaotic market, they could provide a safe haven for your savings.
Perhaps more important is Benz’s next insight:
Rebalancing can trigger a tax bill if you’re focusing on your taxable accounts because it typically involves selling appreciated positions where, if it is a taxable account, you’re going to owe capital gains tax on them. So, you should focus your rebalancing efforts on your tax-sheltered accounts, whether traditional tax-deferred or Roth accounts.
The specifics of your situation may limit your rebalancing options. Regardless, it’s smart to minimize taxes whenever you can… Good advice to keep in mind as 2021 winds down.
But whatever items you decide to pull from this article and put into your savings game plan, don’t wait too long.
Make use of this checklist now (it’s expiring fast)
Don’t wait to consider the items on this checklist. Some of them have a firm deadline (Dec. 31), while others like the backdoor Roth might permanently expire in the future.
Regardless, all of them can help make your financial future more secure.
There’s a reason physical gold has remained the gold standard for inflation-resistant investments over the decades. By privately owning the precious metal, you can control your wealth in a universally accepted commodity as a store of value. Over the long haul, gold is one of the only investments that reliably resists inflation, has zero counterparty risk, and can insulate your savings from a variety of bad economic conditions beyond inflation.
And about those potentially “bad economic conditions,” be sure to read the next article this week, which will cover our 2022 economic forecasts.2021, Featured, retirement plan, retirement savings