A new calendar year can be a great opportunity to reflect on your financial progress in the previous year and review and potentially revise your financial goals for the coming year. That’s true for everyone, and it can be particularly important if you’re approaching retirement. The good news: No matter your age, there’s plenty you can still do to fine-tune your financial plan, either on your own or with help from a financial professional.
By taking steps to improve your financial well-being before you clock out of work for good, you can help ensure a smooth transition into retirement.
Here are 5 suggestions to help start 2024 off right.
1. Review your personal balance sheet or net worth statement
The foundation of every financial plan is the family’s net worth statement. “It all really starts with understanding your assets and liabilities so you know what your total net worth is,” says Mike Christy, regional vice president of advanced planning at Fidelity Investments. “This allows families to understand the value of their of cash positions, taxable investments and retirement assets, as well as real estate, life insurance surrender value, long-term care policies and any business interests.” With an accurate net worth statement, families can then analyze their income, expenses, and overall asset allocation, with an eye toward developing a sustainable retirement plan.
Start by making 2 lists: one with your assets (physical property and accounts that you own) and one with your liabilities (debts that you owe).
Common assets include:
- Checking accounts
- Savings accounts
- Retirement accounts
- Taxable investment accounts
- Real estate
- Cars and boats
Common liabilities include:
- Mortgage balances
- Auto loan balances
- Personal loan balances
- Credit card balances
The difference between the two categories (assets minus liabilities) is your net worth. As you save more of your earnings and reduce or eliminate debt, your net worth will increase—a sign you’re building wealth.
Consider using a digital account aggregator such as Fidelity’s Full View, to link up all of your financial accounts to help you keep track of your net worth.
You can also work with a Fidelity professional to create a net worth statement.
2. Examine last year’s spending and forecast your cash flow
With a solid understanding of your net worth and assets, you can review your income and projected expenses for the year. Your income and expenses—money that comes in and money that goes out—form the basis of your financial plan. Whether you adhere to a strict budget or loosely track your spending, now is the time to ask yourself: Is the method I’m using working for me?
Ideally, your income will cover your essential expenses and savings contributions, and you have some money left over for nonessential (discretionary) purchases, like shopping, entertainment, and travel.
Fidelity's saving and spending guidelines recommend putting about 50% of take-home pay toward essentials such as housing, food, health care, transportation, child care, and debt payments. While the rate of inflation has moderated slightly, prices of everyday goods and services are still up, so chances are you may still feel a squeeze. Try to get ahead of it and consider where you may be able to cut your spending. Try cooking more at home, reducing online shopping, or canceling memberships or subscriptions you don’t use enough, for example. If that’s not possible, find ways to increase your income, such as turning a hobby into a side gig, getting a part-time job, or asking for a raise at your current job.
Next, confirm that in 2023, at least 15% of your pre-tax income—including any employer contributions—went toward retirement savings such as 401(k)s, 403(b)s, and IRAs. If you hit that mark, can you afford to increase contributions this year? In 2024, you can save up to $23,000 pre-tax to a 401(k) and up to $7,000 to traditional and Roth IRAs combined. (People age 50 and over can make catch-up contributions of $7,500 to a 401(k) and $1,000 to an IRA.)
Individuals with HSAs can save up to $4,150 pre-tax, while those with family coverage can save up to $8,300 in 2024.
Next, review any expected changes in your income, including new employment, a bonus, inheritance, or retirement account distribution. The final step in this process is to create a budget that incorporates all these factors, and allows you to regularly monitor your cash flow throughout the year.
”Many of us find that we're spending more throughout the year than we originally intended,” says Christy. “Reviewing your budget regularly allows you to apply some discipline to your financial practices and monitor your progress against your goals through the year.”
Another critical aspect of this exercise is to evaluate any potential federal, state and local tax liabilities. With 2024’s inflation adjustments, federal income tax brackets are increasing, which could impact how much you pay in taxes. Also, reviewing any changes to state tax laws and how they could impact you is critical. Consult your tax advisor if you have questions about your personal situation.
Knowledge is power. Armed with an understanding of tax law changes, you can make strategic moves throughout the year, like harvesting investment losses, to minimize the tax bite at the end of the year.
Learn more about how Fidelity can help you with tax-smart investing.
