5 Pretty Critical Things Original Medicare Doesn’t Cover (And What to Do About It)

If you’re 65 or older, you’re eligible to enroll in Medicare—but this can be a complex process for new retirees. Many make assumptions about what type of care Medicare covers, and it’s often less than they think. 

Here are some typical costs you’re likely to come across in retirement that Original Medicare doesn’t cover.

What Is Original Medicare?

Medicare comes in many parts, but “original” Medicare refers to Parts A and B. 

Part A: This portion generally covers inpatient hospital, some at-home, hospice, nursing home, and skilled nursing facility care. Most Medicare users don’t have to pay a premium for Part A coverage. However, if you or your spouse didn’t pay Medicare taxes while working, you may be able to buy Part A coverage.

Part B: This is the bulk of your medical insurance coverage and includes preventative care, doctor visits, ambulance services, and medical equipment (like hospital beds or walkers). You will have a premium for Part B coverage based on your income. 

If you earn above the income threshold, prepare to pay an additional amount known as the Income-Related Monthly Adjustment Amount (IRMAA). The IRS uses your tax return from two years before applying for Medicare to determine if you must pay IRMAA. 

What’s Not Covered By Original Medicare?

While Part A and B cover many basic and preventative expenses, there are some notable gaps in coverage to keep in mind before enrolling.

#1: Long-Term Care

While Part A might help with minimal home health care (after Medicare makes you jump through some hoops), it doesn’t cover long-term care costs. Even if you opt for a Medicare Advantage or supplemental plan, Medicare will not foot the bill for anything it deems to be “long-term care.”

The problem is it’s not uncommon to need long-term care in retirement. In fact, about 70 percent of people over 65 will need it at some point in their lives, and it can get quite costly. 

In Michigan, the annual cost of a home health aid is about $61,776. If you’re considering a private room in a nursing home facility, expect to shell out around $108,405 per year. And those numbers are only expected to rise as you age.

So what can you do to help cover the costs associated with long-term care?

Here are a few options to consider:

How you choose to cover the costs of long-term care may impact your other savings goals in retirement. Make sure to discuss these options with your financial advisor before making a decision, as everyone’s needs are different.

#2: Prescription Drug Coverage

Original Medicare actually doesn’t cover prescription drugs; you must enroll in Medicare Part D for that.

Even if you aren’t currently taking prescription meds, it’s often a good idea to enroll whenever you’re eligible to do so. Why? Because if you don’t sign up for it during your initial enrollment period, you incur a permanent penalty if you choose to sign up later.

This late enrollment penalty varies depending on how long you wait to obtain coverage. The penalty is calculated by multiplying one percent of the “national base beneficiary premium” by the number of months you didn’t obtain coverage. This total is then rounded to the nearest $0.10 and added to your monthly premium. 

#3: Dental Care

Original Medicare doesn’t cover dental care such as cleanings, X-rays, fillings, or other preventative work. Some Part C Medicare Advantage plans offer minimal dental coverage, but it’s typically not comprehensive. And unfortunately, most Medigap plans don’t cover it either.

If your Medicare plan doesn’t include dental, consider obtaining a separate dental policy.

#4: Vision Insurance

Original Medicare doesn’t include vision insurance. You’ll need to obtain separate coverage if you wear glasses or contacts. However, you may be eligible for vision care if you’ve had cataract surgery or if you have diabetes. 

Some Part C plans cover vision costs, so review your coverage carefully.

#5: Hearing Aids

Original Medicare won’t cover the cost of hearing aid fittings, follow-ups, or the hearing aid itself. This can be a frustrating gap in coverage for retirees. These devices become critical as many people age, and they tend to cost a pretty penny. Expect to pay between $2,000 and $7,000 for a set of two.

Again, some Part C plans offer partial coverage for obtaining hearing aids. Make sure to check your plan before paying out-of-pocket.

Be Sure You’re Saving For All Medical Expenses

Even with Medicare coverage, there are some expenses you’ll need to prepare to pay out of pocket. If eligible, consider leveraging your HSA (a tax-advantaged tool for covering medical costs in retirement). Or, consider earmarking some investments for health-related expenses in the future. 

Whenever you become eligible for Medicare, you’ll have lots of information to sort through and decisions to make. Don’t hesitate to reach out if you need assistance understanding your options or determining what will best suit your budget in retirement.

Disclaimer

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. Insurance products and services are

offered through independent insurance agents.

The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or an indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed accuracy and completeness and does not purport to be a complete analysis of the materials discussed. 

Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

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Does The 4% Rule Still Apply For Today’s Retirees?

For decades, you were in the accumulation stage of life—saving up enough to live comfortably in retirement. Now that you’ve built your nest egg, it’s time to enter the decumulation stage, which can actually feel harder! 

Creating a withdrawal strategy that matches your unique spending needs and risk profile might not be easy, and it likely won’t follow conventional wisdom. You may have heard of the 4% rule for retirement spending, as this is a common rule of thumb that’s been around for nearly three decades.

But in today’s rather unprecedented market conditions, does it still make sense to follow the 4% rule? Let’s take a look.

What’s The 4% Rule?

Bill Bengen created the 4% rule in 1994.

He researched historical data on stock and bond returns between 1926 and 1976 (a 50-year span) to determine retirement portfolio solvency in extreme market conditions.1

According to his results, a “safe” amount to withdraw each year without running out of money was 4% of your total retirement savings—no matter how volatile or tumultuous the market conditions got. Thus, the creation of the 4% rule.

It states that if a retiree withdraws 4% of their portfolio annually (adjusted for inflation), they should be able to sustain their savings for about 30 years.

To Work, The 4% Rule Carries Many Investment Assumptions.

To work as theorized, you have to create a specific type of portfolio based on some assumptions. Let’s review what we see as the top four. 

Assumption #1: You Have a 60/40 Portfolio Model

Bengen based his conclusions on a 60/40 portfolio model—an allocation of 60% stocks and 40% bonds. But, your portfolio’s allocation should be specific to your goals, risk tolerance, risk capacity, time horizon, and needs. In many cases, that will stray from the conventional 60/40 model.

