5 wealth management tips for baby boomers
No. 1: Focus on your retirement purpose. Everybody knows what they want to retire from, but few know what they want to retire to. If you want to really enjoy retirement, it is important to think through what you want your purpose to be in retirement. Besides not going to work, what do you want a typical week to look like?
In our experience, those who are happiest in retirement carve out regular time to serve other people. They volunteer at a local food pantry, become more active in their place of worship or spend more time caring for their grandchildren. They still do traditional retirement activities like going on an Italian vacation, but they make sure that there is also time to focus on causes greater than themselves.
No. 2: Redirect your spending. The younger baby boomers who will be best prepared for retirement are the ones now focusing on redirecting their spending. Now that the kids are out of the house (or almost out of the house) and they have filled up their closet with more than enough clothes to wear -- they are working hard to aggressively add to their retirement accounts and pay off debt.
If you are not fully funding your 401(k) at work, now is the time to make that happen. If you are not able to maximize this year, increase as much as you can and make a commitment in the New Year to increase the percent you are saving until you reach the maximum.
No. 3: Max your tax efficiency. You should evaluate whether you should fund your 401(k) or other company retirement plan on a pretax or after-tax basis utilizing Roth contributions. This requires assessing your current tax bracket vs. your tax bracket estimated in retirement.
If your pretax retirement tax bracket is higher than your post-retirement tax bracket, then save on a pretax basis or tax-deductible basis. If, on the other hand, your post-retirement tax bracket is likely to be higher than the present, you may want to consider funding on a Roth basis where you forego the upfront tax deduction for tax-free treatment of your gains.
No. 4: Consider a Super Roth. If you are already maxing out your 401(k) contributions, then we will sometimes recommend that you consider using what is commonly known as the Super Roth strategy. A Super Roth is created by making after-tax contributions to your 401(k) and then rolling over these funds into a Roth IRA. Not all plans allow after-tax contributions, but if they do it can be a very powerful wealth accumulation tool.
The Super Roth is super because this strategy allows you to invest almost five times the amount into a Roth IRA than you would be able to normally. For example, anyone 50 years old or older can only contribute up to $6,500 of their income into a Traditional Roth IRA if their income is less than $120,000 (or $189,000 for a married couple). But using the Super Roth strategy, the IRS will allow you to contribute up to $30,500 of your income into a Roth IRA regardless of your annual income.
No. 5: Prepare for rising health care costs. As we watch the Baby Boomers transition into retirement, the financial challenge that they are least prepared for is the rising cost of health care. They tend to think that once they qualify for Medicare that their health care costs will remain fairly modest. But they underestimate their out-of-pocket Medicare expenses and they over estimate what Medicare actually covers.
We see the middle class and now even the upper middle class really getting squeezed by health care expenses in retirement. The pace of increase has been relentless at over 5 percent per year inflation on health care expenses for retirees.
So it is important that the younger baby boomers not be caught off guard and that they properly prepare themselves for higher health care costs. There is not always an easy answer for funding these high health care expenses in retirement, but fortunately there are new products and strategies that can help provide some additional protection during the retirement years.
• John W. Bever is a CFP professional at Phase 3 Advisory Services Ltd in Buffalo Grove.