RETIREMENT PLANNING IN THE NEW YEAR

Overview

At this point, near-term retirees tend to fall into one of three categories:

1. You already have all the savings you need; you’re ready.

2. You’re on track to have all the savings you need by the time you retire.

3. You’re not on track and are worried about it.

Regardless of which track you’re on, the steps are the same. However, if you believe your savings will be inadequate, use this time now to boost your nest egg.

That may include several actions. First, contribute regularly to your investments. If you’ve got a five- to 10-year investment timeframe before you retire, it may be appropriate to invest with a growth-oriented or balanced approach. This will depend on several variables, such as how much risk you’re willing to take for the potential of higher returns, your health status, how reliable your job is until retirement and if you’re willing to work longer than you’d planned.

Those are often the variables that help determine how much you can invest based on your projected future earnings. The second factor to consider is how much you can reduce your current expenses. Think about it. If you can cut $1,000 in expenses a month (perhaps all the fluff on your credit card bill), that adds up to $12,000 a year. If you don’t retire until 2030, that’s another $108,000 saved for your nest egg. Consider this hypothetical example of the impact of investing that $1,000 each month in a diversified equity portfolio for a 7% average annual return over the next nine years: The total yield would be more than $150,000.2 Hypothetical example is provided for illustrative purposes only and does not represent any product or investment and does not represent a real life scenario.

That household savings and investing added to your existing investment contributions to an employer-sponsored plan could help your future retirement look a lot brighter. Of course, finding ways to cut back spending can be quite challenging, but it’s a matter of setting priorities and thinking about them every time you’re about to spend money.

Retirement Income: What Will You Reasonably Spend in Retirement?

The key to figuring how much nest egg you’ll need is anticipating how much you’ll spend in retirement. Where you spend your money will change, but how much you spend overall may not — unless you make an effort. Start with your basic living expenses. For example, the general rule of thumb is to try to pay off your mortgage before you retire to alleviate that large monthly expense. Also consider that you will no longer be saving aggressively anymore.

Next, what do you plan to do with your leftover (discretionary) income? Do you have big travel plans, want to buy a second home — or are you planning to stay local and keep your expenses low? Those plans may depend on how much you’ve accumulated by the time you retire, so it’s important to realistically match your spending goals with your accumulation potential.

According to AARP, the rule of thumb is that you’ll need about 80% of your pre-retirement income to maintain your pre-retirement lifestyle. That’s based on the fact that you won’t have some of your pre-retirement expenses, such as costs associated with working (like commuting expenses), contributions to a 401(k) plan and so on.3

Bear in mind that there’s a good chance you’ll need long-term care (LTC) assistance at some point. The latest research shows that someone turning age 65 today has almost a 70% chance of needing long-term care services and supports during retirement. Moreover, women tend to outlive their husbands and need care assistance an average of 3.7 years longer.4

Inevitably, some expenses will be replaced with others. For example, at some point, retirees often have fewer transportation expenses, so those funds can be reallocated for LTC once gas, insurance and maintenance costs are eliminated. However, that may not be enough to cover all LTC expenses. According to the 2020 Genworth Cost of Care Survey, the median cost of an in-home caregiver is $24 per hour.5 If you need someone for eight hours a day, that can run you about $5,400 a month. If you need 24-hour care, that cost can spiral into about $16,000 a month.

It’s important to consider the options for a long-term care plan in case you and/or your spouse live beyond independent years. You’ll want to consider them while you’re still young and healthy enough to be eligible for potential insurance options.

Transition Assets: Develop a New Asset Allocation Strategy

Remember that generally, people invest for growth throughout their lifetime and then put those assets into conservative financial vehicles for use during retirement. However, there is a transition period — the three to five years before you retire — when you may want to reposition your portfolio from what is generally a more risk-oriented allocation to a more balanced allocation.

If you’re planning on retiring in the near term, right now may be your transition period. There are a lot of variables to consider in order to establish an asset allocation strategy for this last chapter before retirement. Much may depend on whether you’re behind the savings curve, and you’ll also want to consider your personal situation and the economic outlook for the next few years. It’s a good idea to consult with a financial advisor to help you determine the best way to allocate your assets for this pre-retirement investment timeframe.

Create a Withdrawal Plan: Consolidation and Tax Considerations

Next, establish your sources of retirement income and your spending plan. For example, how much of your income will come from Social Security, a pension or other guaranteed income sources? How much of your personal retirement portfolio will need to be tapped on a regular basis to supplement those income sources?

Before you retire, consider a withdrawal plan from your retirement portfolio. This means deciding whether you should maintain separate retirement accounts or consolidate them into one. If you have an employer-sponsored plan, find out what distribution options are available to help decide whether you should leave the money where it is and make regular or periodic withdrawals, or roll it over into an individual retirement account (IRA). Keep in mind withdrawals from retirement accounts could have tax consequences, so make sure you check with a tax professional regarding your personal situation prior to taking any actions.