Assumption #2: You Only Invest in Stocks and Bonds

Another assumption is the strict use of stocks and bonds. But in today’s retirement planning strategies, many find it helpful to pad their portfolio with alternative investments, pension plans, guaranteed income, real estate, and other retirement income sources. 

Assumption #3: Retirement Lasts 30 Years

The 4% rule is designed to last a retiree about 30 years. However, retirement lengths vary immensely depending on when you retire and how long you expect to live.

For example, a 65-year-old male expects to live another 19.1 years.2 If that’s the case, only withdrawing 4% annually may be too conservative based on a 30-year expectancy. On the other hand, if someone retires in their 50s, relying on a 30-year projection might overextend their savings.

Assumption #4: Retirees Spend Consistently Every Year

While it does adjust for inflation, the 4% rule makes a considerable assumption regarding your spending: it’ll stay the same every year. 

In reality, your spending habits will likely shift throughout retirement. When you first retire, for example, you might be more active in regards to travel, visiting loved ones, renovating your retirement home, moving to a new city, etc.

But as retirement continues, life tends to settle down, and your spending slows. As you age, however, your spending may pick up again if your health status changes, you lose a partner, or you decide to contribute to a grandchild’s college costs or wedding plans.

Life is unpredictable, and that can include how you’ll be spending your money in retirement.

So, Is the 4% Rule Still Relevant for You?

While considering the assumptions shared above, you might be thinking that the 4% rule isn’t necessarily relevant to you or your retirement needs.

As you’ve heard and seen on the news, we’re experiencing a period of market turbulence and economic volatility. With that being the case, people who are going to retire soon may find the 4% rule isn’t conservative enough to ensure their nest egg lasts a lifetime.

Creating a Better Retirement Income Solution Than The 4% Rule

Instead of strictly following the 4% rule, consider creating a custom solution with your financial planning team to determine your own withdrawal rate in retirement.

This withdrawal rate may change year to year, depending on what’s happening in the markets and your personal retirement plan. For example, you may decide to withdraw conservatively in the early years of retirement if you anticipate needing more later in life.

Drawing down your nest egg can be more complex than you think, especially since you spent decades working hard to build it up. That’s why working one-on-one with a trusted financial professional can be significant. They can help you develop a strategy, project future income, and determine the proper accounts to pull from. Not to mention, a professional can help proactively plan for future tax liabilities to extend the life of your nest egg.

If you haven’t spoken with a financial professional yet regarding your retirement income planning, please feel free to contact our team. We’d be more than happy to look at your current savings and develop a tailored plan to meet your spending needs in retirement. 

Sources:

1What Is the 4% Rule for Withdrawals in Retirement and How Much Can You Spend?

2Retirement & Survivors Benefits: Life Expectancy Calculator

Disclaimer:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

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Are You Overpaying On Insurance In Retirement? 4 Signs The Answer Might Be “Yes”

Insurance is designed to provide financial protection for you and your family, but retaining the right amount of coverage can be a bit of a balancing act. Why? Because overpaying for coverage might give away too much of your nest egg to insurance companies.

Here are four signs that you may be overpaying on your policies and strategies to consider.

Sign #1: You’re Still Paying For Life Insurance

The primary purpose of life insurance is to replace your income if you pass away. If other people, like a spouse and children, rely on your income, life insurance may offer them a financial safety net.

Families in the wealth accumulation stage tend to be the most at-risk of financial turmoil in the event of an unexpected death. This is because individuals in their 30s, 40s, and 50s are most likely to have debts such as mortgages, student loans, personal loans, or car payments, as well as dependents, including children and spouses.

But by the time you retire, your needs for income protection may change. As a financially independent retiree, you and your family may not depend on income from a job to meet your needs—you have your investments, Social Security, and other income sources. Because of this, income replacement might not be a top financial priority.

If You Have a Term Policy

Term policies expire after a set period. If the policy is still far from its expiration date, it may make sense to cancel it altogether if your needs have changed. 

If you do that, consider redirecting the money you were paying for your premiums toward something more aligned with your needs in retirement, such as investing in the market or growing your savings. Remember, this is simply one option, and it may not be suitable for you, so work with your advisor to make a tailored plan.

If You Have a Whole Life Policy

While many of our clients may benefit from term life insurance, some prefer to have whole/permanent policies. Because permanent policies have the opportunity to gain cash value over time, work with your financial advisor and/or insurance agent to determine the best course of action. 

Retaining your whole life policy may make sense because of the death benefit and potential value growth. Plus, withdrawing from your policy or selling it could trigger a taxable event. This is something to consider carefully with your accountant or financial professional before making any decisions.

Sign #2: Long-Term Care Insurance Eats Its Way Into Your Monthly Cash Flow 

About 70 percent of people over 65 will require long-term care at some point in their lives.1 Long-term care insurance may be a way to help cover this costly care. But is it more trouble than it’s worth? For some, it might be.

Long-term care premiums tend to be expensive. And the longer you wait to apply, the more likely you’ll have higher premiums. Generally speaking, it’s ideal to apply while you’re in your mid-50s. By the time you turn 60, costs can skyrocket. 

Long-term care premiums are typically only guaranteed for a set period, meaning the premium rates you receive in your 50s could eventually increase anyway. Not to mention, there are often daily expense limits or lifetime maximum payouts to understand. 

The Bottom Line

Long-term care insurance policies are often sold as a necessary piece of the retirement puzzle, but they can be complex and might not be worth the cost. 

Long-term care insurance doesn’t offer a death benefit for beneficiaries, which means it’s not an effective way to pass money on to your heirs either. 

If you’re concerned about a future need for long-term care and have a whole life insurance policy, adding a rider to the existing policy may be possible. This route allows you to draw tax-free from the death benefit of your policy to cover long-term care costs.

If you and your financial team decide that a long-term care policy might not be a suitable option, there may be some other funding considerations:

  • Reallocating the money you would have put toward premiums into the stock market or supplement other areas of your financial plan like an emergency fund or other savings goals. 
  • Leveraging your HSA if you have one. Typically, you can use HSA funds to cover some long-term care costs, including insurance premiums. 
  • Creating a plan for health expenses in your retirement cash flow plan.

There can be numerous ways to plan for long-term care, depending on your budget, health, dependents, and goals. 

