As the year draws to a close, retirees should take some time to review their financial situation. You can also make adjustments now to ensure a prosperous and secure year ahead. After all, with a well-planned year-end financial checklist, retirees can assess their current state, make the most of potential tax-saving opportunities, and set goals for the future.
Keeping that in mind, here’s a year-end financial checklist to help retirees navigate this process.
1. Review Your Retirement Income Sources
To start, evaluate your income sources to ensure they meet your needs. Among these are Social Security benefits, pensions, withdrawals from retirement accounts like 401(ks), and investment income.
Specifically, consider the following questions:
- Can you cover your expenses with your income streams?
- Over the past year, have your financial needs changed significantly?
Do any adjustments need to be made? If so, consider strategies such as reallocating investments, seeking part-time income, or adjusting withdrawal rates.
2. Don’t Miss Your RMD Deadline
Are you 73 or older? If so, you may be subject to Required Minimum Distributions (RMDs). The IRS mandates the withdrawal of a specific amount from your retirement accounts every year. Despite the temptation to delay, meeting these deadlines is essential to avoid penalties.
Key RMD deadlines:
- 2024 RMD: Typically due by December 31, 2024.
- If you turned 73 recently: You may have until April 1, 2025, to take your 2024 retirement distribution.
- 2025 RMD: Must be taken by December 31, 2025.
If you want to ensure that you comply, you should consult a tax professional or financial advisor for advice.
3. Evaluate Your Tax Situation
As the year ends, you can review your financial situation and plan ahead for the next tax year. If you are a retiree, you have several options for minimizing your tax burden.
- Plan your withdrawals wisely. Depending on your tax bracket, strategically withdraw from your retirement accounts to minimize your tax burden.
- Monitor mutual fund capital gains. Be aware of potential capital gains distributions from your mutual funds and choose the right time to buy them.
- Maximize medical deductions. To reduce your taxable income, consider itemizing your medical expenses, such as prescription drugs, Medicare premiums, and copays.
- Consider tax-loss or gain harvesting. Selling underperforming investments can reduce your taxable income or offset capital gains.
- Strategic charitable giving. To meet your Required Minimum Distributions (RMDs) and receive a tax benefit, utilize Qualified Charitable Distributions (QCDs).
- Leverage Roth conversions. Transferring funds from a traditional IRA to a Roth IRA may reduce your future tax burden.
- Develop a cash flow strategy. By carefully planning your withdrawals to maximize your tax efficiency, you can maintain a comfortable retirement lifestyle.
However, if you want to optimize these strategies for your unique circumstances, it is important to consult a tax professional.
4. Review Your Spending and Budget
A retirement often comes with unpredictable expenses, such as home improvements or medical costs. As such, to be financially prepared, you should;
- Review your spending habits from the past year.
- Identify areas where you can reduce spending or reallocate resources.
- Ensure your emergency fund is adequate, typically three to six months’ essentials.
Ultimately, keeping your spending in line with your income will ensure you remain financially solvent.
5. Revisit Estate Planning Documents
To protect your assets, leave a legacy, and guarantee your wishes are carried out, estate planning is essential. So before the new year, make sure you;
- Update your wills and trusts if you have experienced major life changes. We’re talking about marriages, births, and deaths.
- You should verify that the beneficiaries on your retirement accounts, life insurance policies, and investments are accurate.
- Verify that your powers of attorney and healthcare proxies remain current.
6. Maximize Charitable Giving Opportunities
It’s the season of giving, so there’s no better way to spread cheer than by supporting a charity you believe in. As such, consider these options if you wish to maximize your charitable impact and tax benefits:
- Charitable donations. Donating to your favorite charity can decrease your taxable income depending on whether you itemize deductions.
- Qualified Charitable Distributions (QCDs): If you’re 70½ or older, a QCD is a tax-efficient way to donate directly from your IRA to a qualified charity. You can donate $105,000 to a qualified charity directly and not pay taxes on it by excluding it from your traditional IRA. It also counts toward your Required Minimum Distribution (RMD) and provides significant tax benefits.
Please note that your donation must be made by December 31, 2024, if you wish your charitable gift or QCD to be counted for the 2024 tax year.
7. Evaluate Healthcare and Insurance Coverage
As we age, health-related expenses often increase. Therefore, reviewing your coverage annually is a necessity:
- For the coming year, ensure your Medicare plan meets your needs during the open enrollment period (October 15–December 7).