Also consider — from a tax burden perspective — which accounts to draw from first. The order may vary based on your situation, so it’s good to get advice from both a financial advisor and a tax professional, like a CPA or an attorney. The general rule of thumb typically follows this order:

1. Start with taxable accounts to benefit from lower long-term capital gains rates

2. Then tax-deferred accounts (e.g., 401(k), traditional IRA) because distributions are taxed at ordinary income rates

3. Then tax-free accounts (e.g., Roth IRA) to give them the most time to continue growing

Multi-Year Calendar: Schedule Important Due Dates

An important component of your retirement plan is Social Security. The longer you delay taking it, the higher your benefit. It’s also important to consider when to start drawing Social Security with your spouse in mind. For example, if you start drawing early (you may begin at age 62) because you’re in poor health, consider that the benefit will be locked in at that lower rate for your spouse for the rest of his or her life, should you die first. Depending on your personal circumstances, it may be wiser to draw from invested assets that have the opportunity to continue growing rather than lock in a lower Social Security benefit.

On the flip side, claiming Social Security early may allow you to receive benefits for a longer period over your lifetime, which, in the end, may net the same or more total Social Security benefits than delaying benefits and not living as long. Like all the other components of retirement income planning, the decision on when to take Social Security is unique to your personal situation.

Another consideration is Medicare. You must enroll within three months before or up to three months after the month in which you turn age 65 (or face penalties). Medicare currently offers a lot of options, and they can be confusing, so start investigating how it all works and what it costs long before this enrollment window.

The Binder: A Tool For the Inevitable

Before you retire, or just after, make it easy for you and your family to find and understand your retirement and estate plans. The easiest way to do this is to use a large three-ring binder with dividers to file all of your financial and insurance papers. You don’t need to keep all of your statements. Make sure there is at least one per account, and you may want to update it each year.

Also include your legal papers, such as wills and trusts; everything your loved ones would need to settle your affairs according to your wishes.

“If you’ve thoughtfully prepared and have a well-allocated portfolio and a conservative spending plan, there’s every reason to think you can still retire as planned. But if your vision for retirement has changed, assessing the financial impact of your new priorities can help you adjust your timeline if necessary.”7

Final Thoughts

The pandemic has put a wrench in many people’s retirement plans. Some were forced to retire early, while others know that they will have to go back to work, or work longer, to make up for reduced income or investment losses.

Remember that the further you are from retirement, the more time you have to make adjustments to improve your long-term outlook. Working longer may enable you to save more, invest longer and postpone claiming your Social Security benefit.

Regardless of how well you are tracking toward retirement goals, consider how the pandemic and the recent economic decline may alter your previous plan. You may wish to reconsider travel plans, thoughts of moving to a retirement community and where you want to be cared for should you lose your independence in old age. Each of these factors can add or subtract expenses from the nest egg you need to plan for, and how long it lasts.

The new year is — as always — a great time to take a fresh look at your plans and set new goals to meet them. Never has this been more critical than after this difficult year. With a vaccine and the reopening of the economy on the horizon, make a plan for all the opportunities that may entail.

1 Judith Ward. T. Rowe Price. Oct. 8, 2020. “Retiring Baby Boomers: 6 Steps for Smart Planning.” https://ift.tt/348fJFg. Accessed Nov. 23, 2020.

2 Veeru Perianan. Charles Schwab. June 23, 2020. “Why Market Returns May Be Lower and Global Diversification More Important in the Future.” https://ift.tt/37T9PsF insights/content/why-market-returns-may-be-lower-in-the-future. Accessed Nov. 23, 2020.

3 John Waggoner. AARP. Sept. 17, 2020. “How Much Money Do You Need to Retire?” https:// https://ift.tt/2KeSimC. Accessed Dec. 2, 2020.

4 U.S. Department of Health and Human Resources. Oct. 15, 2020. “How Much Care Will You Need?” https://ift.tt/2wq0NmC. Accessed Nov. 23, 2020.

5 Genworth. Dec. 2, 2020. “Cost of Care Survey.” https://ift.tt/3oNYoZR finances/cost-of-care.html. Accessed Dec. 2, 2020.

6 Judith Ward. T. Rowe Price. Oct. 8, 2020. “Retiring Baby Boomers: 6 Steps for Smart Planning.” https://ift.tt/348fJFg. Accessed Nov. 23, 2020.

7 T. Rowe Price. Fall 2020. “Can I Still Retire as Planned?” https://ift.tt/2a8FFrF content/dam/iinvestor/planning-and-research/Insights/investor-magazine-fall.pdf. Accessed Nov. 23, 2020.