Sign #3: You’re Not On An Appropriate Medicare Plan For You

The Medicare system may be complex, which can make it difficult to enroll in an appropriate plan for your health and budget.

If you haven’t reviewed your coverage in a while, take some time to see what you’re paying and if you’re using the benefits. You may find that a lower coverage plan would serve you best. Or, maybe switching to a supplement plan instead of an advantage plan would better fit your budget.

Luckily, open enrollment is next month (October 15 through December 7). So do your research now, speak with your advisor, and decide if it makes sense to switch. Don’t be afraid to shop around; it could be worth it.

Sign #4: You Haven’t Reviewed Your Home Insurance Policy In Years

Annual increases on your home insurance policy can add up over time, especially if you’ve lived in the same house for decades. Seniors who regularly review and adjust their insurance policies can save an average of $751 in policy premiums.2 

Instead of sticking with the same policy and coverage, see what’s out there. You may be able to cut some costs by switching to a new policy. Many insurance companies also offer bundles. Participants can get a discount on their premiums by bundling home and auto insurance.

Work With a Team to Protect Your Retirement Savings

Imagine reducing your insurance premiums. What could you do with that money? Perhaps you’d put it towards investments, growing your savings, or helping a grandchild go to college.

If you could benefit from a second look at your current policies, don’t hesitate to reach out. Our team is happy to review your coverage.

Sources:

1Understanding Long-Term Care

2Seniors are more susceptible to overpaying for home insurance

*Guarantees are based on the claims paying ability of the insurance companies.

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. Insurance products and services are offered through independent insurance agents. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

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7-Day Weekend: How Retirees Can Build A Great Lifestyle

For many, retirement is an exciting milestone. You’ve worked hard to prepare for this moment, and now’s the time to reap the rewards. But have you ever considered how you’ll spend your newfound free time? 

Many people focus on the preparation it takes to get to retirement without putting in the time to consider what they want to accomplish once there. If you don’t plan on picking up a new job anytime soon, retirement is essentially a seven-day weekend—and that’s a lot of time to fill.

Here’s how we recommend recent retirees build a life they love in retirement.

Yes, You Can Spend Your Money

In fact, we encourage it! You spent decades saving diligently and sacrificing short-term indulgences to build your nest egg. Now that you’ve done it, it’s time to (strategically) spend it.

But changing your mindset from saving to spending isn’t as easy as flipping a switch. It’s emotional to start drawing from your hard-earned savings. Watching the number go down when you’re so used to seeing it grow can be emotional. Many retirees fear spending and wonder if they’re spending too much.

With proper planning and strategizing, however, you can push past the fear of running out of money in retirement. Being over-conservative with your spending actually deprives you of the things you’ve spent years looking forward to.

Like a fad diet, being too strict with your spending tends to backfire. If you don’t find balance, you run the risk of abandoning the plan altogether. It’s a much more effective approach to create a realistic spending plan that keeps you focused and informed while allowing you to enjoy yourself within reason.

Let the Numbers Support Your Spending

It’s not that it’s impossible to overspend in retirement, but if you’re worried about overspending, start by determining how much you’re able to spend in the first place. Having a number in front of you is a way to ease your anxieties and create a guideline for your spending habits in retirement.

Our team at Legacy Wealth Advisors uses financial planning software that provides clients with real-time projections. Together, we’ll look over possible scenarios to help you analyze how much you can safely spend year after year.

From there, we build a withdrawal strategy that’s tailored to your projected spending. Within that withdrawal strategy, we keep your future tax obligations in mind—especially since taxes can threaten your retirement wealth. Throughout the year, we use tax-focused strategies to protect and preserve your wealth.

How to Spend Where It Counts

Not all spending is created equal. In retirement, focus on making intentional spending decisions that align with your goals. That starts, of course, with deciding what those goals are.

Ask yourself, “What type of lifestyle do I envision for retirement?”

Are you itching to travel the world, or do you want to spend winters in a warmer climate? Are you happy living in your same community, or do you want to move closer to kids and grandkids?

Feeling fulfilled in retirement means using your money to fund the things that matter most to you. Spending without a plan or purpose can take away from that feeling of fulfillment.

Understanding your goals gives you a foundation for spending your money intentionally.

Remaining Motivated When Everyday Feels Like Saturday

During your working years, you probably thought, “I wish every day could feel like Saturday.” The week’s stress seems to go away, your time is your own, and thoughts of work are far, far away.

But the reality of a seven-day weekend looks a bit different. Without the obligation of a 40+ hour work week, it’s up to you to create a new routine that brings you joy and fulfillment.

Find things that fill your time and build out your schedule—classes at the local community center, exercise groups, learning courses, volunteer opportunities, etc. Once you have a regular routine, spend your free time with loved ones. Making it a point to socialize with your family, friends, and community members can be an effective way to keep loneliness and isolation at bay.

Building Your Retirement Lifestyle With Legacy Wealth Advisors

When finding your new purpose in retirement, it’s helpful to nail down your spending and savings strategy first.

Here at Legacy Wealth Advisors, we work closely with those nearing or entering retirement to build a tailored withdrawal strategy and identify their biggest lifestyle goals for retirement. If this is something you’re looking to address, don’t hesitate to reach out to our team today.

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

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Why Roth IRAs Are Awesome Investment Vehicles

A Roth IRA is an unassuming powerhouse that brings a lot to the investment table.

With tax-advantaged growth, they may play an essential role in developing a well-rounded retirement income strategy. But what else makes these accounts so special?

Below we’re reviewing the basics of Roth IRAs and how you can make the most of them throughout your lifetime.

What’s a Roth IRA?

With a traditional IRA, the money you contribute is tax-deductible (unless you earn above the IRS thresholds or are covered by a workplace retirement plan), making it effective for reducing your annual taxable income. Plus, the funds in the account grow tax-deferred. However, your withdrawals in retirement are subject to ordinary income tax.

A Roth IRA works the opposite way. 

You contribute to a Roth IRA with after-tax dollars, which won’t lower your taxable income. The advantage of a Roth IRA is that money in the account grows tax-free, and eligible withdrawals are also tax-free. 

