Retirement Plans Likely Need A Review
We are just coming out of an unprecedented time in history after massive disruptions in just about every facet of our lives due to the Covid-19 pandemic. While it appears things are finally back to near normal, most of us would be wise to take an extra close look at our retirement plans in 2023 to ensure we are on the best path forward.Most of the stock market roared to new highs in the second half of 2020 and 2021 as much of the world leaned on technology to do everything from attending work meetings virtually to ordering groceries and restaurant meals while preserving social distancing. This greatly benefited certain parts of the stock market.
Since then, much of the stock market has returned to Earth while the world economy deals with supply chain issues, high inflation, rising interest rates, a war in Eastern Europe and fear of a pending global recession.Taking everything into account, investors should not only take a close look at their retirement portfolios in the coming year but also be aware of law changes that will drastically impact the planning landscape.Investors must make sure they are properly allocated and have the necessary cash available to both weather oncoming storms and take advantage of potential opportunities, while being aware of changes to social security, retirement contributions, tax brackets and Medicare.
Changes to Social Security
The federal government recently announced an 8.7% hike in social security. While this is good news, it is in large part due to the increased rate of inflation that we have experienced, meaning the “real” effect is much smaller if your total spending has also risen.
Due to the increase, an average benefit check will increase around $140 to $1,827 a month, compared with the typical benefit of $1,681 in 2022.
Those currently drawing on their retirement savings may need to make an adjustment to their withdrawal rate. If spending has not increased commensurate with the rate of inflation then the increase in social security may allow for a decrease in portfolio withdrawals, allowing more money to remain invested.
There is also an adjustment to the Medicare Income-Related Monthly Adjustment Amount (IRMAA), which is the amount you may pay in addition to your Part B or Part D premium if your income is above a certain level.In 2023, surcharges for Medicare Part B range from an extra $65.90 per month to $395.60 per month per person on top of the standard Part B premium of $164.90 per month. While these numbers are not insignificant, they are actually slightly down from 2022 premium and surcharge levels.
Keep in mind that the Social Security Administration (SSA) determines if you owe any IRMAA based on the income you reported on your IRS tax return two years prior, meaning the income reported in 2021 will determine if and how much IRMAA is owed.IRMAA related planning can have a significant impact on your health costs in retirement.
Tax Bracket Changes
While tax brackets aren’t changing, the incomes associated with each tax bracket are increasing for 2023. For example, a married couple in the 22% marginal tax bracket can earn up to $190,750 in 2023 before moving into the next bracket, an increase of $12,600 from 2022 income thresholds.
How does this impact taxpayers?
- Tax bills may be lower assuming equal income
- Withholding may need to be adjusted, providing higher monthly cash flow
- Increased opportunity for Roth conversions before crossing into a higher bracket
- Ability to earn more without moving into a higher marginal bracket
Review your expected 2023 income to see if you need to make any adjustments to your income and conversion plan.
Take Advantage of Contribution Limit Increases.
As we know, one of the best assets investors have is time, which allows for compounding. For those nearing retirement, it is especially important to make sure that your portfolio is properly allocated to not take on losses right before or in the early years of retirement.Recessions and bear markets are a natural part of the economic and investment cycle, albeit uncomfortable as they occur. If you are nearing retirement or already retired, keeping cash on hand to cover living expenses is especially important during periods of volatility and a potential recession and market downturn.
However, if you are nearing retirement then you still have the opportunity to continue saving and invest in the market at lower prices. The years leading up to retirement are a great time to be maxing out retirement contributions and taking advantage of the catch-up contribution.
- IRA contribution limit increased to $6,500
- Catch up contribution for those over 50 remains the same at $1,000
- 401(k) employee contribution limit increased to $22,500
- Catch up contribution for those over 50 increases to $7,500
- Income thresholds for Roth IRA contributions or deductible Traditional IRA contributions increased
- SEP IRA contribution increased to $66,000
Maximizing retirement contributions is one of the most important steps one can take to save for retirement and plan current and future taxes.
Proper Asset Allocation in a Volatile Market
Proper asset allocation is always important, especially in a volatile market. As disciplined, long-term investors, our philosophy is that the allocation among different asset classes should not change due to temporary market conditions. Timing the market by sliding in and out of the investment at the perfect time has proven to be a fool’s errand over and over. Remaining steadfast in a well planned strategy tends to work out much better.The primary driver when deciding on a proper allocation of assets depends largely on when money will be needed. If you are close to retirement, your best portfolio looks much different than it would have looked decades prior.
In 2023 we know we are facing high inflation and a potential recession. Our best strategy is to build a diversified portfolio of funds that stretch across sectors, market capitalization, and geographic locations with a proper mix of stocks, bonds, and cash.Generally speaking, we recommend rebalancing the portfolio at most every quarter to take advantage of the ebbs and flows of this volatile market. There is no reason to make drastic, extraordinary changes to a portfolio based on temporary market swings due to volatility, especially if there are some low risk assets in your portfolio, as we advise everyone.
Higher Interest Rates Present an Opportunity
The higher interest rates are having a huge impact on retirement plans as well. The higher rates make it much more difficult for companies to earn a profit leading to a shrinking stock market.However, for those in or near retirement, higher rates are not necessarily bad. It will be easier to generate a guaranteed income with a portion of your retirement assets. For years, savings and CD interest rates have been practically zero in many cases, but going forward, it will be easier to earn a decent return with those assets. Those with certain types of life insurance or annuities are likely to be pleasantly surprised by higher future dividends.
While 2023 will be a year full of uncertainty as we deal with the waning pandemic, high inflation, and rising rates, it is important to remember it is just one year in a very long game. Successful investors keep their focus on the long-term, understanding that there will be difficult periods to weather.If you are nearing retirement or just want to ensure you are as prepared as possible for what may come, now would be an excellent time to make and implement a solid plan for your financial future.