If you regularly read financial and investment publications, you probably think you’ve heard just about every bit of retirement planning advice in the book. Maybe you have, but more than likely you’ve heard the same advice parroted from expert to expert.
While finance gurus tend to focus on the same subjects, there are some lesser known strategies and tricks that most people don’t know about. Here are some of them. (For related reading, see: How Mortgage Debt Can Derail Retirement.)
Convert or open a Roth 401(k) or a Roth IRA. There are two reasons why: A traditional 401(k) plan or IRA has required minimum distributions (RMDs) that start when the participant is 70½ years old. If these distributions are not taken, the IRS will assess a penalty – and when you take them, you pay regular income tax on them, which could raise your tax bracket. However, both 401(k)s and IRAs have Roth options, which let you withdraw money tax-free. A Roth IRA doesn't require RMDs (the Roth 401(k) does). Like traditional IRAs and 401(k)s, Roth IRAs and 401(k)s allow penalty-free withdrawals starting at age 59½, which makes them an option for Baby Boomers. What's more, if you end up working past the year when you turn 70½ before you retire, you can still contribute earnings to a Roth IRA or either type of 401(k) – but you can't contribute to a traditional IRA. The problem is, when you convert money in a traditional retirement account to a Roth, you have to pay income taxes on that money. But as Carlos Dias, Jr., a wealth manager at Excel Tax & Wealth Group in the Orlando, Fla., area, points out, "Those who contributed and are in a low tax bracket might be able to withdraw all of this taxable money at little or no cost."
Diversify your retirement accounts. Most people either have Roth or traditional IRAs or 401(k)s. Instead of choosing, Boomers can benefit from having both versions of each plan. That way, they’ll reap the rewards of having tax-deferred and taxable accounts. They can also buy mutual funds and ETFs separately to further expand their portfolio.
Open a simplified employee pension IRA or solo 401(k). Business owners have more ability to contribute to an IRA or a 401(k). The contribution limit for both SEP IRAs and solo 401(k)s is $53,000 a year, which allows entrepreneurial Boomers to sock away more of their earnings into retirement. For seniors behind on their retirement savings, these contributions can beef up their nest eggs. Be aware, cautions Eric Follestad, CFP, chief business development officer of Titan Capital Management in Modesto, Calif., that in addition to saving their own money, setting up "a SEP IRA subjects an owner to the requirement to put in money for employees, with certain restrictions." (For related reading, see: SEP IRAs: Introduction.)
Live on your retirement income before retirement. Most people decide how much they can withdraw for retirement based on estimates, but some experts recommend taking a year to practice living on the fixed income. This will not only illuminate if the amount is sufficient, but it will also get the retiree used to his or her new form of income. Big changes can make retirement scary and uncomfortable, so anything that can be done to ease into things is recommended.
Find your hobbies. Preparing for retirement isn’t just about having your financial ducks in a row; it’s also about knowing what the days will be like. Many people retire from long-time careers without a firm plan for what they hope to do once their time is free. This can leave seniors feeling lonely, restless and useless. Before retiring, find hobbies, passions and goals that will make your free time (at last!) engaging and energizing. You can meet new people, develop new skills and build a new – and equally fulfilling – life in your later years.
Play catch-up. Boomers 50 and older are eligible to make catch-up contributions both to their IRA and 401(k). They’re allowed to put in an additional $6,000 into their 401(k) and an extra $1,000 to an IRA. Since some employers match a percentage of 401(k) contributions, they might earn even more than the initial $6,000.
Right now, many Boomers are stressing out about their nest eggs as they settle into retirement age. With 2016 shaping up to be a potentially challenging investment year, many of those approaching retirement age are willing to try anything to ensure the security of their future. If that's you, consider trying one of these lesser known methods. A little trial and error can be healthy, informative and stimulating. (For related reading, see: The Continuing Retirement Savings Crisis.)