With a Roth IRA, you choose to pay taxes now to avoid paying them later. This is a significant benefit to those who expect to move into a higher tax bracket later in life.

Tax-Free Distribution Requirements

To avoid penalties when taking distributions, the account must be open for at least five years, and you must be 59.5 or older. You could face tax penalties if you don’t meet either of these requirements.

However, there are a few exemptions. You can withdraw from your Roth IRA penalty-free if you:

1  

  • Have a qualifying disability
  • Use the withdrawals to pay for qualifying higher ed costs
  • Are purchasing your first home
  • Use the withdrawals to pay for medical expenses that exceed 7.5% of your AGI

4 Big Reasons Why Roth IRAs Are Useful

Here are a few reasons why Roth IRAs may make an effective addition to your retirement income lineup.

Reason #1: You Can Withdraw Contributions At Any Time

With most retirement savings accounts, you can’t touch the funds without penalty unless you meet the age requirements.

What’s special about a Roth IRA is that you can withdraw the contributions you’ve made to the account at any point. Note that you cannot touch the earnings without incurring a tax penalty. This makes it especially important to track how much you contribute to your Roth IRA yearly.

While you won’t pay the penalty on contribution withdrawals, you are still responsible for paying income tax on the amount withdrawn.

Reason #2: Distributions in Retirement Are Tax-Free

Tax planning is critical for retirees, and amplifying your tax-free retirement income bucket gives you more freedom and flexibility in retirement. If you have a higher-income year, maybe with more realized gains or the sale of a home, drawing from that tax-free bucket supplements your income while keeping taxes at bay.

Remember, creating a tax-efficient plan for your retirement income helps extend the life of your investments. 

Reason #3: Roth IRAs Don’t Have RMDs

Roth IRAs are the only type of retirement account that doesn’t have required minimum distributions (RMDs).

For traditional IRAs and 401(k)s, the IRS determines a set amount that account holders must withdraw each year—the formula considers the account balance and life expectancy. The SECURE Act bumped the age for starting these RMDs from 70.5 to 72. 

Since the funds in these accounts are tax-deferred, RMDs are subject to ordinary income tax. But with a Roth IRA, you don’t have to worry about RMDs—you can withdraw your funds in retirement when you need to. 

Reason #4: They Make a Great Addition to Your Estate Plan

If you’re looking for a tax-efficient way to pass money to your loved ones, look no further than a Roth IRA.

Distributions from an inherited Roth IRA remain tax-free, and spouse beneficiaries can hold onto the account for as long as they like. If a non-spouse beneficiary inherits the account, they will need to withdraw all funds from the account within 10 years unless they are:

  • Disabled or chronically ill
  • Under the age of 18
  • Less than 10 years younger than the original account owner

But, Not Everyone Can Directly Contribute to a Roth IRA

For 2022, the contribution limits for Roth IRAs are $6,000 per person, or $7,000 per person over the age of 50.

Roth IRAs do have income limits. If your modified adjusted gross income falls within the income phase-out range, you’re eligible to contribute a lesser amount. If you earn above the phase-out ceiling limit, you are not eligible to contribute at all.

For 2022, the phase-out ranges are:2 

  • Single taxpayers and heads of household: $129,000 to $144,000 
  • Married, filing jointly: $204,000 to $214,000
  • Married, filing separately: $0 to $10,000

How to Bypass Roth IRA Income Limits

There are ways for high earners to bypass Roth IRA income limits. 

A backdoor Roth IRA and mega backdoor Roth IRA involve contributing to a traditional IRA or 401(k) before converting the funds into a Roth account. These can be fairly complex and may increase your tax liability in the year you make the conversion, so consult with a tax professional and financial advisor first.

Another option is to do an in-service rollover from your 401(k) to a Roth IRA. Not all plan providers allow in-service rollovers, however. Consult with your HR department or plan sponsor to determine if this is a viable option.

Make Your Roth IRA Work For You

Roth IRAs are effective tools for building wealth and growing your tax-free retirement income bucket. 

In most cases, it makes sense to contribute to a Roth account when you’re in a lower income tax bracket than you anticipate being in during retirement. Or, if you believe taxes overall will increase by the time you retire, paying them sooner rather than later makes a lot of sense. 

As you continue saving for retirement, don’t hesitate to reach out to our team. We’re here to help address all areas of your wealth, including your retirement savings strategies. 

Sources:

1Publication 590-B (2021), Distributions from Individual Retirement Arrangements (IRAs)

2IRS announces changes to retirement plans for 2022

Disclaimer: 

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

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Can You Afford To Retire Tomorrow?

One of the most common questions clients present to us is,

“When can I comfortably retire?”

They want to know if the nest egg they’ve diligently accumulated over the years is enough to get them to and through a long retirement. 

To help, we’ve outlined how you can evaluate your retirement savings needs, “test drive” your budget, and adjust your savings strategy before leaping into your golden years.

Go Gently Into The Retirement Red Zone

Legacy Wealth Advisors specializes in helping those entering the “red zone” prepare for retirement.

What’s the “red zone?”

No, it’s not the coveted field location in football that sets teams up to score. In terms of retirement, the “red zone” refers to the five to ten years before you leave the workforce. 

Unlike an NFL red zone, where teams may be more apt to take risks and show off their offense, a retirement red zone is where many people benefit from strong defense. This translates to being more cautious with spending and saving—spending less and saving more. 

The “red zone” is when we buckle down to ensure a smooth transition into retirement. It’s important because this approach is designed to protect your assets and cash flow. By letting up on the gas pedal a bit, we help mitigate the sequence of returns risk and offer a cushion against negative returns in the early years of retirement.

When you’ve reached this point, some critical things to consider include:

  • Evaluate your current savings
  • Identify potential savings gaps
  • Analyze spending and pinpoint habits you want to avoid
  • Test drive your retirement spending estimates

Let’s dive a bit deeper into each of these categories.

Evaluate Your Current Savings

When considering your countdown to retirement, start by identifying all of your assets, including anything in your retirement accounts (401(k), IRA, etc.), brokerage accounts, real estate, cash savings, etc.

Calculate everything to determine the size of your nest egg. From there, we can estimate how much you’ll have when you actually retire by calculating your investments’ projected rate of return. 

