The start of a new year is always a good time to take a closer look at where you are financially and figure out whether certain changes may help you boost your retirement readiness. While there are many things you can do, here are four steps you might want to move to the top of your "to consider" list.
First, look over your year end investment statements to see if your portfolio needs rebalancing. Even with the economic havoc wreaked by the COVID-19 pandemic, the stock market generated double-digit returns last year. This may have boosted the stock allocation in your retirement portfolio higher than you originally intended. To restore your targeted asset allocation, consider selling some stocks and reinvesting the proceeds into bonds or cash to get your portfolio back in balance. This is something you should do at least once a year, and even more often if you can.
Second, think about converting some or all of your Traditional IRA assets to a Roth IRA. Even though you’ll have to pay taxes on the converted amount, once this money is in your Roth IRA and you’ve held the account for five years, you’ll never have to pay taxes on any withdrawals you make after age 59½. And, unlike with Traditional IRA and 401(k) plans, you’ll never have to take required minimum distributions. The earlier you complete the conversion, the longer you’ll benefit from the Roth’s tax-free compounding.
Third, if you have dividend-paying stocks in your taxable investment accounts, consider using some of this dividend income to help pay for everyday expenses. Since most dividends are taxed as ordinary income whether you spend them or reinvest them, thinking of them as an additional source of annual income may make it easier to rationalize spending them. More importantly, if spending dividends in the years leading to your retirement can help you delay taking Social Security or tapping into the principal of your investments, then you’ll boost the odds of having more money to live on when you’re ready to retire.
Finally, if you’re approaching retirement and are having trouble figuring out these complex financial issues on your own, now may be an ideal time to seek out a fee-only fiduciary financial planner. These professionals can conduct a comprehensive analysis of your investments, projected Social Security and pension payments and your estimated income needs to help you determine if it makes sense to implement any of these new year’s financial resolutions or other strategies to help smooth your path toward a more comfortable retirement.
For further research:
Next Avenue, 3 Smart Money Resolutions for 2021