If you’re planning to make New Year’s resolutions for 2019, there’s a good chance at least one of them will be related to your finances. Money management issues like big credit card bills or a small savings account balance may be more top of mind on a day-to-day basis, but the beginning of a new year is a great time to tackle more long-term goals like retirement. Here are some retirement-related action steps to consider resolving to do next year:
1) Contribute to a Roth IRA. If you’re eligible, you have until April 15th to contribute for 2018 and you can contribute for 2019 starting on January 1st as well. The earlier you contribute the better since the money can grow and eventually be withdrawn tax free after age 59 1/2 as long as you’ve had the account open for at least 5 years. (Having tax-free money in retirement is particularly useful if you retire before becoming eligible for Medicare at 65 since health insurance subsidies under the Affordable Care Act are based on taxable income.)
The reason a Roth IRA is a good place to start is because you can withdraw the sum of your contributions at any time and for any reason without tax or penalty so it can also double as an emergency fund. If you withdraw any earnings before age 59 1/2 and 5 years, they may be subject to taxes and a 10% penalty, but the contributions always come out first. If the money in your Roth IRA is part of your emergency savings, just be sure that you keep it someplace safe from losses like a savings account or money market fund. Once you accumulate enough savings somewhere else, you can invest the Roth IRA in something more aggressive.
2) Max the match in your employer’s retirement plan. If you’re fortunate enough to have an employer that matches your contributions, try to contribute at least enough to get that full match. Otherwise, you’re leaving part of your compensation on the table.
3) Run a retirement estimator. This will let you know whether you’re on track to hit your retirement goals and if not, what you can do to reach them. But as with any calculator, it’s garbage in, garbage out. Some reasonable assumptions to use are a 3% inflation rate, a life expectancy of 90 or higher, and average annualized investment returns of 4-6%, depending on how aggressively you invest.
4) Contribute more to an HSA. If you’re eligible to contribute to an HSA (health savings account) it can be a valuable retirement account as well. That’s because the contributions are pre-tax and can be invested and withdrawn penalty free at age 65 for any purpose. In addition, the money would also be tax free if used for qualified medical expenses, including premiums for long-term care insurance and Medicare. This is the only account that has the triple tax benefits of pre-tax contributions, tax-deferred growth, and tax-free withdrawals.
5) Contribute more to your employer’s retirement plan. These contributions are conveniently deducted from your paycheck and have the tax benefits of tax-deferred (pre-tax) or tax-free (Roth) growth. If you can’t afford to contribute enough now, see if your plan offers the option of “auto-escalation” or a “contribution rate escalator” that can automatically increase your contributions gradually over time.
6) Contribute more after-tax to your employer’s plan. If you’ve maxed out your pre-tax and/or Roth contributions, you might still be able to make after-tax contributions to your employer’s plan. These contributions can be converted to a Roth account for tax-free growth either within the plan (called “in-plan conversion”) or by rolling it into a Roth IRA.
7) Consider consolidating retirement accounts. If you have retirement plans from previous jobs still with your old employer(s), you might want to roll them into your current plan or an IRA. At the very least, it would be easier to manage fewer accounts and you might have a better selection of investment options.
However, there are a few reasons why you might not want to consolidate. One is if you want to invest in something that’s only available in your old plan. The second is if you have employer stock since you can pay a lower tax on the gain by transferring the shares directly from the account to a regular brokerage account rather than rolling them over to another retirement account. Finally, if you’re under age 59 1/2 and the old plan is a 457 or if it’s a 401(k) or 403(b) and you left the job after age 55, you would not be subject to penalties on withdrawals from the old plan but might be if you rolled it over to an IRA.
8) Make sure your investments are properly diversified. The easiest way to do this is with a target date retirement fund, which is a fully diversified “one-stop shop” that automatically becomes more conservative as you get closer to your target date. If you want a more personalized portfolio, you can use this worksheet, a robo-advisor or investment guidance from a financial planner.
9) Switch to lower cost funds. Research has found that having low costs is arguably the best predictor of which funds will outperform going forward. Look for funds with low expense ratios (the fees the fund charges) and turnover ratios (how often the fund trades, which can indicate transaction costs). Index funds, which passively track an index, generally have the lowest of both costs and tend to outperform more expensive actively managed funds over the long run.
10) Consider purchasing long-term care insurance. You can do everything perfectly in terms of building your nest egg and see it wiped out with a few years of long-term care expenses. If you have between $200k and $2 million in assets, you might want to purchase long-term care insurance to protect those assets. In particular, see if your state offers a long-term care partnership program, which provides special asset protection. It’s a good idea to purchase it in your 50s to early 60s because if you wait too long, it could be a lot more expensive or even impossible to qualify for should something happen to your health.
When you’re making your resolutions this year, go ahead and resolve to exercise more and eat less. Just don’t forget your retirement goals too. After all, someday you’ll want to be able to do something with your healthier, fitter future you than just work.