Your Financial To-Do List for January 2022

Susan Dziubinski: I'm Susan Dziubinski with Morningstar. The new year is upon us, and Morningstar's director of personal finance and retirement planning, Christine Benz, has put together a month-by-month to-do list for investors in 2022. She is here today to discuss what financial tasks we should tackle in January.

Hi, Christine. Happy New Year.

Christine Benz: Hi, Susan. Happy New Year to you, too.

Dziubinski: You say that January, kicking off the new year, is a great time to really think about the big-picture health of your plan. How do you go about doing that?

Benz: Right. I'd like to think of this as kind of an inverted pyramid if you're thinking about your plan. At the top of that pyramid would be, "How am I doing?" And if you are someone who is in accumulation mode, the key way that you measure that is thinking about your retirement savings rate or whatever you are saving for, how are you doing toward that goal. I think for a lot of people in accumulation mode, it's wise to set their savings targets at about 15% of income. But certainly, if you're a higher income worker, you should reach for an even higher savings rate closer to 20%. Check on that. Spend some time with a good holistic retirement planning calculator. One I've long recommended is T. Rowe Price's retirement income calculator. Vanguard's Retirement Nest Egg Calculator is also helpful. There are some good tools out there. Sample an array of opinions to see how you're doing toward retirement readiness.

And then, if you're someone who is already retired, the key metric that you want to be paying attention to is, what is your spending rate and does it pass the sniff test of sustainability? There's been a ton of research on this topic, including from our team at Morningstar, but you want to be revisiting that withdrawal rate to make sure that you are staying within the parameters that you've set out for yourself. So, look at that spending rate. If you are someone who is just embarking on retirement, you'd probably want to be a little bit conservative in setting that initial withdrawal rate because we know that equity valuations are high, we know that bond yields are really low, we know that inflation is kind of an emerging threat. And so, you'd probably want to set the bar pretty low in terms of starting withdrawals. The good news is that retirement portfolio balances are also up.

Dziubinski: Christine, the past year or so, we've been hearing a lot about the great resignation. And a pretty significant cohort of that group are people who retired earlier than they might have expected. So, we're in 2022. Let's say you're someone who is thinking about retiring earlier than you might have planned, how should you be considering the decision? What should you be looking at and what should you be thinking about?

Benz: Certainly, time horizon is a really important consideration in this. So, if you're a young retiree, if you're someone who is retiring, say, in your 50s, and you think you have a 35 or 40-year time horizon, that means you should really be quite conservative in terms of your starting withdrawal rates. You don't want to just take 4% and run with it, because we know that the longer the time horizon, the more careful you need to be in terms of that withdrawal rate. Our recent research that looked at in-retirement withdrawal rates would suggest that people with balanced portfolios with a more conventional time horizon of 25 to 30 years would start out at roughly 3.3% or mid-3.0% range, whereas people who have longer time horizons would need to be at an even lower level than that. There are certainly lots of things you can do in terms of varying your withdrawal rates. So, there's a lot of power if you are willing to rein in your withdrawals in periods of market weakness that could potentially let you take more in periods when the market is strong and more over your entire time horizon. So, I would urge people just embarking on retirement to look at some of the flexible strategies because that is a way to lift your withdrawal rate, but it is a little bit of a bargain in that you need to be able to be prepared to tighten your belt if a weak market environment does materialize.

Dziubinski: You also say that January--sticking with the big picture theme--is a good time to really take a good hard look at your household's capital allocation decisions. What do you mean by that?

Benz: Right. We hear so much about asset allocation, how to allocate our investment portfolios. I think there's much less discussion about household capital allocation choices. But they're so important. And the thing is, we are each steering our savings to a variety of opportunities each month or each year. And so, I think the idea is to think holistically about your plan. If you have a mortgage, for example, recognize that that's competing in your capital allocation structure alongside your retirement allocations. My personal bias is that for people who like certainty, even though their mortgage rates may be nice and low, they've taken advantage of declining interest rates, that mortgage paydown can make sense, especially for people who are approaching retirement, locking down that portion of your budget by retiring that mortgage can deliver a higher return on investment certainly than they could earn by investing in very safe securities within their portfolios. So, I would urge people to, when they're thinking about their plan and where they plan to deploy their cash over the next year, to think about their household capital allocation in totality and that means debts as well as savings opportunities.

Dziubinski: And then, lastly, Christine, you say January is a great time to look at your retirement plan contributions. And we have some changes in 2022, right, as far as how much you can contribute to different types of plans, right?

Benz: That's right. So, fairly modest changes, but changes nonetheless. IRA contributions are staying the same for 2022. They will be $6,000 for people under 50; $7,000 if you're over 50. We're seeing a little bit of a change in terms of 401(k), 403(b), 457 contributions. Those are going up to $20,500 for the under-50 folks and $27,000 for people who are 50 and above. And as we typically see each year, health savings account contributions are also going up a little bit. They're not technically retirement plans, but a lot of our readers and viewers, I think, do use their HSAs as such, sort of ancillary retirement savings vehicles. So, revisit those annually, because we do see a little bit of a nudge up in terms of how much you can put into the HSA.

Dziubinski: Well, Christine, thanks for your time today and for putting some things on our to-do list for January. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski. Thanks for tuning in.