Being aggressive with your savings as you approach retirement is one of the most effective ways to catch up or compensate for times when you weren't able to save as much as you would have liked to. Like many other well‐compensated and savvy professionals, pilots are generally aggressive savers. But there still may be good reason to ramp up as you near retirement. And once you reach age 60, when you know your flying days are limited to five years at most, it is a good time to assess your retirement planning and accelerate your savings if needed. Here are some options for boosting your savings as you approach retirement. As always, it's recommended to discuss your overall financial plan with a financial advisor:
Maximize your retirement plan contributions – This is especially important in order to take advantage of an employer contribution. Once you are over 50, additional catch‐up contributions are available. For 2020, the maximum contribution is $19,500; if you are 50 or older by the end of the calendar year, you can contribute an additional $6,500. If your plan allows, take advantage of after‐tax contributions as much as you can. My earlier blog post explains this: New After‐Tax Rollover Rules: Helpful and Tax Payer Friendly
Roth IRA – Although contributions are not tax deductible, withdrawals are not taxed, providing tax‐free money in retirement. Individuals age 50 and older can contribute up to $7,000 to a Roth in 2020; those under age 50 can contribute up to $6,000. These contributions are subject to income phase‐out ranges.
Eliminate consumer debt – Pay off credit card or car loan debt as quickly as possible and tailor your monthly expenses to avoid debt. Once you have eliminated these debts, put the money you had used for monthly payments toward retirement.
Evaluate insurance policies – You might be able to reduce your type and level of insurance from what you needed earlier in your life and career. For example, you may no longer need term life insurance that was purchased to help support kids who are now grown. The savings in premiums then can go into your nest egg.
Downsize – Many people think of moving to a smaller home at or after retirement. If downsizing earlier is possible, you likely can reduce expenses such as mortgage payments, property taxes, insurance and other costs, allowing you to save more for your eventual retirement.
Taxable accounts – If you have maxed out your contributions to tax‐advantaged accounts, save extra money in these accounts, for additional retirement income. An automatic savings plan takes money out of your account each month before you can spend it.
Spend less and save more – It's a simple, obvious point. But just taking a hard look at your spending—the small everyday indulgences as well as big‐ticket splurges—is key to determining wants and needs, and helping you decide how much you can put aside for retirement. One other suggestion you can consider to optimize your nest egg is to delay taking Social Security benefits. If you have other sources of income that are sufficient, you can increase your eventual Social Security monthly income significantly by deferring the benefit until you are older. For example, according to information at socialsecurity.gov, if your full retirement age is 66 and your monthly benefit at that age is $1,000, delaying to the maximum of age 70 increases your monthly benefit to $1,320—a 32% increase. In contrast, if you take Social Security early, at age 62, your monthly benefit is reduced to $750. See my earlier article, “Planning Your Retirement Spending? Take a Layered Approach.”
Here is a checklist of some important considerations as your retirement approaches:
- Decide what you want to do in retirement: Will you focus on hobbies and interests, pursue volunteer work, or perhaps work part time? There is no correct answer. It depends on how you wish to spend your time and the resources you have available to you.
- Decide where you will live: Perhaps you plan to stay put. Others choose to move to be near children and grandchildren, or other relatives. Still others move to a retirement or recreational community.
- Estimate your expenses – Draw up a budget for all of your monthly spending, including rent or mortgage, insurance, entertainment and travel, debt, taxes, etc.
- Assess your portfolio and project your income: You will need to determine when and how to tap your assets to have enough income to cover your expenses, in the most tax‐efficient way.
- Determine and understand your health insurance options: For many people, this will mean signing up for Medicare and a supplement at age 65. But some, including those who retire before age 65, might have access to coverage from a former employer or may need to obtain their own coverage.
- Make sure you have an updated will and any other legal documents you will need such as a power of attorney, medical power of attorney, etc., and that your spouse and/or attorney have copies and access to this information.
- Plan for the unexpected: Consider how you will cover the cost of an unexpected home repair, auto accident, medical bills and other financial events.