7 steps to prepare for your upcoming retirement

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Bolster your portfolio as you approach retirement
Planning to retire within the next 10 years?
Taking these actions now could help bolster your portfolio as you approach your planned retirement date.
From the Merrill Edge Minute e-newsletter.

Key points

  • Picture yourself in retirement. Then estimate the resources you will require to support your vision. You may need to make some adjustments now.
  • Consider maintaining a sound mix of stocks, bonds, mutual funds and other assets to provide your portfolio growth opportunity throughout retirement
  • Health care costs will likely be higher later in life. Consider options to make sure your needs are covered in retirement.
After decades of working and saving, you can finally see retirement on the horizon. But now isn't the time to coast. If you plan to retire within the next 10 years or so, consider taking these steps today to help ensure that you have what you need to enjoy a comfortable retirement lifestyle. Examining your income sources well in advance of your target retirement date gives you time to make any necessary adjustments.
Start by envisioning the kind of retirement you want. Will you work part-time, volunteer, travel? Next, develop a realistic picture of the financial resources you may need and then determine if your current ones will be sufficient to support your plan. If you find there is a gap, think about how to accumulate the additional assets you need, or adjust your vision to match your resources. By analyzing your current expenses, you may identify discretionary items that can be eliminated or reduced. "If you look at everything you purchased over the course of a month, you may be surprised at how much you can cut back to have more money to invest for your retirement," says Debra Greenberg, director, IRA product management, Merrill Lynch.
Here are some steps to consider when you are approximately 10 years away from retirement:

1. Make sure you're diversified and investing for growth

It can be tempting to shy away from stocks to reduce risk, but the growth that stocks may provide is still important at this stage of your life. Consider maintaining a sound mix of stocks, bonds, mutual funds and other assets that fits your risk tolerance, investment time horizon and liquidity needs.

Examining your income sources well in advance of retirement gives you time to adjust your plans if necessary.

A well-balanced portfolio may help you weather downturns and potentially generate the kind of income that you will need to cover expenses in a retirement that could last more than three decades. Use the Merrill Edge Asset Allocator™1 to make sure your portfolio is in line with your investment objectives for your retirement plan. Please note that diversification does not ensure a profit or protect against loss in declining markets.

2. Take full advantage of retirement accounts, especially catch-up contributions

Whenever possible, increase your retirement contributions up to the maximum allowed in your 401(k), IRAs or other retirement plans. Aim to put enough into your 401(k) to qualify for any maximum matching contribution that your employer may offer. If you're 50 or older, rules for catch-up contributions let you set aside more than the usual contribution.
As you near retirement, account consolidation might simplify your investment management and provide a clearer picture of your total retirement assets. Consider combining IRAs of the same type with one institution. Also, review any 401(k) accounts you may still have with former employers. Learn more about 401(k) distribution options and other considerations when changing jobs. There are several options available and you might determine that rolling over your retirement plan to an IRA rollover could make sense for you.2
Contribution Limits
  Younger than Age 50* Age 50 and older
Traditional** or Roth IRAs
2016 and 2017 Maximum Contributions*** (deadline for 2016 is 4/18/17)
$5,500 $6,500
2016 and 2017 Employee Contributions (deadline for 2016 is 12/31/16)
$18,000 $24,000

* You are treated as being age 50 or older if you will turn age 50 or older at any point during the calendar year.

** Contributions to Traditional IRA accounts may be tax deductible. IRS annual modified gross income restrictions for head of household or single filer who participates in an employer retirement plan are $61,000 for 2016 and $62,000 for 2017. For married couples who participate in an employer retirement plan, it's $98,000 for 2016 and $99,000 for 2017.

Generally, married couples filing separately are not entitled to a deduction for contributions to Traditional IRAs. However, if you are married and file separately but do not live with your spouse at any time during the year, your maximum deduction is determined as if you were a single filer.

If neither you nor your spouse is covered by an employer retirement plan, the maximum deduction is either $5,500 or $6,500, depending on whether you are age 50 or over.

*** IRA contributions for 2016 can be made through 4/18/2017. IRA contributions for 2017 can be made through 4/17/2018. You generally have until April 15th of each year to make your contribution for the previous year. If April 15th falls on a weekend or holiday, the deadline typically is the next business day. 401(k) contributions for 2016 can be made through 12/31/2016.