Here at Legacy Wealth Advisors, we use financial planning software to provide real-time projections, enabling you to see how your savings could translate to spending when you retire. This tool can help give you confidence in your “retirement number” and help us create a strategy that will help support your future spending needs. 

Estimating your projected income for retirement is necessary to identify any potential savings gaps.

Mind The—Potential—Savings Gaps

For some people, there’ll be a discrepancy between how much you have saved for retirement and how much you’ll truly need to maintain your current standard of living.

Remember, understanding this gap starts by assessing how much you’re projected to have in retirement.

If you aren’t sure how much you expect to spend, take your retirement savings for a “test drive.” Here’s a simple calculation. Multiply your current cost of living and how long you anticipate being in retirement. 

Try that same exercise but with your expected numbers. Will your current (or projected) nest egg cover this amount? Can you make compromises on your spending? How can you create a savings/investment plan to boost your savings over the next decade? 

If you’re having trouble assessing your spending, grab out your credit card and bank statements over the last year to help get as accurate an estimate as possible.

If you believe there may be a gap, we recommend you use your time in the “red zone” to address this and create a strategic plan for filling it. 

Test Drive Your Retirement Spending Budget

Test driving is an integral part of preparing for retirement.

To drill down deeper, we recommend thinking about how your spending habits may change—or stay the same—as you enter retirement.

  • Do you think your pace of spending will remain fairly similar, or is it possible you’re underestimating your lifestyle costs? 
  • What significant costs do you anticipate in retirement, such as an out-of-state move, buying a vacation house/condo, increased travel, etc.?
  • How do you envision spending your time?

With more free time on your hands in retirement, you may be looking forward to joining a country club, traveling, starting a small business, and more. With changes like these, you’ll want to prepare a savings strategy that accounts for these new expenses.

Making Strategic Financial Decisions

During the years leading up to retirement, determine if you need to ramp up your savings or if you’re comfortable continuing to save at the same rate. By identifying whether or not you have a gap in your retirement savings and expectations, you can strategize accordingly.

Many of the financial decisions you make during this “red zone” period can help set you up for success in retirement, like increasing your retirement savings and reducing expenses.

Increase Retirement Savings

Once you reach 50, you can start making additional contributions—known as catch-up contributions— to certain retirement savings accounts. Taking advantage of catch-up contributions can help you fill the gaps in your savings strategy and even provide an extra cushion.

2022 contribution limits include:

  • 401(k) & 403(b): $20,500 limit with $6,500 catch-up contributions
  • IRA: $6,000 limit with $1,000 catch-up contributions
  • HSA: $7,300 family limit with $1,000 catch-up contributions (For those 55 and older)

If you aren’t yet maxing out your retirement contributions, consider doing so as you enter the retirement “red zone.”

Reduce Expenses and Debt

Debt can look highly different before and after retirement. 

When you have a steady paycheck coming in, the mortgage payment may not be as big of a concern, but once you retire, you’ll likely become much more aware of where you put your hard-earned money.

What debt are you still paying down? Consider addressing debts like car payments, mortgages, medical bills, personal loans, and more before entering into retirement. Debt, especially high-interest debt, can really chip away at your retirement savings when not managed properly.

Next, ask yourself, are there any expenses you can reduce before retirement? Take a look at your current cash flow plan and identify potential areas for improvement. Do you really want to put a bunch of money into home renovations when you plan on selling the house when you retire? If you’re paying for seven streaming services, are you comfortable parting ways with a few you never use? 

Minor adjustments here and there can add up to significant savings over the span of retirement.

Ready to Retire?

Everyone’s on a different path when it comes to retirement. Whether you’re ready now or looking to wait a few years, working with a financial partner can be a complete game-changer. 

At Legacy Wealth Advisors, we help those nearing retirement develop a comprehensive strategy and transition smoothly to financial independence. Reach out to our team anytime to talk about your personal journey toward retirement and how we may be able to help.

Disclosure:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

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Should An Annuity Ever Have A Place In Your Retirement Plan?

As you continue building your retirement income strategy, you’ve likely come across annuities. 

A neighbor may have recommended them, or maybe an insurance agent sent a letter advertising their offerings, or perhaps you saw a too-good-to-be-true ad on TV. So what exactly are annuities?

Annuities are financial products that can provide guaranteed income in retirement, but there’s more to them than meets the eye.

If you’re considering adding an annuity to your retirement plan, here are a few considerations to make first.

What Is an Annuity?

Simply, annuities are insurance products. 

Purchasing an annuity creates a contract between you and an insurance company. You agree to pay a specific amount to the company, and they guarantee a set amount back in return.

When purchasing an annuity, you can make a lump-sum payment to the insurance company or make payments over time. Similarly, you can either receive a lump sum payment from the insurance company or a series of regular payments. You can also choose to receive money immediately or later, depending on how your annuity is established.

The idea of an annuity is to provide retirees with a fixed stream of income. It’s an alluring offer—steady income in a world where turbulent markets, low-interest rates, and high inflation seem to be the mainstay. But annuities are complex vehicles with a significant amount of fine pint—let’s get reading. 

Types of Annuities

There are three common types of annuities for individuals to choose from:

  • Fixed annuity
  • Variable annuity
  • Indexed annuity

Fixed Annuity

If you purchased a fixed annuity, the insurance company offers you a minimum rate of interest on the annuity and a predetermined amount of recurring payments. State insurance commissioners oversee and regulate fixed annuities.

Variable Annuity

There’s more flexibility in a variable annuity, as the company you purchase it from will allow you to direct your payments to different investment vehicles. The most common option is a mutual fund. 

Because there’s flexibility in where you invest your money, your payout, too, will vary. It will depend on how much money you put in, your rate of return on the investments, and any associated expenses. The SEC regulates this type of annuity.

Indexed Annuity

An indexed annuity acts almost like a hybrid between fixed and variable, meaning it combines common features of insurance products and securities. 

The idea is that the insurance company you purchase your annuity from will provide you payouts with a return based on the stock market index, like the S&P 500. In a fixed index annuity, you remain protected from market volatility while still benefiting from market upswings. 

Just like fixed annuities, state insurance commissioners regulate indexed annuities.

