2021 Year-End Retirement Planning Guide

As the year 2021 draws closer to its end, you will complete another year of retirement planning. However, the last two years, 2020 and 2021, were unlike ordinary annual retirement planning years. In 2020, the world was hit by the COVID-19 pandemic, which led to global economic shutdowns. Markets plummeted to record-breaking lows and witnessed extreme volatility, causing significant losses and paving the way for emotion-based investing. Between mid-February and March, the S&P 500 index cut down by over 30%. The U.S. Treasury yield for 10-year securities is also below 1%, which is a historic low. The level of stock market volatility was comparable with that of the global financial crisis.

However, the end of 2020 and the onset of 2021 can be described as the year of recovery. Even though the pandemic resurfaced at the beginning of this year, the situation was under control by mid-year. Further, the market was on the recovery road towards a new normal. With rising wages, falling unemployment rates, and several government initiatives, the stock market rebounded strongly. The ten-year Treasury yields climbed back above 1.20%, and the market indices have recorded strong growth. By the beginning of 2021, the S&P 500 gained 15.6%, and the Dow Jones gained 6.6%. Overall, the market indices growth and the consequent stock market were comforting. This recovery led to sufficient hope for the new year 2022. However, there are still multiple checks you must do as a retirement planner.

Between the crashing and rebuilding of the market, several aspects of retirement planning suffered. Inflation has been steeply rising, implying a need to juggle your retirement plan. Several retirement account measures introduced during the COVID-19 initial phase have been pulled back by the government. For instance, the federal CARES (The Coronavirus Aid, Relief, and Economic Security) Act suspended the RMDs (Required Minimum Distributions) from 401(k) and IRA (Individual Retirement Account) during the COVID-19 outbreak in 2020. However, in 2021, the RMDs have been reintroduced. Further, the changes made by the Secures Act in 2019, temporary suspension of RMDs, along with alterations in tax-favored plan withdrawals and loans against retirement accounts, has made it imperative for you to reconsider your retirement plans for 2022. Apart from modifications in retirement planning rules, some changes that fuel the need for year-end retirement planning checks are rising inflation, rising life expectancy rates, alterations in tax exposure, new policy proposals, etc. To counteract against the aforesaid changes, you may consider reaching out to a professional financial advisor who can help design a financial strategy to minimize the impact of such factors.

Here is a quick year-end retirement planning guide:

1. Rebalance your portfolio: 2020 and 2021 led to significant and unexpected changes in the stock market. The market changes affected by the global economic slowdown had a considerable impact on your retirement portfolio. As an investor, your risk tolerance was pushed to limits, and in some cases, you might have had to give in to the pressure of falling stock prices to curb losses. Given such alterations, it is possible that your retirement portfolio no longer aligns with your risk preference. For instance, before 2020, a lot of people had a keen interest in equity investments due to high-risk tolerance. Hence, their portfolios typically included stock holdings. However, given the steep fluctuations of the stock market over the past year, most investors have lower risk appetites now. As a result, portfolios have shrunk to medium or low-risk investments like bonds, alternative assets, etc.A year-end assessment of your retirement portfolio will help you assess if your current portfolio is in sync with your risk appetite. If not, you can make the necessary changes and structure the portfolio to suit your preferences. That said, even in retirement and despite the stock market volatility, it may not be advisable to avoid stocks on the whole. Retirement plan advisors suggest holding some percentage of your assets in equity to ensure your portfolio generates inflation-beating returns in the long run. Rebalancing the portfolio will allow you to restructure it as per your comfort level. Further, you can also consider investing in new opportunities, which have stood strong against the stock market volatility. For instance, if you want high returns but are not ready for equity-related market risks, you can consider investing in REITs (Real estate investment trusts), where you can invest in real estate without owning or managing the property. REITs work like mutual funds and invest your money in real estate, allowing you to earn potentially high profits. You can also consider investing in commodities and precious metals to ensure you create a diversified retirement portfolio. Further, investing in fixed-income, low-risk assets like bonds can provide you income stability during retirement, irrespective of the market volatility.
2. Reassess your retirement accounts: Each year, the IRS (Internal Revenue Services) alters the maximum amount you can contribute to tax-advantaged accounts like an IRA, 401(k), and other similar retirement accounts. The alterations are made per the cost-to-living adjustments every year. For 401(k), the IRS has increased the maximum contribution limit to $20,500 in 2022. In 2021, you could only contribute $19,500 if you were under 50 years. Catch-up deposits for those aged 50 years and above remain the same at $6,500 for 2022. These new amounts are also applicable for 403(b) and 457. While the IRS increased the 2022 retirement contribution limits for 401(k), the IRA limits have remained unchanged at $6,000 since 2019. However, income restrictions for eligibility in a Roth IRA have changed. If you are a single-saver, Roth IRA contributions in 2022 begin to phase out at $129,000. If your earnings exceed $144,000, your contributions are restricted. In your yearly retirement plan assessment, check if your plan is in sync with the newest updates on your retirement plans. Aim to maximize your contributions and effectively tap all tax-advantaged retirement plans for individuals. Moreover, be aware of any withdrawal rules and penalties that are introduced. You could consult a retirement planning financial advisor to guide you in making full use of your tax-deferred retirement savings accounts.
3. Check if your RMD is due: The IRS mandates all 401(k) and IRA investors to take RMDs from their accounts subject to some rules. RMD is a defined sum that you must withdraw each year from your eligible tax-advantaged retirement accounts like a 401(k) and IRA. As per law, RMDs from your retirement savings accounts begin by April 1 of the year you turn 72 years. For instance, if you will be 72 in 2022, you are bound to take your first RMD until April 1, 2023. Not taking your RMDs or failure to take the full RMD each year will subject you to IRS penalties, which can go up to 50% of the RMD sum or the shortfall. For instance, if you have to take an RMD of $30,000 in 2023 from your IRA, but you only withdraw $20,000 in 2023, you have to pay the penalty on the sum not withdrawn ($10,000). This could mean you end up paying $5,000 as a penalty to the IRS. However, you have permission to withdraw more than the RMD. So, if you take $31,000 instead of $30,000 as RMD for 2023, you do not have to pay any penalty, provided you fulfill the other withdrawal formalities like withdrawing money at 59.5 years, etc. A year-end check of your retirement plan will enable you to evaluate when your RMDs are due. In the wake of the pandemic, the CARES Act suspended the RMD rule for 2020. However, the rule is back in 2021 and has some added complexity, given the alterations of the SECURE Act in 2019. Before the SECURE Act, the RMD age was 70.5 years. So, for everyone who reached age 70.5 before January 1, 2020, taking a RMD by April 1 of the following year was mandatory. But the CARES Act suspended the RMD for 2021, leaving some individuals who turned 70.5 in 2019 to begin their first RMD in 2021. Alternatively, for someone who turned 70.5 in January 2020 or later, their age for RMD is 72 years per the SECURE Act. This means that since they will not be 72 until 2021, there is no RMD mandate until April 2022. In all, when it comes to RMDs, it is best to evaluate your status per the new rules. You can consult a retirement planning financial advisor to ensure you are not missing out on any crucial RMD rules.