- Consider adding supplemental insurance policies, such as Long-Term Care Insurance or Medigap, to your policy.
- Assess your out-of-pocket expenses and adjust your Health Savings Account (HSA) contributions (if applicable).
8. Monitor Your Investment Portfolio
To ensure that your investment portfolio aligns with your risk tolerance and income needs, you must review it periodically. At the very least, you should consider;
- Rebalancing. Your portfolio should be adjusted to align with your target allocation of stocks, bonds, and other investments.
- Reducing risk. It may be a good idea to shift your investments toward more conservative ones as you age.
- Income generation. Consider investing in dividend-paying stocks and bonds as part of your portfolio.
It’s strongly suggested that to align your investment strategy with your goals, work with a financial advisor.
9. Plan for Inflation and Rising Costs
It’s no secret that inflation erodes purchasing power. Retirees need to plan for rising costs as follows;
- Your budget should reflect higher healthcare, utility, and food prices.
- Consider investments that historically outpace inflation. Examples include Treasury Inflation-Protected Securities (TIPS), commodities, or real estate investment trusts (REITs).
10. Set Financial Goals for the Coming Year
The new year is a great time to set new goals. Consider what you want to accomplish financially in the coming year. Here are some examples;
- Reducing financial stress by paying off debt.
- Saving money for future travel or a large purchase.
- Putting money aside for grandchildren’s education. In most states, you have until December 31 to contribute to a 529 education plan to qualify for a tax deduction or credit.
Ultimately, setting specific, measurable, and attainable goals will make the coming year more productive.
11. Stay Informed on Legislative Changes
Retirement laws and benefits programs can change, which could affect your finances. A few examples are:
- SECURE Act updates. Take note of any changes affecting RMDs, contributions, or annuities. For example, employers must inform the Department of Labor about orphaned 401(k) plans beginning in 2025. As a result, workers can quickly find lost plans using the new search tool developed by the Department of Labor.
- Social Security adjustments. Keep up to date with cost-of-living adjustments (COLAs). As an example, Social Security and Supplemental Security Income (SSI) benefits are set to increase by 2.5% in 2025. As a result, over 72.5 million Americans will see their benefits change.
You can stay informed by subscribing to and following reliable financial resources like Due, The Motley Fool, or Morningstar. To stay informed, you can also consult your advisor.
12. Connect with Your Financial Team
The end of the year is also a great time to check in with your financial advisor, tax preparer, or estate planning attorney. These professionals can help you with the following;
- Develop a tax strategy that maximizes your income.
- Prepare or review a financial plan.
- Answer any questions or concerns about your retirement finances.
Conclusion
In addition to being a task list, a year-end financial checklist ensures that your retirement years will be financially secure and stress-free. A proactive approach to reviewing your income, taxes, spending, investments, and estate plans will give you confidence and clarity going into the new year.
FAQs
Why is a year-end financial checklist important for retirees?
A year-end financial checklist can help retirees maximize their financial opportunities. It can also help identify potential tax savings, optimize retirement income, and prepare for the future.
When should I start preparing for my year-end financial review?
The best time to start preparing is a few months before the end of the year. Doing so gives you ample time to gather necessary documents, consult with financial advisors, and make timely decisions. Even if you wait until the last minute, it’s better than not doing it.
What are Required Minimum Distributions (RMDs), and how do they affect my taxes?
In retirement accounts like 401(k)s and IRAs, RMDs are mandatory withdrawals for individuals over a certain age. If you do not take your RMDs, you may be penalized significantly. To determine your RMD amount and timing, consult a tax advisor.
How can I minimize my tax liability in retirement?
There are several strategies you can use in retirement to minimize your taxes;
- Tax-loss harvesting. To offset capital gains, underperforming investments are sold.
- Charitable giving. Your IRA can be used to make qualified charitable distributions (QCDs).
- Roth IRA conversions. A Roth IRA can potentially reduce future tax liability by converting traditional IRA funds.
- Tax-efficient withdrawal strategies. To create a tax-efficient withdrawal plan, work with a financial advisor.
Should I rebalance my investment portfolio at the end of the year?
An annual portfolio rebalancing can help you maintain an asset allocation aligned with your long-term goals and risk tolerance. You should, however, consult a financial advisor to determine your best rebalancing strategy.
Image Credit: Marcus Aurelius; Pexels
