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Milestones in Focus - Financial Planning Timeline: 50’s to Early 60’s Pre-Retirement Checkup

July 09, 2021
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Financial Planning Timeline: 50’s to Early 60’s Pre-Retirement Checkup

In this installment of Milestones in Focus, we will explore financial planning topics that should be top of mind when a household is in their 50’s to early 60’s. This time period can be characterized by peak income, retirement catch-up provisions, long-term care (LTC) insurance considerations, strategic estate and tax planning, and the reduction of outstanding debts. This is by no means an exhaustive list, but if these topics are overlooked or delayed, it can cause difficulty down the line for those racing to catch up.

Peak Income & Salary Deferral

As salary and bonus income reaches what is often  a peak, continuing to defer income into qualified retirement accounts is key. Income tax liabilities are consistently higher during this high earning phase, but by contributing to retirement accounts, current taxes are reduced. If retirement accounts are fully funded, building out non-qualified accounts can create a buffer for retirement cashflow needs. By having three asset pools – retirement (pre-tax), non-qualified (post-tax), and real estate assets, households better prepare themselves against the threat of rising taxes, interest rates, and inflation. Focusing solely on maxing out retirement contributions, while neglecting to build post-tax assets, can leave you less prepared to fund capital outlays (e.g. new roof) without incurring a larger-than-expected tax bill. 

Catch-Up Provisions

Saving for retirement is often challenged during this period, due to the funding of private schools or college, asset acquisition (e.g. vacation house), or other committed expenses.  Don’t fret if you are unable to max out retirement contributions every year – it is not too late to “catch-up”. After the age of 50, a “catch-up contribution” provision is permitted by the tax code. In effect, regular annual contribution limits are increased by $6,000 in 401(k) or 403(b) accounts, $1,000 in Roth and IRA accounts, and $3,000 in SIMPLE 401(k)’s.

Long-Term Care (LTC) Insurance

Elder and Custodial care have become increasingly important to plan for as aging families may require professional attention in their advanced years. Long-Term Care policies attempt to address this rising need by offering single pay, installment (10- or 20-year policies), or lifetime payment plans. Keep in mind that in order to receive manageable rates or to qualify for such a policy, households must begin to structure LTC policies as soon as feasible and most-importantly, before any health issues arise. The later you wait, the higher LTC premiums will be – if you are even eligible. Single premium or installment plans are a great way to hedge against the rising costs of healthcare; once they are funded the premiums are not subject to increase. In contrast, lifetime payment plan premiums are subject to increases over time and may become unaffordable in your later years.

Strategic Estate and Tax Planning

Estate plans should be in effect much earlier than when you reach your 50’s and early 60’s; however, these plans are most likely due for key updates. Do not neglect revisions, modifications, or updates to Will and Trust documents, as an unexpected death can drastically derail estate planning intentions. Estate planning topics may include changes to state of residence, Executor or Trustee updates, children reaching the age of majority, asset and liability key updates, and more. Assuming that assets have grown over time, liquidation and diversification techniques may greatly benefit a household in an attempt to reduce tax burdens and retain hard-earned income.   

Debt Reduction 

Retirement is around the corner and debt-heavy households will find it more difficult to maintain their lifestyles in retirement if the demands of current debt service remain at high levels. We frequently recommend clients pay down their mortgage as much as possible, or eliminate it, as they approach retirement. A simple amortization schedule can act as a useful tool to determine how quickly mortgage debt can be paid down over time and to highlight options. Paying down a mortgage should not be prioritized over previously stated funding topics and insurance, however it should be considered when heading into retirement.

As always, we look forward to discussing these topics in greater depth  at your convenience. If your financial plan or estate documents are due for an update or review, please reach out and we will schedule some time to discuss. Thank you and have a great summer!