3. Downsize your debt

Consider accelerating your mortgage payments so that the loan will be paid off before you retire. To curb new credit card debt, try paying cash for major purchases. By limiting new debt and reducing existing debt, you can minimize the amount of retirement income that will be spent on interest payments. "If you pay off a credit card that charges 9.9% interest, it's like earning 9.9% on a risk-free investment," says David Laster, head, Retirement Strategies, Merrill Lynch Wealth Management.

4. Calculate your likely retirement income

Estimate your predictable income from sources such as Social Security and employer pensions. The rest of your retirement funds likely will need to come from your savings and investment accounts. To make your assets last throughout your lifetime, the old rule of thumb was that you could afford to spend 4% of your portfolio annually in retirement. So if you have $1 million dollars in retirement assets, you could expect to afford to spend roughly $40,000 of that amount per year when you retire. When added to your other savings, Social Security and pensions, is that enough to support the retirement you envision? "Four percent is a good starting point, but it can also be overly simplistic," says Laster. "Your own rate of withdrawal should be personalized and based on a variety of factors, such as age, gender and risk tolerance."
Achievable spending rates for retirees
Source: David Laster, Anil Suri and Nevenka Vrdoljak, "Systematic Withdrawal Strategies for Retirees," Journal of Wealth Management, Winter 2012.
The advantage of looking at these income sources well in advance of retirement is that it gives you time to adjust your plans, if necessary. Options for boosting your retirement funds include:
  • Postponing your retirement date and working longer
  • Reducing your discretionary expenses
  • Deferring Social Security payments (each year you delay, your monthly benefits grow by 8%, until age 70)
The longer you put off tapping into your retirement nest egg, the more likely your savings will last.

5. Estimate your retirement expenses

Some expenses, such as health care, may be higher later in life, while others, such as commuting or clothing costs, may decline. What you spend will depend on how you live during retirement. If you expect to travel widely, for example, your projected costs might even be higher than they are now, while you're still working.

6. Consider future medical costs

If you retire at age 65 or older, Medicare will cover the majority of your routine health costs, but you may want to consider supplemental coverage to help pay for your nonroutine health expenses, which are likely to rise as you get older. Moreover, Medicare doesn't cover most long-term care costs. Learn more about how you can prepare for health care costs in retirement.
To help protect your retirement nest egg, consider buying long-term care insurance, which can help with expenses such as home health aides. If you buy coverage now, your premiums will be lower than if you wait a few years, and you'll be less likely to be rejected by insurers.
If you have a health savings account, consider putting in the maximum contribution. The money is tax-advantaged but can only be used for qualified health expenses. Money that you don't spend can accumulate with tax-free compounding until you need it during retirement.

7. Plan where you will live

Where you retire could have a big impact on your expenses. For example, if you sell your house in an expensive location and move to a condo in a low-tax state your expenses could decline sharply, perhaps freeing income to pay for other priorities. You may also consider staying in your town or city, but moving to a smaller home that's more financially manageable. On the other hand, you might elect to live in an area with high living costs and taxes so that you can be near grandchildren or move to a cosmopolitan city — a move that could require you to economize.

It's never too late to get started

When your planned retirement date is a decade away it can seem like a distant event. But it's important to plan carefully and set realistic goals so that time is on your side and can help you have the means to enjoy the sort of retirement you have always dreamed of.
Even if you started saving and investing for retirement late, or have yet to begin, it's important to know that you are not alone, and there are steps you can take to increase your retirement savings. "It's never too late to get started," says Greenberg.
Next steps

1 Asset allocation does not ensure a profit or protect against loss in declining markets.

2 You have choices for what to do with your employer sponsored retirement plan. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth, roll over to an employer sponsored plan from a prior employer to an employer sponsored plan at your new employer, take a distribution or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment and provide different protection from creditors and legal judgments. These are complex choices and should be considered with care. Visit http://www.merrilledge.com/retirement/rollover-ira or call a Merrill Edge rollover specialist at 888.637.3343 for additional information about your choices.

The content within this article should not be construed as investment or tax advice.

Opinions are subject to change due to market conditions and fluctuations. Any investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance, time horizon, liquidity needs and investment goals. Always consult with personal professionals before making any investment decisions, including a tax advisor.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state.