This content is provided for informational purposes; it is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product.

No investment strategy can guarantee a profit or protect against loss in periods of declining values. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by AE Wealth Management. Neither AEWM nor the firm providing you with this report are affiliated with or endorsed by the US government or any governmental agency.

AE Wealth Management, LLC (“AEWM”) is an SEC Registered Investment Adviser (RIA) located in Topeka, Kansas. Registration does not denote any level of skill or qualification. The advisory firm providing you this report is an independent financial services firm and is not an affiliate company of AE Wealth Management, LLC. AEWM works with a variety of independent advisors. Some of the advisors are Investment Adviser Representatives (IAR) who provide investment advisory services through AEWM. Some of the advisors are Registered Investment Advisers providing investment advisory services that incorporate some of the products available through AEWM. Information regarding the RIA offering the investment advisory services can be found at https://brokercheck.finra.org/.

12/20-1428036

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COVID Outlook: Economy, Finances, Health

Overview

Compared to 2008, the current pandemic-induced recession is three times worse in terms of annualized gross domestic product (GDP) decline. Economists have urged Congress to pass additional stimulus legislation for unemployment benefits, forgivable loans to small businesses, aid to the travel industry and allocated funds to save local government jobs in the wake of reduced tax revenues.1

The good news is that vaccine manufacturers Pfizer and Moderna both recently announced they have developed vaccines that are more than 90% effective; the bad news is that it may take a while for production to ramp up enough to vaccinate the entire U.S. population.2 And globally, until the majority of intercontinental travelers are immune, we’re not out of the woods yet.

Economic Prospects

In addition to the U.S., Europe, Brazil, India and others, emerging markets have been hit hard economically. Even the Swedish economy, which never locked down, suffered due to lack of consumer demand. Domestic consumers have displayed a reduced willingness to spend throughout the course of the pandemic, especially those whose employment — and livelihood — remains tenuous.

Interestingly, countries that mandated strict protocols have emerged less scathed. For example, China technically escaped a recession altogether. South Korea and Taiwan conducted widespread testing and contact tracing, so they were able to quash outbreaks and largely contain the virus, saving their economies from the wrath of consumer fear.3

Because widespread vaccination immunity is still many months away, economists warn that the U.S. will face a very dark winter. However, one thing a vaccine does provide is optimism; we can now see a light at the end of this dark tunnel.

Financial Lessons for the Future

The pandemic brought with it a whole new set of variables for investment opportunity. For example, some companies flourished in the glow of the stay-at-home culture this year, such as Zoom, Amazon and Netflix.4 The country is in a precarious state. We have more than 1,500 deaths and 160,000 new positive cases of coronavirus per day, contested election results and potential shutdowns threatening a fragile economy.

On the day Pfizer announced its vaccine, the stock market rejoiced. The Dow Jones Industrial Average jumped 834 points, up 2.95%, while the S&P 500 rose to 1.17%.5 The vaccine news also boosted pharmaceutical stocks and industries hurt by the pandemic, such as cruise line, movie theater and airline stocks, as well as oil prices.6

The pandemic has been a good reminder that we cannot predict a global crisis or its potential impact on markets. It’s useless to try to time investment decisions, particularly when saving for a long-term goal such as retirement. Instead, time in the market allows for steady, sustainable growth, a key factor in achieving long-term financial goals.

It’s important to balance your long-term investing strategy in order to weather short-term bouts of market volatility. By maintaining an appropriate mix of a variety of financial vehicles, your asset allocation strategy can help you pursue financial goals within a specific time horizon.

Personal Safety Net

The pandemic left many people who had never been unemployed before with no income. Even those without much in savings may have felt immune from hard times because they had a steady job, employer sponsored health insurance and a retirement plan. Then suddenly, they found themselves with no insurance, no way to pay their bills and worried about withdrawing money from their 401(k).

For those living paycheck-to-paycheck, this underscored the need for an emergency savings fund to cover three to six months’ worth of expenses. Having a separate, liquid savings account can provide a safety net to help people stay in their homes, keep their car and put food on the table during difficult times — without taking on debt or threatening their future financial security.

Health Outlook

While a near-term vaccine is great news, it does not negate the damage already caused by COVID-19, both economically and physically. The medical community warns that we still don’t understand the long-term effects of this potentially debilitating and fatal disease.

Follow-up among people who survived serious COVID-19 cases suggests that many may never return to their previous health status. Studies show that the virus can cause serious damage to the heart, lungs and other organs that are likely to cause problems in the future. There is evidence that even those who suffered only mild symptoms may have lingering effects.7

While we continue to learn more about the long-term effects of COVID-19, the challenge of the Affordable Care Act (ACA) has many Americans concerned. They worry that, if the Act is overturned, insurance providers could consider a previous COVID-19 diagnosis as a pre-existing condition and deny coverage as a result. As of this writing, the Supreme Court had not reached a decision regarding the future of the ACA.