Pros of Annuities

People choose to purchase annuities primarily for these three reasons:

  • Regular payments over time
  • Death benefits
  • Tax-deferred growth

Let’s take a closer look at each potential benefit.

Regular Payments Over Time

Perhaps the most consistent fear about retirement is running out of money.

It’s challenging to structure a retirement income and spending plan that will sustain you for the rest of your life, and a guaranteed income stream can be a great comfort in that department.

When you purchase an annuity, your provider establishes a set schedule of payments to be made over a specific period. Doing so creates long-term, stable income that helps bring peace of mind to individuals and couples during retirement. 

The payout period may be over the remaining lifetime of the annuity holder or even over the lifetime of their spouse, or other designated beneficiary, meaning that annuities could also be part of your estate plan. 

Death Benefits

Should you die before you begin receiving payments, your beneficiary will still be able to benefit from monthly payouts from your annuity.

Tax-Deferred Growth

Any growth due to returns earned from your annuity isn’t taxed until you begin receiving payments. This perk allows you to save money over time without paying taxes on the growth until you make withdrawals.

Cons of Annuities

While guaranteed income in retirement is appealing, there are some significant considerations to make before purchasing an annuity.

A few common concerns include:

  • Fees and commissions
  • Lack of liquidity
  • Conservative returns

Fees and Commissions

Annuities come with a cost—often a high cost. 

And for some, the cost of added fees and commissions makes them a less-than-desirable retirement income option. You can expect different annuity types to come with different price tags. 

The more complex, the more expensive the product is likely to be. 

Lack of Liquidity

Once you’ve put your money into an annuitized contract, you’ve made a long-term commitment that can be very difficult and costly (if even possible) to get out of. 

For younger couples who have their peak earning years still ahead, it may not make financial sense to tie up so much of their money in this long-term financial product, especially if they have short-term goals like buying a home or paying for a child’s education.

Conservative Returns

Again, an annuity offers steady, guaranteed income. With that said, it’s a conservative investment option. This can make it appealing for those approaching retirement who don’t have time on their side to ride out potential market volatility. But for a younger couple, these more minimal returns would almost surely be an unnecessarily conservative option.

Legacy Wealth And Annuities

Financial advisors tend to have mixed reactions to annuities. 

Our Legacy Wealth advisors understand that they can be a good fit for some, but their cost is often a significant deterrent. We tend to see annuities oversold by other advisors, even when a better-suited option may be available for their clients.

If you’re considering purchasing an annuity, it’s a big financial decision that you shouldn’t take lightly. Our team would be happy to help you take a closer look at the benefits and considerations of annuities, just reach out to schedule a time to talk.

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Ready To Retire Early? 3 Questions To Answer First

After spending decades at a nine-to-five, the idea of retiring early is an appealing prospect for most. In fact, a recent study from research firm Hearts & Wallets found that over a third of people under 54 said they aspired to retire by 55.

But how many of them are prepared (financial or otherwise) to do so? For many pre-retirees, leaving their jobs early can feel more like a dream than an actual possibility.

We want to help pre-retirees determine if retiring early is an attainable goal. Below consider three questions regarding your financial and emotional preparedness for an early exit from the workforce.

Question #1: Are You Financially Ready for Retirement?

The idea of retiring early is exciting, but cutting your timeline short will require more savings than you previously anticipated. You’ll likely need more savings the earlier you wish to retire. Shaving 5+ years off your timeline may require different financial strategies than only retiring a year or so earlier than planned. 

To determine your retirement readiness, reverse engineer your savings. This process puts a rough number on retiring early, which you can use to establish a savings goal.

Start by figuring out your yearly expenses. Take a look back at the past couple of years and identify recurring bills or costs. These could include house payments, insurance, travel, holidays and birthdays, phone or internet bills, utilities, taxes, debt, etc. The more detailed you can be with this list, the more accurate your estimate is.

Also, don’t assume you’ll automatically spend less in retirement—many retirees’ spending remains relatively consistent and can even spike in the first couple of years as you check off big-ticket items like traveling, moving, etc. 

Once you have a comprehensive roundup of your annual expenses, multiply it by the number of years you anticipate being in retirement. If the current average lifespan in the U.S is about 80 years and you retire at 55, you could be in retirement for 25 years! Count on a long and prosperous retirement, as you want to be sure your nest egg lives longer than you.

This exercise can leave you with a rather large, intimidating number to put on your retirement. If you find that you’re a hair or two shy from your goal, consider how you can make up the difference:

  • Delay retirement to continue to work and max out your retirement savings vehicles.
  • Plan to pursue a part-time job or encore career after you leave your job so you can rely on a steady paycheck.
  • Redirect current spending toward saving for retirement.

With enough planning, dedication, and sound strategizing, we can work together to get you there.

Bonus: Make A Cash Flow Plan

You want to retire early, incredible, but how will you access your hard-earned money? In most cases, you have to be 59 ½ to withdraw funds from your retirement accounts (401k, traditional and Roth IRA, etc.) without a penalty. 

So, what can you do?

  • Consider the Rule of 55. This IRS rule allows you to withdraw funds from your 401(k) before 59 ½ without the 10% penalty. But, you’ll have to follow a couple of rules. First, you have to leave your job in the calendar year that you turn 55 or older. Second, you can only withdraw funds in the 401(k) from your most recent employer, not any others you have floating around—which makes consolidating sound like an excellent idea. 
  • The 72(t) Rule. The 72(t) rule allows you to access funds from your IRA before you turn 59 ½. But this is an incredibly complex rule riddled with intricacies. We can review your situation to determine if it could be a good fit for you.
  • Use your Roth IRA. While you can’t withdraw earnings, you can withdraw contributions penalty-free if the account has been active for five years.
  • Lean on personal savings. Now is your brokerage account’s time to shine! You can use some funds to supplement your expenses.

Question #2: What Are You Retiring To?

What is your reason for wanting to retire early? Escaping a stressful work environment is understandable, but dig a little deeper into the “why.”

If you’re unhappy in your current position, consider whether a job change or career shift could be a suitable alternative to retirement. Retiring early requires an immense amount of planning and preparedness. If you think you may find fulfillment by switching jobs instead, it could be a less financial strain in the long run. 