3. Evaluate and refine your financial goals for the new year
With a clear understanding of your assets and cash flow, you can review your goals, assess their attainability and make any necessary tweaks to your plan, including reducing expenses or increasing necessary savings. You could also start the annual process by reviewing your goals, but without a clear understanding of your current financial position it can be difficult to understand how sustainable your goals and overall plan are.
Retirement savings target
When you total the balances of all your retirement accounts, how close are you to your savings target? If you’re unsure, Fidelity can help you estimate how much you may need to retire. You can also visit Fidelity’s Retirement Planning & Guidance Center for more ideas.
The suggested savings target for someone retiring at full retirement age of 67 (for someone born in 1960 or later) is 10 times their annual income. Working backwards from that goal, a 60-year-old should aim to have 8x their annual income saved and a 50-year-old should aim to have 6x their annual income saved. If you plan to retire earlier than 67, the amount you need will likely be higher, in part because you’ll need to fund a longer retirement.1
Another factor is when you plan to claim Social Security. Claiming at 67 (depending on your birth year) generally means you get the full benefit you’re entitled to, while delaying up to age 70 could increase your monthly benefit by up to 24%. Think about whether you can cover your expenses in the early years of retirement through savings and/or a pension.
If you’re falling behind on your savings target, consider ramping up your deferrals to a 401(k), 403(b), or 457 plan until you hit the maximum—if you can afford to—which is $23,000 in 2024, plus an extra $7,500 for people 50 and over. Not only can it boost your nest egg, but you can potentially save on taxes today.
Finally, depending on your financial situation, consider whether a Roth IRA conversion could help your overall financial plan by reducing your income tax liability in retirement.
A sound investment strategy hinges on many factors, including an investor’s personal goals, time horizon, and risk tolerance. “As you get closer to retirement, you may become more risk averse and your asset allocation should reflect the appropriate level of risk,” Christy says.
Generally, a conservative investment portfolio includes more bonds than stocks and may offer lower returns, while an aggressive portfolio includes more stocks than bonds and can potentially offer a higher return. (If neither suits you, don’t worry: There are an array of options in between.) The way your nest egg was invested in your 30s and 40s likely won’t be the best setup in your 50s and 60s. Typically, the closer you get to retiring, the less risk you’ll want to take.
One of the challenging things about retirement planning is setting up a tax diversification strategy that can help you control the impact of taxes. By contributing to different types of accounts, you may be able to keep taxes to a minimum when you retire.
1. Tax-deferred accounts—such as 401(k)s, traditional IRAs, and annuities—can be a great way to potentially save on taxes in the year you contribute. But when you take the money out, it gets taxed as ordinary income.
2. A tax-exempt account, like a Roth IRA or Roth 401(k), is funded with post-tax dollars, meaning no taxes are due upon withdrawal, assuming the 5-year aging rule has been met and you are age 59½ or older. Note: If a 401(k) allows an in-service Roth conversion, the converted funds are subject to a 5-year waiting period. Direct Roth contributions have a 5-year waiting period on earnings, but the contribution is not subject to the waiting period.
3. Taxable accounts, such as traditional brokerage accounts, hold stocks, bonds, and mutual funds that generate capital gains, which are ultimately taxed at a lower rate than ordinary income.
There may be years in retirement when the market is down or tax rates have gone up. With these three “buckets” of income to choose from, you may potentially better manage your income in retirement and avoid higher tax rates.
Find out more about other taxes and surcharges that can affect your retirement income in Viewpoints: Are ghost taxes haunting you?
If most of your retirement money is in a traditional 401(k) or IRA and you expect 2024 to be a lower income year than years when you will take withdrawals in retirement, consider whether it makes sense to convert all or part of the balance to a Roth, known as a Roth conversion. You’ll pay taxes on the money you convert, and with a lower income to start, you can lessen your chances of jumping into the next tax bracket. The upside is that qualified withdrawals are tax-free, assuming the 5-year aging rule and other conditions have been met.2
Gauge the potential effect of retirement income strategies on your taxes with Fidelity’s retirement strategies tax estimator.
4. Assess your insurance policies
Insurance is practical, yet often overlooked. By this point you’ve likely spent decades building wealth—don’t leave it unprotected.
A great place to start is to review any employer sponsored insurance options including life insurance and disability insurance to confirm that they offer enough coverage. If not, consider getting a supplemental policy to fully protect your earning potential and provide for your loved ones in your absence.
