In a recent address, BlackRock CEO Larry Fink voiced concerns about the U.S. retirement system, noting it was "under immense strain." No single issue is the cause, but a combination of issues, including an aging population, rising costs of living, and higher life expectancy, is contributing to the situation.
Despite Fink's concern, many Americans can still ensure they're prepared to take on retirement without a financial burden looming over them. Though not 100% foolproof, these are three time-tested ways to build a retirement plan that should survive any economic climate.
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1. Diversify your retirement accounts
Most people know about a 401(k) plan because it's the most common retirement account, but it's just one option. Consider supplementing it with an IRA account.
There are two main types of IRAs: traditional and Roth. The difference between them comes down to when you pay taxes. With a traditional IRA, your contributions may be tax deductible, depending on your income, filing status, and retirement plan at work. It's not until you start making withdrawals that your tax bill comes due. With a Roth IRA, you contribute after-tax money and then enjoy tax-free withdrawals in retirement.
In addition to setting money aside for retirement, utilizing IRAs offers a chance to manage your tax liabilities better. For example, you could withdraw from a Roth IRA in the earlier parts of retirement to minimize Social Security tax obligations and better manage 401(k) and traditional IRA required minimum distributions.
2. Prioritize maxing out your health savings account
For most retirees, healthcare costs are one of the highest expenses you'll face in retirement. For many, it's the highest expense.
According to Fidelity's Retiree Health Care Cost Estimate, a single person aged 65 in 2023 may need to save approximately $157,500 (after tax) to cover healthcare expenses in retirement. This number jumps up to around $315,000 for an average retired couple the same age.
One of the best ways to prepare for this is to utilize the health savings account (HSA) available to people enrolled in a high-deductible health plan. An HSA allows you to contribute pre-tax money and take tax-free withdrawals for qualified medical expenses. By taking advantage of an HSA, and if possible, prioritizing the maximum annual contribution, you can lower your taxable income and the financial burden of healthcare costs in retirement.
It's also worth noting that if you're fortunate enough not to have many healthcare costs in retirement, you can withdraw money from your HSA for any reason without facing the typical 20% early withdrawal penalty once you turn 65. Just keep in mind such withdrawals will be subject to taxes.
3. Be flexible with your retirement withdrawals year to year
For a while, a popular strategy for retirement withdrawals was the 4% rule, which states that retirees should plan to withdraw 4% of their savings in the first year of retirement and then adjust that amount each subsequent year for inflation. Theoretically, that would help retirees avoid the risk of running out of savings for at least 30 years. The problem, however, comes during times of high inflation, when adjusting for it may cause someone to deplete their savings quicker than anticipated.
More important than the specific numbers themselves, a situation like this highlights how important it is to be flexible with your retirement withdrawals and finances each year. Many good economic indicators exist to provide warnings of potential down periods or inflation spikes, but when it's all said and done, most are just educated guesses and not foolproof predictions.
Considering how quickly the economic and retirement landscape can change, retirees need to regularly review their retirement financial strategy to make sure it's aligned with present market conditions. It's better to be overprepared for a changing landscape and relieved when it doesn't happen than the opposite.
