Preparing for Retirement

My clients, let’s call them Margot and Greg, paid a visit to the Falmouth office recently. They’re a couple from Mashpee in their mid-50s. Margot teaches middle school and Greg owns a catering business where he employs three people full-time. With their kids grown and moved out, Margot and Greg are now more focused on saving for retirement and they are hoping to call it quits before they’re too old to enjoy that retirement.

As we got to talking, Greg mentioned that he’d read a recent Cutter Family Finance article in which I wrote about financial resolutions for the new year. Like me, Greg explained that he is not big on New Year’s resolutions.

Margot added that Greg never sticks with them anyway.

Greg agreed with her and told me that was in part why they scheduled an appointment. He explained that Margot is worried that they are not doing enough to save for retirement and he figures the beginning of the year is a perfect time to assess their strategy and see what else they can be doing to prepare.

That’s why I love Margot and Greg – they take the long view, and they think strategically. Those are both strong signs of an educated investor.

Let me share with you, Cutter Family Finance readers, what I told them.

Even though the new year has begun, we all still have time to make contributions to retirement funds for the 2017 tax year. Until April 15th, Margot and Greg (and you) can continue to contribute to traditional IRAs and Roth IRAs, up to the limit of $5,500 ($6,500 if you’re 50 or older). The same goes for small business owners like Greg who have Simplified Employee Pension (SEP) IRAs, as well as those with Solo 401(k) plans, so long as contributions are made by the due date of the business tax return, with extensions.

The IRS has also raised the 2018 employee contribution limit for employees under 50 who participate in the federal Thrift Savings Plan, a 401(k) plan, 403(b) plan and most 457 plans, to $18,500, up from $18,000 last year. Employees 50 or older also get a slight bump, from $24,000 to $24,500.

It’s not a lot on the surface, but that increment adds up over time.

While contribution limits for Traditional IRAs and Roth IRAs haven’t changed for 2018, the IRS has improved the rules a bit. If you participate in a 401(k) or another employer-sponsored retirement plan, contributions to Traditional IRAs can be deducted in full if your Adjusted Gross Income is less than $63,000 (for single filers) or $101,000 (for married couples filing jointly). That income limit is $1 ,000 higher than last year.

Your ability to deduct IRA contributions is phased out if your income is higher, but there again, the IRS has made some improvements. The phase-out range for single filers is $63,000-$73,000, up $1,000 from last year. Married couples filing jointly also each get a $1,000 bump, so the phase-out range for them is now $101,000-$121,000.

The income phase-out range for Roth IRA eligibility has also gone up in 2018, from $120,000-$135,000 for single filers and $189,000-$196,000; up $2,000 and $3,000 respectively from 2017.

As I told Greg and Margot, since the IRS is letting us keep a little bit more of our money this year due to tax reform, it may make sense to adjust your contributions. Be sure to act as soon as you can.

Margot’s concerns about their retirement savings certainly aren’t unfounded. For example, the cost of healthcare in retirement is skyrocketing – premiums are rising each year, and with changes to Social Security and Medicare still in the crosshairs of Congress, it’s hard to predict where they’ll be when Margot and Greg are ready to retire.

Margot and Greg have an appropriate investment strategy in place. They’ve invested in a combination of diverse asset classes that will help reduce their overall risk in the event of a significant market downturn and they have a portfolio that have both strategic and tactical components. I explained to them that to really be prepared for retirement, they should also calculate what they think their expenses will be in retirement. And they should do that sooner rather than later.

For example, Margot and Greg moved to the Cape 20 years ago, and they still have a few years to go before they’ve paid off their mortgage. Once they have, that’s a considerable monthly expense they won’t need to worry about anymore.

But the mortgage alone isn’t their only housing expense – besides utilities and maintenance, they’ll also need to figure the costs of property taxes and insurance. Assuming they stay in their current dwelling, that is. Greg wants to “rightsize” their living space now that the kids are on their own. If Greg can convince Margot that it’d be the right move, their expenses may be reduced in the future.

So I left the teacher with some homework. I suggested she make a spreadsheet of their monthly expenses; including credit card bills, utilities, insurances and other recurring charges; then pad that number a little bit (maybe 20% or so). A “fudge factor” if you will, because quite frankly, you can’t plan for everything. (It is also helpful to adjust your final number for inflation – an exercise that is too complicated to get into this week, but one that you can find guidance for online.)

I suggested that once Greg and Margot arrive at that number, they should add up any retirement income that they will receive from guaranteed sources. If doing this yourself, be sure to include Social Security benefits, for example, lifetime annuity payments, or distributions from defined-benefit pensions.

It is critical to ask yourself if your guaranteed income covers your fixed expenses. And if not, what’s your plan to cover the shortfall?

I’m looking forward to meeting with Greg and Margot again. Once they have done their homework, we can decide whether any adjustments need to be made to their plan; there’s still time to act. And forewarned is forearmed. It all comes back to what I tell you all the time, folks:

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President at Cutter Financial Group, LLC, with offices is Falmouth, Duxbury, and Mansfield. Cutter Financial Group provides private wealth and investment management advice incorporating low risk, low volatility financial strategies. Jeff can be reached at jeff@old.cutterfinancialgroup.com.

Cutter Financial Group LLC (“Cutter Financial”) is a registered investment advisor.

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