Also important: Think about health insurance and long-term care, which can be paid for in a variety of ways, including through insurance.
According to the Fidelity Retiree Health Care Cost Estimate, a single person age 65 in 2023 may need approximately $157,500 saved (after taxes) to cover health care expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000 saved. Someone turning 65 today has nearly a 70% chance of needing some type of long-term care in their remaining years, and costs of this care would be in addition to regular health care expenses.3
Now is the time to plan for how you’ll cover these care costs in retirement. If you’re enrolled in a high-deductible health plan, max out contributions to your health savings account (HSA). In 2024, individuals can contribute up to $4,150 and families can contribute up to $8,300 (people 55 and over can add an extra $1,000). The money never expires and you can use it for all sorts of expenses, from copays to prescriptions.
And, don’t overlook property, casualty and personal excess liability insurance. As part of your annual financial check-up, you should review the coverages for your homeowner’s and automobile insurance, and consider if any circumstances have changed that might require adjusting the coverages. If you believe your risks may exceed the protection provided in these policies, you can also explore purchasing umbrella liability coverage as well.
5. Review your estate planning documents
Regardless of your net worth, everyone needs an estate plan. If you do not take the time to craft your own written plan, the laws of the state in which you pass away will control how your assets pass.
Your estate is comprised of money, assets, and possessions that you own or control at your death. When you pass away, these assets will need to transfer to either your beneficiaries (whether designated or through the intestacy process), charities that you select, or in the form of state and/or federal taxes. An estate plan typically includes a will, health care power of attorney (or proxy), an advanced health care directive, and a durable financial power of attorney. Depending on your planning goals and specific situation, a revocable and possibly irrevocable trust may also be part of your estate plan.
As you review these documents, pay particular attention to the names of people you nominate to serve as your fiduciaries, including your executor, power of attorney, and guardians. Also, review the specific provisions you incorporate into these documents to ensure each beneficiary’s share, for example, is still consistent with your wishes. While Fidelity recommends reviewing your estate plan at least every 3 to 5 years, intervening events such as moving, births, divorces, etc., could require changes. It is a good practice to spend a little time each year ensuring the documents reflect your wishes and are consistent with your goals.
In addition to reviewing each of your estate planning documents, you should use your net worth statement as a guide to review each of your accounts’ titling and beneficiaries. Confirm that your assets are properly titled including real estate, bank accounts, and brokerage accounts. Typically, assets can be owned individually, jointly with a spouse or someone else, or as tenants in common. Individually owned assets will transfer to the named beneficiaries, if any, upon the account owner's passing. This can help ensure the assets avoid a lengthy probate process and go to the right person when you pass away. You may even want to name a contingent, or secondary beneficiary, in the event that the first beneficiary is unable or unwilling to take ownership of the asset.
Jointly owned assets and accounts generally pass to the surviving joint owner upon one joint owner's death. Assets owned as tenants in common rely on the probate process to transfer the interest of one deceased tenant. In other words, the interest does not pass by beneficiary designation or joint ownership. You should work closely with your attorney and financial professional to ensure your assets and accounts are properly titled and aligned with your overall estate planning goals.
An estate plan should also include deciding what happens if you become unable, either physically or mentally, to manage your daily living or finances. “It’s possible many of us will be incapacitated before we pass away,” Christy says.
Incapacity planning typically involves setting up a durable financial power of attorney, where you can designate a person to manage your financial affairs when you can no longer do so for yourself. It also includes a health care power of attorney (also known as a health care proxy) or a living will, so that someone you trust can make decisions on your behalf when you no longer can about your end-of-life care. If you already have these documents in place, review them annually to ensure that they reflect your current wishes.
Lastly, depending on your financial situation and specific goals, consider setting up a revocable living trust. Such a trust can be created while you are alive, and it can be amended or revoked at any time. It allows the person who created the trust (the grantor) complete access and control of trust assets during their lifetime. Upon their death, the trust becomes irrevocable and includes instructions about how trust assets should be managed and distributed.
You can find out more about revocable and irrevocable trusts in Viewpoints.
Achieving your most important financial goals starts with developing a plan for how you spend, save, invest, and protect your money. Sticking to the plan helps you avoid veering off course as you approach retirement. By revisiting your net worth and budget, investments, retirement plan, insurance coverage and estate plan at the beginning of the year, you can prepare for whatever lies ahead in 2024.