Happy New Year!
Planning is a wise part of retirement stewardship. But no matter how well we plan, we must always remember that "The heart of man plans his way, but the Lord establishes his steps" (Prov. 16:9).
And now that we are closing out 2018 and looking out ahead to 2019, I thought I would share some thoughts about what some things you can do to make sure you are on track with your retirement stewardship.
Since I am now "retired," our financial situation has changed somewhat. We are, of course, no longer getting a "paycheck" (unless you call Social Security benefits "paychecks.") So, I have had to create our own using Social Security and income from savings. Yet these checkpoints are also relevant to my wife and me.
Obviously, if you aren't retired, your situation will be different, and even if you are retired, there may be similarities, but yours will still be different from mine. In any case, here are ten practical stewardship checkpoints that may be helpful, regardless of what stage of life you are in:
1. Your investment portfolio
I wish I could say that I only look at my retirement investment portfolio once or twice a year, but that wouldn't be true. I tend to look at it every few weeks, but that doesn't mean that I do anything. It can be a little unsettling when the markets are so volatile, so it really doesn't make a lot of sense to look at it at all if I'm not likely to do anything anyway.
About 2 years ago, I started raising more cash in my portfolio. At one point I had close to 20%, but I have been slowly using some of it to buy assets when there is a significant decline in the market. I am now at about 16% (my "target" is 12%), but I am in no hurry to get there.
My current equity allocation is about 35%, so if stocks go down 10%, I would only see a 3.5% decline in my overall portfolio. It's not that I don't care, but that doesn't bother me too much. I am not going to sell since I own dividend-paying domestic and international stock funds that I want to keep for the long haul. I mainly want the regular dividend payments, although some capital appreciation that at least keeps up with inflation would also be good.
At this time of year, the main reason to take a look at your portfolio is to check your asset allocation. If your strategy is to maintain a 60% stock, 40% bond allocation, and it has shifted to 50% stock/50% bond due to declining stock prices in 2018, you may want to sell bonds to buy more stocks. I probably wouldn't make any changes as the markets are very volatile right now (and that will probably continue in 2019) so your allocation could change back in a week.
The fact is that we simply can't know with any certainty whether rebalancing would make our portfolio any more optimal than it already is. Plus, continually fiddling with our asset allocation to ensure that it is within, say 5% of our "target," can be counterproductive as we can tend to get too aggressive and end up selling the wrong assets at the wrong time. In that way, individual investors are often their own worst enemies.
2. Your risk tolerance
How aware are you of your risk tolerance? As the markets have "corrected" over the last few months (and it may not be over yet), have you seriously considered selling your stock funds and put your money in your mattress? Have you been looking at your balances every day and wondering if you should go out and purchase an annuity instead?
If so, your stock allocation in your portfolio may be too high for your risk tolerance. Perhaps you are younger, and you read somewhere that a 45-year-old should have an 80% equity portfolio, but now you realize that you can't stomach the short-term volatility of a portfolio that is that heavily weighted toward stocks. You may, over time, want to make adjustments to bring it more in line with your risk tolerance. Some recommend an allocation based on "your age in bonds," which for a 45-year-old would be 55% stocks and 45% bonds. If you want to stay heavily invested in stocks, you could consider less volatile funds. such as Vanguard's VMVFX mutual fund or Fidelity's FDLO ETF (there are many other similar funds out there).
If you are older, or perhaps already "in retirement," the sequence risk that the current market volatility and trends present should not be taken lightly. As a new retiree, I am more than a little concerned about this. This risk can be mitigated somewhat with a lower stock allocation, but there are economic scenarios where both stocks and bonds decline.
For many retirees, their "safety net," or income "floor," is Social Security, perhaps combined with an annuity or pension income. Keeping a cash reserve can be another safeguard, but it does not have the same effect as the others (once you spend it down, its gone). All of these can help us weather a multi-year market decline, but it certainly wouldn't be any fun.
3. Your retirement savings
It's good to check periodically to see if you are on track with your retirement savings based on your age. The "how much should I have saved" question is always a tricky one to answer since there are so many unknowns about the future (your retirement date, your expenses in retirement, inflation and tax rates, annual average investment returns, etc.).
Fidelity Investments offers some salary multipliers that you can use to estimate what you should have saved by a particular age: 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. So, for example, someone age 50 who is currently earning $80,000/year should have about $480,000 saved.
Based on most studies, the majority of people aren't "on target." (One recent study found that households ages 45 to 54 had average retirement savings of $215,800, with median savings of $82,600.)
