The end of the year is the perfect opportunity to look at your finances and make adjustments. Whether you are newly retired or have spent years in retirement, a financial checkup can help you enjoy your senior years more comfortably.
To set yourself up for success in 2021, check these four things off your list.
1. Rebalance your portfolio
The older you get, the more conservative your investment portfolio should become. If you're investing too heavily in stocks, a market crash could cause your savings to plummet.
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While nobody knows for sure what the market will do in 2021, it's wise to play it safe when you depend on your savings to pay the bills. That said, it's still a good idea to keep at least some of your portfolio in stocks. They generally have much higher rates of return than bonds, and they can help your investments grow faster, meaning your savings will last longer.
One consideration when rebalancing your portfolio is the rule of 110. Your age subtracted from 110 is the percentage of your investments that should be allocated toward stocks. If you're 65, for instance, you would allocate 45% of your portfolio toward stocks and 55% toward bonds. This number is flexible, however, and you can adjust your investments depending on your tolerance for risk.
2. Plan for required minimum distributions
Required minimum distributions (RMDs) were suspended in 2020, but they'll likely come back for 2021. If you have money invested in a tax-deferred account such as a 401(k) or traditional IRA, you'll need to start taking RMDs at age 72.
Your RMD amount will depend on your account balance and your life expectancy factor, which is calculated by the IRS. If you have multiple tax-deferred retirement accounts, you'll need to take RMDs from each of them.
The penalty for skipping an RMD is stiff, too. Miss an RMD, and you'll be hit with a tax penalty of 50% of the amount you should have withdrawn. Although the CARES Act waived all RMDs for 2020, it's a good idea to start planning for your 2021 RMD so it won't take you by surprise.
3. Analyze your spending over the past year
Budgeting is crucial during retirement because it helps your savings last as long as possible. Now is a great time to analyze your spending over the year to spot trends and see if there are areas where you spent more than planned.
If you don't already break your expenses down by category, it may be a good idea to start. That way, you can easily see where you're spending the most money and compare your spending levels to previous years. You can decide whether you need to cut costs in certain areas of your budget.
4. Estimate next year's spending
Once you have an idea of how much you spent this year, the next step is to estimate what next year's costs will look like. Although your expenses may vary depending on what happens with the pandemic, try to estimate your future costs the best you can.
Also, think about how much of your income next year will come from your retirement fund versus Social Security benefits or other sources of income. Consider your RMDs here, too, to be sure you'll be withdrawing enough from your retirement fund to avoid penalties.
It's also a good idea to set spending limits in certain areas of your budget. Setting these caps now can help you avoid overspending, as well as hold you accountable if your spending starts creeping up throughout the year.
The end of the year is a time to reflect. And although 2020 has been incredibly difficult in many ways, setting your financial priorities now can give you a leg up in 2021.
