Hitting the big 5-0 is a great life milestone. It also serves as an excellent time to consider an in depth review of your Financial Planning and zeroing in on what you need to do to Get Retirement Right. Although the list could go on and on, here I want to share with you 7 planning strategies to not overlook if you are in your 50's.
First of all there are Five Key Areas to your Finances. These involve Estate Planning, Taxes, Protection, Retirement and Investments. These seven planning items below touch on each of these areas and I'll note what each one involves.
1. ESTATE PLANNING: Make Certain Your Estate Plan is Up to Date (OR IF You Don't Have...One Get One)
Chances are your T Shirt collection of life's milestones by the time you reach your 50's might include some of the following: kids, marriage, divorce, aging parents, loss of a spouse, kids are now teenagers or off to college, started a business, own other real estate than just your residence and the list goes on
All these are reasons that could merit an update of your current Estate Plan. The general rule of thumb is about every three years it makes sense to review your Estate Plan. Now keep in mind although a thorough one involves an Estate Planning attorney; a good start is reviewing your documents yourself. There may be instructions that you outlined in your Trust for example that after you read through them are outdated. Another example is individuals that you named in your Trust, Will, or Advanced Directives to help carry out your Estate Plan are no longer the ideal person. Bottom line is you want to make sure you have this buttoned up air tight.
2. PROTECTION PLANNING: Review Your Life Insurance Coverage
I started my Financial Planning career in March of 2000. As of the date of this blog that is about 18 years ago. When people tell me "I don't like insurance." My common response is "Neither do I, but I like what it does for my clients." I've helped file more claims than I can count, I can tell you the money is never enough. I personally witnessed in my family someone lose their life in their 50's. On top of the fact its an emotional tragedy, financially its devastating without a plan in place. Its a time when maybe you have kids getting to college age or you have children that are starting families. You are potentially at your peak earning years, you were going to be the one that gives the extra bump to your kids to make that first home purchase, the wedding, take the whole family on that cruise so everyone is together, care for your aging parents, the list goes on. Life insurance combined with an up to date Estate Plan; at the very least can help you fulfill part of that Legacy you envisioned. Now is a great time to review your coverage to make sure its adequate and if the policy structure is optimum for you.
Now, on the brighter side of things now is also a good time to review your life insurance coverage to see if you should:
- Upgrade existing policies at a lower cost
- Redesign the coverage you have to overlap your investment strategy and retirement planning
- Integrate your life insurance coverage with Long Term Care coverage (more on this on Strategy #5)
3. TAXES, RETIREMENT & INVESTMENTS: Have a Retirement Projection Prepared For Yourself
We've all heard the saying "Failing to plan, is planning to fail" and this what I want to help you avoid in this step. Chances are you've been adding all these year into your 401k, 457, 403b or company retirement plan; but are you in the ball park for your retirement goal?
This is where having a retirement projection prepared is a big help in knowing that answer. The type of projection I recommend is a Monte Carlo projection.1 This essentially "stress tests" your plans for retirement.
A Monte Carlo simulation is a method of testing an outcome over a range of possible variables. Monte Carlo simulations are used in retirement planning to predict the success of your retirement goal that you help outline. A Monte Carlo retirement analysis will consider your level and rate of savings, the income you want in retirement, taxes, inflation, investment performance, how long you expect to live, among many other things and give you a probability of success.
With this information in hand you can course correct your plans early enough to make an impact on your retirement goals. You might be doing a great job saving 10% of your income into your 401k, but without a clear idea how far or near you are to your retirement goal; your chances of success are weaker. Having a Monte Carlo Retirement Calculation prepared can give you important insights to the track that you are on for your retirement and what you need to do to get there.
4. TAXES: Consider a Roth IRA Conversion
A Roth IRA conversion2 is when you convert part or all of your Traditional IRA into a Roth IRA. This is a taxable event. The amount you convert is subject to ordinary income tax. It can be a beneficial strategy depending on your overall situation but it is also a delicate decision because it might also cause your income to increase, thereby subjecting you to the Medicare surtax. Roth IRAs grow tax-free and withdrawals are tax-free in the future, at a time when tax rates might be higher. They also do not have any Required Minimum Distributions (RMD) that require you to take money out of your pre-tax retirement accounts after age 70.5; which RMD's for some people is nothing more than additional income they are taxed on when they really don't need it.
Another benefit is when you leave a Roth IRA to your beneficiaries they won't have to pay taxes on it. Therefore it can be something your leverage in your Estate Planning.
Whether to convert part or all of your traditional IRA to a Roth IRA depends on your particular situation. It is best to prepare a tax projection and calculate the appropriate amount to convert. Remember—you do not have to convert all of your IRA to a Roth. Roth IRA conversions are not subject to the pre-age 59½ penalty of 10%.
Many 401(k) plan participants can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½. There are a number of pros and cons to making this change. Keep in mind The Tax Cuts and Jobs Act of 2017 has been the largest overhaul of the Tax Code in 30 years. Given a Roth Conversion involves a good deal of Tax Planning its worthwhile to get informed of the recent changes.
To learn more download our free Ebook: 5 Things You Need to Know About Tax Reform.
The bottom line is this is a time for this to be on your radar. It's worthwhile to have the numbers crunched to determine if a Roth conversion is a good idea for your particular situation.
5. PROTECTION: Investigate Long Term Care Insurance
The National Institute on Aging define Long Term Care as: a variety of services designed to meet a person's health or personal care needs during a short or long period of time. These services help people live as independently and safely as possible when they can no longer perform everyday activities on their own.
When you're healthy and active in your 50s, it's hard to imagine not being able to bathe or dress yourself. But it's just a fact of life that people need help as they get older. Nearly half of all people over 85 have some difficulty walking, and this in itself can limit the things you can do for yourself.
Keep in mind Long Term Care is not covered by Medicare. Even the most comprehensive Medigap policy pays for 100 days of skilled nursing care only. But if you're not sick enough for skilled nursing care, they're not going to pay for it. The average period of skilled nursing care is just 28 days. And when it comes to custodial care for help with activities of daily living, there is no coverage at all.
Having an answer to the question: "What are you going to do when your health changes?" Is what investing Long Term Care Insurance is all about.
Long Term Care Insurance can help build a moat around your finances and estate planning goals so there is at a minimum a first line of defense to defray the costs of extended care. There are polices that are very much like your auto insurance and disability insurance; as long as you continue to pay for the coverage its there for you. There are also polices that you can purchase with a lump sum premium that if you never use the coverage a death benefit is paid out. Its worthwhile to investigate your options; you might be surprised that its an easy fix to the wild card that lurks in the deck of your golden years.
A change in health doesn't have to completely derail your finances and independence when you plan properly.
Determine which of these five planning strategies is the biggest priority for you and tackle that one first. Then work your way down to the others that you haven't yet addressed, you'll be glad you did.
1 The projections or other information generated by Monte Carlo Analysis tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time
2 If converting a Traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted Traditional IRA contributions and on all earnings. A conversion may place you in a higher tax bracket than you are in now. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary we suggest that you discuss tax issues with a qualified tax advisor.