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10 Financial Do's and Don'ts for a Six-Figure Retirement

Patch any holes in your savings bucket.

"Frustrated Savers" have worked hard their whole lives but have fallen short of their savings goals for reasons often out of their control. Still, they have been able to build 401(k) balances in the six figures, but they might have to delay their retirement date, decrease expenses, and find ways to earn some income during retirement to increase the odds that their savings will last their lifetimes.

In addition to taking those steps, Frustrated Savers should consider these 10 financial do's and don'ts to help them meet their retirement goals.

Do Consult a Financial Advisor

Knowing the numbers before you retire--or even after--can help you decide if and when you'll be able to retire. Even during retirement, a financial plan can help you better determine an appropriate budget. There's no need to be afraid! A good financial advisor can provide a clear road map to reaching your goals.

You should also use your advisor's advice for portfolio investments. First, because you should have better things to do than manage your investments, and second, a qualified professional will do a better job for you in the long run. Professional management will ensure that your portfolio is neither too aggressive nor conservative, maintain a diversified portfolio, provide tax management, and advise you on your spending budgets on an ongoing basis. An advisor can help you stay the course during times of market volatility.

Here are some tips to find financial advice:

Find the Right Financial Help

Once you’ve found a few candidates, be sure to ask him or her these five questions:

5 Questions to Ask a Financial Advisor

Don’t Retire Too Early

The thought of retirement can be tempting. But there are emotional and financial reasons to not jump the gun. Make sure you have a life outside of work or retirement will be nonstop boredom. Sleeping in and watching TV are not the keys to a happy retirement. Financially, retiring early can be devastating. Each year of early retirement represents one less year of savings and one more year of spending.

Do Consider Safety Nets

The safety nets of insurance and an updated estate plan are critical. However, two types of insurance are typically overlooked: excess liability (umbrella) insurance and long-term-care insurance.

When I ask clients if they have umbrella insurance, I get one of two answers: "yes" or "what's that?" I explain umbrella insurance to my clients like this: If someone trips and falls at your house and sues you, they can generally go after your entire net worth. Most insurance, including homeowners and auto, covers to a maximum of about $500,000. Umbrella insurance can cover from $500,001 to the limit you specify--recommended to be your net worth. So, umbrella insurance is essential to protecting your assets. What's surprising about this coverage is that it doesn't cost a lot. A few hundred dollars a year can add a significant layer of financial security.

Another important safety net might be long-term-care insurance. Many people erroneously assume that long-term care can be covered by medical insurance or Medicare. This is not the case. Medical insurance and Medicare cover medical expenses, not long-term custodial expenses.

More than 50% of adults older than 65 will require long-term care. Care could be required for several years at a cost of $10,000 or more per month. The average time spent in long-term care is 2.5 years for women and 1.5 years for men. But 13% of people will need long-term care for more than five years. Care could be required for several years at a cost of $10,000 or more per month.

Long-term-care insurance can be pricey. In fact, that's one of the main reasons people opt not to get this coverage. While there are elements of this insurance that are crucial, there are ways to lower costs while preserving the important protection. Check with your own qualified financial advisor before making any decisions. If you're like me, you hate spending money on insurance. But for Frustrated Savers, self-insuring is out of the question. So, consider paying for the coverage you need.

Read the following article for more information: Must-Know Statistics About Long-Term Care: 2019 Edition

Don’t Pay for Unnecessary Insurance

Although certain insurance is essential, once you are in or near retirement, some insurance is no longer needed, such as life insurance and disability insurance. These types of insurance are generally purchased to replace earnings of the covered individual. By definition, a retired person is no longer working and, hopefully, has accumulated sufficient assets to cover future needs. Note that some life insurance policies might have accumulated cash-surrender value. If this is the case, there are four options:

1) Continue the coverage as an investment decision, either by continuing to pay premiums or by using the cash-surrender value to pay premiums for a while.

2) Cash in the policy. To the extent you receive cash in excess of your basis in the policy, you will pay ordinary tax on the gain.