4. Consider Qualified Charitable Distributions (QCDs): If your RMDs are due in 2022 or anytime soon, you have an alternate option if you do not wish to take withdrawals by the due date. If your year-end retirement review reveals you are close to your RMDs, you can consider taking a QCD instead. A QCD allows you (if you are 70.5 years or older) to donate up to $100,000 towards charity. You can directly donate this sum from your taxable IRA to avoid taking RMDs. You have the choice to donate $100,000 collectively to one charity or distribute it amongst two or more charities. QCDs do not increase your taxable income. Hence, this strategy can help you avoid falling into a higher income tax bracket. Further, QCDs lower your IRA balance, which can potentially reduce your RMDs in the future. However, you can make a QCD only to specific qualified charitable organizations. Hence, it is advisable to check with a retirement planning financial advisor before making any charitable contributions. Also, state rules regarding QCDs vary. Consult with your financial advisor to understand the tax impact in your case.
5. Stay updated on estate planning: A vital year-end financial ritual you can consider following is updating your estate plan and related documents, such as wills, guardianship, etc. You cannot control the events that impact your life, but you can prepare yourself to handle adverse events in the future. The COVID-19 pandemic highlighted the fragility of life and how important it is to have a secure financial backup and a reliable estate plan. Reviewing your estate planning documents annually helps you stay safe in emergencies and even after your demise. The benefits of estate planning accrue even in situations, such as physical or mental incapacitation or disability, health crisis, etc. Moreover, estate planning gives you complete control over how your assets are passed, distributed, and used after your demise. This means that if you stay updated on your estate plan, you can plan your needs when alive and determine what happens to your estate and your hard-earned money after your demise. Every year, reassess your will and living trust directives. Ensure you have named the right beneficiaries, executors, trustees, guardians (in case of minor children), etc., as you head into 2022. Also, review if your retirement account beneficiaries and beneficiary appointments for your will are aligned. If the beneficiary of your will and retirement accounts do not match, it can cause legal issues, risking your estate to go through the complicated process of probate. For instance, if you named your ex-spouse as the beneficiary of your IRA but listed your present spouse as a beneficiary in the will for your IRA, then this can lead to legal hassles.Check if your estate documents specify the beneficiary, asset distribution, asset usage, healthcare directives, trustee rights, guardian duty, children’s rights, and more. Review your estate plan yearly to evaluate your taxes. If done well, comprehensive estate planning can reduce your tax burden in the present and for your family in the future. For 2021, estates with a value up to$11.7 million are free from federal taxes. However, these limits change every year. Hence, an annual estate plan assessment is necessary.
6. Analyze annual and lifetime gifting: When undertaking annual financial planning for retirement, it is beneficial to review your estate gifting strategy. Giving income-producing assets to children while you are alive helps to reduce your current income tax bracket and also the future income tax burden for your children. This is specifically beneficial if you have a large estate and want to take advantage of favorable tax exemptions. For 2020, lifetime gifts up to $11.58 million were exempt. In 2021, this limit was increased to $11.7 million. However, the timing of gifting plays a pivotal role in estate planning. Overall, you can give away $11.7 million in gifts to your children, and they will be below the estate tax limit. There is also no restriction on the number of people you can give the gifts to. This means you can distribute a sizable share of your assets amongst your beneficiaries even when you are alive. While annual and lifetime gifting is an effective medium to reduce your estate taxes, it is important to note that such gifts can be taxable to the giver in form 709. Further, estate policies keep changing frequently. For instance, the lifetime gifting exemption is expected to reduce to six million dollars only in 2026. Hence, it is important to assess lifetime gifting and estate rules before you adopt such a strategy.
7. Reevaluate your budget for 2022: As you enter the new year, focusing on your portfolio, retirement accounts, estate plans, etc., is important, but it is equally critical to review your budget for the new year. The objective is to reassess your spending for 2021 to create a sound budget for 2022. You can identify areas where you went overboard with the previous budget and aim to cut down on those expenses in your new budget for 2022. Creating a budget helps you stay on track with your financial goals and makes you accountable for any overspending or missing the savings mark. As a part of your budget planning exercise, ensure you check your emergency fund status. If you have used the corpus recently, replenish the fund with at least three to six months of living expenses. If you do not have an emergency fund, create one in your new budget and ensure it has at least three to six months of living expenses. If your family grew in the past year, adjust your fund accordingly. An emergency fund allows you to fulfill any immediate and urgent expenses without dipping into your long-term retirement savings. A critical part you should ideally remember when creating your budget for 2022 is to refinance your mortgage, if any. If possible, aim to pay off your loans as early as possible so that you can make room for more savings in your budget later.

To summarize

These are some of the vital measures you should consider in your year-end retirement plan review. However, this list is not exhaustive as everyone’s financial condition is different. But this guide is a start to creating a retirement plan that can ensure a comfortable and financially secure retired life. It is advised that you consult a retirement planning financial advisor that can help you conduct an exhaustive annual financial check and create a fail proof retirement plan for a safe future.
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