If you are comfortable with where you are, even if it's less than what Fidelity suggests, then don't fret. But if you're way behind, you may want to increase your saving in either your 401(k)/403(b) or IRA. Take advantage of "catch-up contributions" if you are over age 50. If you don't have the extra money to save, take a hard look at your expenses to see what you can do to create additional margin.
4. Your overall expenses
This should probably be a part of everyone's new year planning regime. Take a look at your overall expenses and compare them to your budget. (If you don't have a budget, you may want to put one together for 2019, especially if you want more control over your spending.)
I do this mainly to check for trends, but since I am now retired, we may need to make some adjustments. Most recurring expenses in retirement are reasonably predictable, but a lot of research on retirement spending suggest that there can be a lot of fluctuation in year-over-year expenditures due to unexpected expenses that aren't predictable at all.
Large unexpected expenses are by definition low-probability events, and they are fundamentally unpredictable. For example, a couple of years ago, I had to have an HVAC system replaced. I knew it was getting old, but I didn't expect it to fail that year; I could not have "predicted" that I would need to replace it that year.
The biggest challenge for retirees is unplanned (and uninsured) medical bills. Those age 65 or older who are on Medicare Parts A and B, and who have also purchased a Medicare Supplement Plan (or who have signed up for a Part C Medicare Advantage Plan), will be in pretty good shape, depending on plan deductibles, etc. They shouldn't have substantial uninsured medical bills. However, those who retired earlier with a high-deductible private or ACA plan could take some unexpected hits.
It's generally a good idea to expect that you will get hit with significant unplanned expenses. The best way to handle that is not to try to predict it, but to plan for it by maintaining a cash reserve that can be used when needed.
If you are in retirement, part of your spending assessment might include changes to your retirement savings withdrawal strategy. Even if you are using the so-called 4% "safe withdrawal" approach, your actual spending may vary, so what is "safe" one year may not be "safe" in another due to poor market returns, unexpected expenses, and other factors.
If you are using an "income only" strategy that does not rely on selling any assets to raise capital, you may be in slightly better shape. But no matter what your strategy, I don't think there is any reasonable fixed amount or percentage that you can "safely" spend for the rest of your life from a volatile investment portfolio. You need to be prepared to make adjustments based on the many variables we have already discussed.
5. Your debt
If you are managing some consumer debt, did you make progress in paying it down in 2018? Did you take on additional debt? Certain kinds of debt, such as student loans, home mortgages, and business loans can be helpful because they enhance our ability to grow our earnings or improve our lives in other ways with a reasonable probability that we will be able to pay them off. But non-secured consumer loans and credit card debt for things like clothing, furniture, appliances, and automobiles are just the opposite; they may help us satisfy some immediate want or need, but they can be debilitating in the long term.
If you are in debt and don't have a strategy for paying it off, take a look at Dave Ramsey's "Baby Steps," especially the method he calls the "debt snowball." The sooner you eliminate your debt, the better because it frees up resources for giving and saving.
If you are getting close to retirement, it is a good idea to become debt free, including your house, as soon as you can. That will help you to keep your expenses in check, making your savings and other sources of retirement income last longer. If you are in retirement, possibly with less income than when you were working full-time, your debt may be more difficult to manage. Do what you can to pay it off as quickly as possible. Consider downsizing or selling some "stuff," or even taking a part-time job, at least until the debts are paid.
6. Your taxes
When it comes to planning for a new, most people immediately think about their taxes for the one that just ended. They start building their "tax file" (records, statements, receipts, etc.) and perhaps download their favorite tax preparation software. (I have used TurboTax for many years, but there are a lot of good products out there.)
I don't spend a lot of time thinking or worrying about taxes. Historically, I have tried to minimize the size of any refund and also to avoid having to pay any taxes out of pocket; in other words, optimized withholding so that I don't give the government an interest-free loan throughout the year, nor do I owe them anything at the end of the year.
Since I am now "retired," our tax situation has changed. Some percentage of our Social Security benefits will be taxable, as will anything we withdraw from our non-Roth IRA account. My IRA is with Fidelity, and I have set up monthly automatic withdrawals to supplement our Social Security income. As part of that arrangement, I have requested Fidelity to withhold a percentage for Federal Income Taxes.
I have to confess that I don't enjoy seeing that money siphoned out of my savings to a tax escrow, but it is important to withhold enough to make sure we can avoid IRS penalties for "underwithholding." We will owe no penalties if our tax bill is less than $1,000 after we subtract the amount already withheld for taxes. If our tax bill is above that amount, we won't have to pay the penalty if we pay at least 90% of our total tax due for the year by withholding or by making quarterly tax payments. (Penalties can also be avoided if we withhold an amount equal to 100% or more of our tax bill for the previous year. But since my income will be less in retirement, that is unlikely.)