3) Borrow against the policy. As long as there's enough cash value (or continued premium payments) to pay interest and avoid lapsing, there is no tax due on amounts borrowed. When the insured person dies, the insurance benefit will pay off the loan and any remaining amount will be paid to beneficiaries tax-free.

4) Sell the policy to a third party. This strategy might work even if there is little to no cash-surrender value. To the extent proceeds received are greater than the tax basis, tax will be owed on the gain.

Do Consider Options

When considering retirement, you have more options than you think. As we discussed in the first article of this series, delaying retirement, reducing expenses, and generating additional income go a long way to helping Frustrated Savers fund a sustainable retirement. And there are other strategies, such as downsizing your home, moving to a cheaper neighborhoods or parts of the country, and decreasing spending over time. If you are open to possibilities and willing to be flexible, retirement can be closer than you think.

Don’t Take Social Security Too Early

Taking Social Security benefits before full retirement age can reduce your monthly benefit by up to 30%. Delaying benefits past your full retirement age increases your benefit by 8% a year through age 70. So, when should you take Social Security? This is a complex question that can involve detailed calculations. However, I believe there are some general observations that can help shortcut the decision-making process.

It is generally best to wait until your full retirement age to begin taking benefits. Full retirement age is 66 years old for those born between 1943 and 1954, and it begins increasing to 67 years old for those born later.

Taking Social Security benefits early could be the wrong move if you plan to continue working. That's because earning income above $18,960 per year lowers the amount you receive from Social Security. As a Frustrated Saver, you will likely need to work through your full retirement age (at least), so plan to wait to claim Social Security benefits.

Delaying benefits beyond your retirement age can also work to your advantage if you don't need the cash flow right away. An 8% bump for each year of delay is a pretty good deal!

Do Consider Roth Conversions

If you have 401(k)s and IRAs, the period between retirement and required minimum distributions, or RMDs, can present a great opportunity to do Roth conversions. Without wage income or RMDs, it is possible to minimize taxable income--if you have sources of cash for living expenses other than retirement accounts.

The Roth IRA is the holy grail of tax planning. Although funded with dollars after taxes, it grows tax-free and withdrawals are tax-free--meaning that income is never taxed. Additionally, there are no required distributions from a Roth IRA. So, if you have 401(k)s and IRAs, the opportunity to do Roth conversions should not be overlooked, even though you must pay tax on the amount converted.

Don’t Overuse Credit Cards

Accumulating credit card debt is a huge financial mistake. If you can't pay off credit card balances each month, you shouldn't use them. The instantaneous ability to spend beyond your means and high interest rates can lead to spiraling debt and ruin your retirement security.

Do Regular Updates

I always say a financial plan is a snapshot, not a moving picture. As time goes on, updating your financial plan is imperative. But don't consider just your financial plan. Update your estate documents periodically. Check your phone and cable plans for better deals. Revisit your insurance coverage. Just as it's important to get regular health checkups, eye appointments, and teeth cleaning, it's important to have ongoing financial checkups.

Don’t Set Unreasonable Expectations Regarding Gifts or Donations

Being overly generous or committing to large charitable contributions can pose a threat to funding retirement throughout your lifetime. For example, if you start playing the Bank of Mom and Dad role, your kids will continue to expect bailouts, which eats away your nest egg.

As you start retirement, your savings reflect what you accumulated throughout your working years. Although the bucket seems huge, it isn't, when you consider its purpose. It is your means of survival for the rest of your life. So, adding extra commitments and frequently helping out organizations, friends, and family members in excess of your budget will put pressure on your savings.

How do you say no when you need to? Simply remind your kids that they don't want to end up taking care of you. Or, when all else fails, blame it on your financial advisor!

Sheryl Rowling, CPA, is head of rebalancing solutions for Morningstar and founder of Rowling & Associates, an investment advisory firm. She is a part-time columnist and consultant on advisor-focused products for Morningstar, and she continues to actively work in the advisory business. Morningstar acquired her Total Rebalance Expert software platform in 2015. The opinions expressed in her work are her own and do not necessarily reflect the views of Morningstar or of Rowling & Associates LLC.

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