A record 4.1 million Americans may retire this year: Financial planners say they should take these 5 steps
The so-called silver tsunami of retirees is beginning to crest this year, as a record-high 4.1 million Americans turn 65 in 2024. While many are part of an exodus from the workforce, not all of them will retire: Some cannot afford to stop working, and there is also a growing cohort of college-educated baby boomers who want to keep their jobs despite having the financial means to retire.
Still, as baby boomers reach what experts are calling the "peak 65 zone," the number of people retiring is expected to jump from around 10,000 per day over the past decade to over 11,200, according to the Alliance for Lifetime Income’s Retirement Income Institute. The surge in retirees is expected to last through 2027.
While boomers have had decades to save, invest, and prepare for the next chapter, there are a few strategies they may have overlooked. For those nearing retirement, here are five tips from financial advisors to maximize money—and longevity—in the golden years.
1. Consider a Roth conversion
Most people are familiar with 401(k)s and IRAs, but there are other retirement accounts that belong in your financial plan, like a Roth IRA. Though they are usually thought to be best for younger workers due to the income cap on contributions, you can still get the benefits of a Roth even if you make too much to contribute to one outright, via a Roth conversion.
As the name implies, the strategy involves converting your traditional IRA into a Roth IRA. When you make the conversion, you’re essentially moving funds from a pre-tax vehicle to a post-tax vehicle; you’ll pay taxes on the money now at your current rate, and then it will grow tax-free.
The benefits are plenty, advisors say. You’ll enjoy tax-free withdrawals in retirement (assuming you meet the other requirements) and no required-minimum distributions during your lifetime. This is a good way to add tax diversification to your financial plan and reduce your lifetime tax bill.
2. Optimize your taxable account
Speaking of which, tax diversification can go beyond 401(k)s and IRAs. Taxable accounts also play an important role, and it's important to know which to tap first.
"With a 401(k) or IRA, it is all pre-tax and subject to income tax, so the federal and state government may 'own' around 30% to 50% of those accounts," says Scott Bishop, a Texas-based certified financial planner (CFP). "If money is in a Roth IRA or taxable brokerage account, the results may be different."
A taxable account doesn't have the tax benefits of a retirement account, but it also doesn't have the restrictions they do. It allows you to invest for the future, but without the contribution limits, withdrawal penalties, required distributions, and so on.
It is especially useful to have some funds in a brokerage account if you're not sure what tax bracket you'll be in in retirement; withdrawals from a taxable account are taxed at the capital gains rate, whereas money taken out of a 401(k) is taxed at your ordinary income tax rate (which will likely be higher). And with a taxable account, only the gains are taxed, whereas the entire withdrawal from a 401(k) is. Having an array of accounts allows you to develop a strategic withdrawal strategy.
"Just as you diversify your investments to help tackle the uncertainty of the markets, diversifying the tax treatment of your accounts can help you weather the uncertainty of the tax landscape and manage your income in retirement," writes Judith Ward, a CFP, for T. Rowe Price.
And of course, you will want a chunk of money set aside in cash, in case of emergency. Wes Battle, a Maryland-based CFP, says the ideal amount is six months' worth of expenses.
3. Delay Social Security
Though some people are eligible to start taking Social Security benefits as early as 62, financial advisors say it's best to postpone doing so until age 70, or at least to when you reach the so-called full retirement age, if at all possible. That will increase the benefit amount and help you lower your taxable income, because you will have spent some of your savings from your other retirement accounts first. "This is one of the most overlooked opportunities in financial planning," says Andy Baxley, a CFP in Illinois.
The full retirement age depends on when you were born. For those born in 1960 or later, full retirement age is 67. For those born between 1955 through the end of 1959, it is between 66 and 2 months and 66 and 10 months. If you were born before 1955, it is 66 (and you've already reached it). Delaying until age 70 means you can earn a "delayed retirement" credit, which gets you a higher benefit.
Even if 70 isn't likely, delaying them even a few years or months can make a big difference in the size of the check you end up getting. You can view your projected benefit amount on your annual Social Security statement, which you can view on the Social Security Administration's website.
4. Fine-tune your budget
Many people (and financial media) focus on reaching a magic retirement savings "number," be it $1 million or $1.46 million or more. But the more important numbers for near-retirees to focus on are actually those in their retirement budget, says Bishop. They can be broken into the following categories:
Fixed costs. That's your mortgage or rent, insurance, property taxes, food, healthcare, and so on.
Discretionary costs. That includes estimated expenses for the fun things you'll do in retirement, including traveling, dining out, etc.
Planned future costs. Fixed and discretionary costs may make up most of your budget most of the time, but you can run into trouble if you're not anticipating other expenses, like home repair costs, new cars, long-term care, etc.
The budget "needs to be thoughtful and conservative," Bishop says. An advisor can help you think through contingent costs and craft one that works for your family.
That said, your budget can always change. Sandi Weaver, a CFP in Kansas, suggests testing out a monthly withdrawal amount for around six months, and then readjusting as needed. Expenses change in retirement, and it's okay for your plan to change too.
"Don't sweat the small stuff," Weaver says. "The retirement phase is long, [potentially] 30-plus years, so if you get the finances wrong for one to two years, you can get it back on track."
5. Make an 'unretirement plan'
Finally, advisors say while getting the finances and tax strategies right is important, equally so is making the most of your days in retirement: You have a financial plan, but you'll want a holistic life plan as well. How will you keep your mind and body healthy? Are you interested in volunteering? Would part-time work be better? Do you want to help with your grandkids? Without some forethought, it might be more difficult than you think to easily fill your time.
One strategy is to create a so-called unretirement plan. Outlined by Mark Walton, a Peabody award-winning journalist, in his book Unretired: How Highly Effective People Live Happily Ever After, this involves thinking through what fascinates you and what you could dedicate your time to in retirement. It could be (full- or part-time) work, though it doesn't have to be.
"Soon-to-be retirees should keep in mind that those who are retiring to something are more successful than those that are retiring from something," says Howard Pressman, a Virginia-based CFP. "Twenty-four hours is a long time if you're just sitting on the porch yelling at the neighborhood kids to stay off your lawn."
He suggests asking yourself questions including, where will you live? How will you stay engaged? How will you stay active? How will you replace lost social connections from work?
"The clearer this vision is, the easier the transition will be," says Pressman. "There's a big difference between a financially secure retirement and a happy retirement."
This story was originally featured on Fortune.com