I estimated my 2019 taxes with a calculator called "TAXSIM" provided by NBER. The changes that Congress made to the tax code puts us in a lower tax bracket than I would have been, but I still needed to calculate how much I wanted Fidelity to withhold from my IRA withdrawals to satisfy the "90% rule."
If you aren't retired but want to stay "even" with the IRS each payday, you could use to the tool to estimate your 2019 taxes and then double check your withholding with your employer. Better to get a little extra and invest it or increase giving than to let the IRS have use of it for a year or more.
7. Your required minimum distributions (RMDs)
Although I am retired, and I have a "traditional" IRA that will be subject to RMDs in the future, this isn't a current concern for me since I have not yet reached age 70 ½. However, if you reached that age in 2018, and you have a non-Roth IRA account, you are subject to the rules for the first time in 2019.
This rule requires that you withdraw (and pay taxes, which is what this is really all about ) based on a minimum percentage each year. Failure to do so results in 50 percent penalty – ouch! The rate goes up each year, and the IRS calculates it based on projected account balances and life expectancy, but it is easily converted into a set of age-based percentages.
For someone just turning age 70 ½, the percentage is 3.65. It steadily rises to 4.35% at age 75, 5.35% at age 80, etc. This ensures that a substantial portion of your savings—which were pre-tax when you saved them and have grown tax-free ever sense—are taxed in retirement. We don't like this, but I think you can see the point ("render to Ceaser what is Ceaser's").
Some retirement professionals suggest using the RMD as an overall savings withdrawal strategy. You could start with 3.0 or 3.5% when you retire at age 65 or 66, and then increase it to at least 3.65% when you reach age 70 ½. If you are already using the 4% "safe" withdrawal rate, you will be fine until you reach age 74 when the RMD is 4.2%.
8. Your will and final documents
If you don't have a will and other final documents prepared, do it as soon as possible. If you do, then it's a good idea to see if they need updating.
If your family, financial, or health situation changed significantly in 2018, there may be changes you need to make.
9. Your giving
The time has passed to make last-minute gifts that could impact your 2018 taxes. But the reality is that charitable contributions don't carry as much "weight" as they used to since the new tax laws enacted in 2017 raised the standard deduction.
For 2019, the standard deduction for a married couple filing jointly is $24,400. There is an additional standard deduction of $1300 for each married taxpayer age 65 or older. So, the standard deduction for my wife and I will be $27,000, which means that we would need itemized deductions (including charitable contributions) more than that amount to receive a tax benefit greater than that afforded by the standard deduction.
I have always maintained that tax benefits should not be the tail that wags the giving dog. In other words, we give to honor and glorify God and for the good of others, not because we receive tax benefits. If we benefit from the tax laws, then all the better.
So, rather than being concerned about the tax impacts, examine your level of giving in 2018 and see if was consistent with where you wanted it to be. If you'd like to do more, consider setting a target (such as a 5% increase) and then do it in small increments over time, adjusting your spending accordingly to make that possible.
10. Your accounts
If you have several bank accounts, and perhaps an old 401(k) or two with former employers, consider simplifying your financial life by consolidating them.
Before I retired, I consolidated all of my retirement savings at Fidelity in two different IRA accounts (one traditional and one Roth—the before tax traditional IRA account is by far that largest). This greatly simplified portfolio management and overall management of my financial affairs. (And the older I get, the more important this becomes.)
I wrote a lot more about the benefits of simplification in this article.
Planning for an unpredictable 2019
That's basically it. Most of these things are relevant to the majority of us, and none of it is very complicated. I don't spend hours and hours planning from one year to the next. Nonetheless, think it wise to make an assessment of the prior year and at least make some educated guesses about what you want to do the next year in terms of spending, giving, and saving.
One thing I know for sure: the future is unpredictable, therefore, our plans are largely unpredictable as well. We don't know what will happen politically, socially, and economically in 2019. Nor do we know how long we will live, what our health will be, what market returns will look like, and what our actual expenses will be. But that doesn't mean that we should just throw up our hands and surrender to these future uncertainties.
It's best to have some understanding of where you are and where you'd like to be a year from now. But don't lose a lot of sleep over market declines, your portfolio balance, or the crazy news reports. Keep doing the things you know are part of wise retirement stewardship while trusting in God, who is your source and provider, and you'll be fine.
But seek first the kingdom of God and his righteousness, and all these things will be added to you (Matt. 6:33).