Not to mention, entering retirement before you’re truly ready is a jarring experience. A significant number of retirees suffer from depression caused by loneliness and isolation, and the CDC estimates that over 7 million adults over 65 battle with depression. Going into the next phase unprepared may not be the right answer to combatting an unfulfilling work life.

Before diving headfirst into the unknown, think about what you want your next chapter to look like. You know you’re looking for a change, but that doesn’t have to be as drastic as early retirement. Pivot career tracks to something that’s more aligned with your interests. Or, check out part-time jobs, consulting or freelance opportunities, even starting your own business. These can be fulfilling alternatives that continue to keep you engaged without the commitment or stress of a full-time job.

Leaving the workforce altogether may still be your ultimate goal. But before clocking out for good, put a clear plan in place for what you want to do next. One of the most critical elements of your retirement lifestyle is planning for your time. Build a purposeful and meaningful routine you’re excited to pursue—not just idly feeling the sand wedge into your toes. 

Set up volunteer opportunities in your community, offer to babysit your grandkids a couple of times a week, or focus on hobbies you’ve wanted to try. Retiring with a solid game plan is what makes you feel fulfilled and satisfied in your golden years.

Question #3: What Adjustments Do You Need to Make?

Before leaping into early retirement, there are a few things to check off your to-do list first. These include lifestyle adjustments that will help make up the difference between how much you need to sustain your retirement and how much you already have saved up. Examples of these lifestyle adjustments include downsizing your home, increasing your retirement savings, and paying off debt.

The fewer financial obligations you’ll have in retirement, the less you’ll need to have saved up. That’s why reducing or eliminating debts like a mortgage, car payment, and personal loans can impact your retirement plan.

Finances aside, keep in mind the personal adjustments you’ll face in retirement. If you’re used to spending every day at the office, what will you do with your weekdays in retirement? Going from a full workweek to an empty schedule is more difficult than most people realize. It’ll be helpful to determine how you want to spend your days ahead of time to avoid any shock and doubt during the transition into retirement.

Bonus: Make A Healthcare Plan

Leaving your job comes with several consequences, and one that many early retirees forget about is their health insurance. If you retire before you’re eligible for Medicare (65), you must have a plan to supplement your expenses. Here are some ideas to consider:

  • COBRA coverage—usually available for up to 18 months after you leave your job
  • Become a dependent on your spouse’s insurance
  • Shop for a policy on the marketplace.

Retiring with Legacy Wealth Advisors

Retiring early is an exciting dream, and for many diligent savers, the reality is more possible than they realize.

If this is something you’re considering, we encourage you to speak with your advisor sooner rather than later. At Legacy Wealth Advisors, we can help you create a strategy that moves you closer to your goal.

Feel free to schedule a 15-minute call with us; we’re happy to dive deeper into your goals for retirement.

Disclaimer: Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. 

Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

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5 Habits Happy and Healthy Retirees Share

Preparing for retirement seems to revolve too much around the numbers—how much to save, what and when to withdraw, considering taxes, the type of insurance coverage you need, etc.

But whether you’re transitioning toward retirement soon or already enjoying your golden years, it’s important to remember that the numbers—while important—aren’t everything.

They’re only one part of what your retirement will look like. 

As 2021 winds down and you look forward to the new year, we want to help end things on a positive note. Consider these five healthy habits your dose of inspiration to make retirement as sweet as can be.

Habit #1: Stay Physically Active

Whether you’ve been a workout fanatic your whole life or just starting your fitness journey, staying active will directly impact your overall happiness in retirement.

Exercising regularly offers essential benefits for retirees such as:

  • Reducing the risk of certain diseases
  • Maintaining balance and strength
  • Improving sleep
  • Boosting the immune system
  • Maintaining mental stimulation
  • Combating isolation

In a recent study, retirees actually ranked their health as the most important ingredient to a happy retirement.1 And it makes sense, why work so hard to save for retirement if you won’t be physically able to enjoy it?

If you’re a fitness novice, there’s no better time to start than in retirement. From aerial yoga to horseback riding, to walking groups, there’s any number of activities you can try that aren’t in a gym or on a treadmill. 

The important thing is to find something you enjoy and can stick to regularly. The CDC recommends that adults 65 and older take part in 150 minutes of moderate aerobic activity per week.2 For reference, that’s just about 20 minutes a day.

Habit #2: Challenge Your Mind

Just as you want to keep your body in working condition, your mind needs to be challenged as well. Exercising your brain regularly plays a critical role in maintaining cognitive function for longer in life.

Reading a new book or completing a crossword puzzle are great ways to start the day off right. Anytime you try a new activity, engage in a meaningful conversation with friends, or take a class, you’re challenging your mind. That stimulation is needed to feel fulfilled and engaged throughout your retirement.

Find ways to minimize your screen time. Instead, focus on utilizing your time in retirement to the fullest. If there’s a hobby you’ve always enjoyed, maybe it’s time to explore it deeper. Whatever you enjoy doing, consider how you can make it mentally challenging and engaging.

Habit #3: Build a Routine You Love

By the time retirement rolls around, it’s natural to feel resentment towards a nine-to-five. But love it or hate it, it did give you a routine. Ending that routine abruptly (i.e., retiring) can be a shock to the system.

To maintain a feeling of regularity, consider creating a new routine—one that’s dictated by your own interests and desires. Instead of obligation, this routine is driven by things that bring you joy and fulfillment.

Take some time to explore what feels good for you. Your new routine can contain whatever you want: gardening in the morning, babysitting your grandkids in the afternoon, and volunteering at the library in the evenings. You may even find that you miss having a work schedule, in which case an encore career or part-time job might scratch that itch.

Because you’re living a work-optional life in retirement, you have the newfound freedom to create a routine that works best for you.

Habit #4: Find a Community That Fills You Up

A routine isn’t the only thing that gets left behind in the office when you retire. You likely had coworkers you considered friends or family, and leaving them in retirement is challenging. But your social life is just as meaningful in retirement as it was during your working years.

To combat isolation, you’ll need to be proactive in rebuilding a community of friends and family. A community, no matter how big or small, is central to a joyous retirement. Connect with others at your fitness center, church, clubs, or community center. Find people who may have interests and hobbies in common, or join a volunteer organization.