President-elect Joe Biden outlined his steps to mitigate these types of foreseen ramifications of the virus with a plan that includes:8

• Communicating national, evidence-based guidance designed to slow community spread and stop outbreaks.

• Working with state- and local-level officials to implement prevention protocols and strengthen public health facilities.

• Boosting vaccine distribution and personal protective equipment production.

• Hiring thousands of public health workers to perform contact tracing and provide health services for high-risk populations.

• Strengthening the Affordable Care Act by expanding coverage for people eligible for premium subsidies and reopening the federal marketplace for special enrollment as necessary for those who lose employer-sponsored insurance.

• Creating a caregiving workforce for families struggling to find affordable care for their children, aging relatives or loved ones with disabilities, as well as helping improve the outlook for women’s employment.

“We have to function as one nation. That means having a national plan.” — President-Elect Joe Biden5

Final Thoughts

COVID-19 has impacted not only the U.S. but the entire global population in many ways. Throughout this pandemic, economists have cautioned that economies hit hard by the pandemic cannot fully recover until the coronavirus is contained. The big question on everyone’s minds is exactly when that might happen. Uncertainty and anxiety linger for many Americans, especially among rising case numbers and lack of additional stimulus from Congress.

There is light on the horizon, however. The promise of a new vaccine provides hope that we might begin to return to normal soon. Additional treatments for COVID-19 symptoms also look promising and could provide assistance in lowering death rates while shortening the length and strength of the illness. As we make progress on treatments for our physical health, our economic health should improve as well. Although questions around the coronavirus and its after-effects remain, we feel optimistic that we may be poised to turn the corner and open a new chapter for our economy.

1 Scott Egan. CNN. Nov. 9, 2020. “A vaccine might be coming, but the Covid economy still desperately needs stimulus.” https://ift.tt/3a0pPeP. Accessed Nov. 9, 2020.

2 Zachary Brennan and Sarah Owermohle. Politico. Nov. 16, 2020. “There are two effective Covid-19 vaccines. What’s Next?” https://ift.tt/342OFXX. Accessed Nov. 16, 2020.

3 Ceri Parker. World Economic Forum. Sept. 25, 2020. “World Vs Virus podcast: An economist explains what COVID-19 has done to the global economy.” https://ift.tt/1qmVTj4 agenda/2020/09/an-economist-explains-what-covid-19-has-done-to-the-global-economy/. Accessed Nov. 9, 2020.

4 David Goldman and Anneken Tappe. CNN. Nov. 9, 2020. “Dow soars more than 1,000 points after Pfizer announces great news about its vaccine and Joe Biden declared victorious.” https://ift.tt/32nVh28. Accessed Nov. 9, 2020.

5 Joseph Woelfel. The Street. Nov. 9, 2020. “Dow Closes Up 800, Nearly 3%, on Coronavirus Vaccine Progress.” https://ift.tt/3n6Ry1n. Accessed Nov. 9, 2020.

6 Richard Beales. Reuters. Nov. 9, 2020. “Breakingviews – Pfizer jolt delivers taste of postCovid markets.” https://ift.tt/3gyMfoK breakingviews-pfizer-jolt-delivers-taste-of-post-covid-markets-idUSKBN27P1YP. Accessed Nov. 9, 2020.

7 David Hunter and Anne Moore. World Economic Forum. Oct. 2, 2020. “7 things we still don’t know about coronavirus, even after 1 million deaths.” https://ift.tt/1qmVTj4 agenda/2020/10/million-deaths-coronavirus-experts-questions/. Accessed Nov. 9, 2020.

8 Allison Aubrey. NPR. Nov. 8, 2020. “President-Elect Biden Has A Plan To Combat COVID-19. Here’s What’s In It.” https://ift.tt/3oJAZbZ hold-president-elect-biden-has-a-plan-to-combat-covid-19-heres-what-s-in-it. Accessed Nov. 9, 2020.

9 Ibid.

No investment strategy can guarantee a profit or protect against loss in periods of declining values. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by AE Wealth Management. This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product.

AE Wealth Management, LLC (“AEWM”) is an SEC Registered Investment Adviser (RIA) located in Topeka, Kansas. Registration does not denote any level of skill or qualification. The advisory firm providing you this report is an independent financial services firm and is not an affiliate company of AE Wealth Management, LLC. AEWM works with a variety of independent advisors. Some of the advisors are Investment Adviser Representatives (IAR) who provide investment advisory services through AEWM. Some of the advisors are Registered Investment Advisers providing investment advisory services that incorporate some of the products available through AEWM. Information regarding the RIA offering the investment advisory services can be found at https://brokercheck.finra.org/.

11/20-1408627

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