Habit #5: Identify Your Purpose

Defining your “why” has never been more vital than in retirement. It’s easy to fall into a sedentary, listless lifestyle when you’re no longer obligated to go to work. But with 20+ years ahead of you, it’s essential to make them count.

What will give you meaning, value, and purpose in retirement? From passion projects to starting your own business, there’s no end to the things you can focus your time and energy on in retirement. 

Many retirees find value in volunteering with an organization they’re passionate about or embarking on an encore career they’ve always dreamt of. Finding a purpose in retirement gives you something to work toward, focus on and get excited about in the years to come.

Finding Happiness in Retirement

Preparing for a healthy and happy retirement extends far beyond a financial plan. At Legacy Wealth, we can take the lead on getting you to and through the transition process. But it’s on you to envision what your own happy, healthy and purposeful retirement will look like. Once you have the ideal retirement life in mind, we can develop an ongoing plan to help you work towards your goals.

Feel free to reach out to our team today to discuss your own retirement planning questions.

Sources:

1 https://agewave.com/what-we-do/landmark-research-and-consulting/research-studies/health-and-retirement-planning-for-the-great-unknown/

2 https://www.cdc.gov/physicalactivity/basics/older_adults/index.htm

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. 

The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of  Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

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A Step By Step Guide To A Retirement Spending Plan That Works for You

If you’ve saved diligently for retirement, your hard-earned nest egg deserves an intentional spending plan. But as you likely know, it can be challenging to switch from a mindset of saving to spending. 

That’s why Legacy Wealth works with individuals and couples preparing for, transitioning to, and enjoying retirement. Together, we’ll help you determine the best course of action for utilizing your savings in a tax-efficient and goal-focused manner during your golden years.

As you consider your spending in retirement, you’ll need a retirement budget. Here’s how to start building one today.

Step #1: Determine Your Income Channels

Perhaps the biggest question to ask yourself when preparing a budget is, “Where will my money come from?”

To answer, look at the income channels you’ll have in retirement, specifically your fixed and variable income.

Fixed Income

Fixed income refers to income that will not change in value. Because of this, you’ll know exactly how much you’ll receive each payout and (usually) when to expect it. Examples of fixed income could include Social Security, a paycheck from your job, a pension, and an annuity.

There are strategies to maximize these fixed income streams. For example, delaying Social Security benefit payouts will increase the monthly amount (up until the age of 70). Similarly, the distribution method in which you choose to receive your pension will impact your income in retirement. You may have options such as receiving monthly payments or a lump sum amount.

Liquid assets like an emergency fund or cash are considered fixed income as well. These should be included when determining how much income you’ll have in retirement.

Variable Income

In your working years, variable income could come in the form of commissions or bonuses. In retirement, they may be dividends from investments or other earnings that fluctuate like a rental property.

Variable income sources are, as they sound, going to change from payment to payment. For example, you may choose to withdraw more or less from accounts like 401(k)s or IRAs to meet your spending needs in retirement.

Combining Your Income Channels

Keeping these retirement income sources in mind, you’ll want to develop a withdrawal plan alongside your advisor. This plan will account for things that can dwindle your savings, like inflation and taxes.

Step #2: Define Your Lifestyle Goals

Having all the savings in the world will only get you so far. The next step is determining what you want your retirement to look like and how you can utilize your savings to make it happen. Your desired lifestyle in retirement will have an immense influence over your corresponding spending.

Start big with questions like, “Where do I want to live in retirement?”

Do you want to stay in your current home, move closer to your kids, or buy a house in your favorite city? The answer will be the first factor in determining what you’ll be spending your money on in retirement.

Are you looking forward to traveling the world right away? Or are you taking a few years to spend quality time at home?

Start narrowing in on more day-to-day expenses you’ll want to prepare for. Do you have expensive hobbies, like boating or horseback riding? With more free time in your days ahead, you should be able to continue doing the things you love.

Step #3: Break Down Your Daily Spending

Keeping the above retirement goals in mind, it’s time to get a bit more granular. In as much detail as you can, estimate costs for your projected expenses.

These could include:

  • Mortgage or rent
  • Groceries
  • Utilities
  • Cell phone, internet & cable bills
  • Insurance (life, health, auto, home, etc.)
  • Taxes
  • Debts (auto loans, credit cards, etc.)
  • Entertainment
  • Travel & vacations

A realistic look at how much you’ll be spending in retirement is crucial. This list serves as a checkpoint in your retirement savings journey by answering the question: Are you on track to meet your needs, or do you need to reconsider your savings strategy?

Step #4: Make a Plan to Meet Your Goals

If your current retirement savings doesn’t meet the demand of your projected expenses, prepare to make up the difference.

Whether you’re a few months or a few years away from retirement, there are some things you can do to give your savings a boost.

Max out contributions to your retirement savings accounts, including 401(k)s, IRAs, and HSAs. Those over 50 are allowed to make additional catch-up contributions. If you have the means to do so, use this opportunity to tuck away as much as possible. Remember that contributing to most non-Roth accounts will reduce your taxable income for the year the contributions are made.

If you’ve recently received (or plan on receiving) a large windfall such as an inheritance, property sale, bonus, or lawsuit settlement, consider putting a portion of this towards your retirement.

Remember, you can always reevaluate your current household budget for opportunities to re-direct spending towards retirement savings. You may also find it worth your peace of mind to continue working an additional year or two beyond your original retirement date.

Step #5: Spend Intentionally in Retirement

Above all else, let your goals and values guide your spending in retirement. In doing so, we can help build a spending plan that’s unique and personal to you. 

At Legacy Wealth, we can help you determine what’s worth splurging on and where you may be able to afford to cut back. If you want to spend more on a boutique gym experience, for example, let’s make sure it’s reflected in your budget. Whatever you find joy and value in, we’ll make it a priority in retirement.

Retirement should be your time to live life your way, without the restrictions of work obligations or financial uncertainty. If you’re excited to develop a spending plan that’s tailored to your retirement goals, set up a 15-minute consultation with our team today.

Disclosure:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

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If you have questions about retirement planning and want to work with a financial advisor that cares about you and your goals, let’s talk.

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