10 Retirement Planning Steps for Clients to Take Before 2023

2. Max Out the Health Savings Account

In Edmisten’s experience, health savings accounts, which are available to clients who are participating in high-deductible health plans, can be a powerful vehicle for building tax-advantaged savings for retirement.

While many people use the balances in their HSA accounts for current medical costs, there is a unique triple tax benefit derived by saving these funds for retirement health care expenses.

Edmisten says 2022 contribution limits for HSAs are relatively high. Individuals can contribute up to $3,650 to an HSA for the year, and up to $7,300 for a family plan. If the client is 55 or older, they can make an extra catch-up contribution of $1,000 per year, and a spouse who is 55 or older can do the same if each individual has their own HSA account.

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3. Set Aside 12 to 18 Months of Living Expenses in Cash

Edmisten says one of the biggest mistakes someone approaching retirement can make is not setting aside enough cash.

“While investing heavily in stocks makes sense to grow retirement savings, more thought needs to be given to generating retirement income and having stable funds available to spend when you retire,” he says. “If someone is invested only in stocks when they retire, they are relying on the movement of the stock market to dictate their success in retirement.”

According to Edmisten, if early retirement spending is higher than anticipated and investment losses are severe enough, a retiree many never recover and could run out of money early in retirement. The clearest way to avoid this is to hold adequate cash reserves before one starts retirement.

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4. Consider Starting a Solo 401(k)

Noah Damsky, principal at Marina Wealth Advisors, says clients who are entrepreneurs can consider opening a solo 401(K) or defined benefit plan before the end of the year.

While other retirement accounts, such as IRAs and Roth IRAs, can be opened in 2023 for 2022 contributions, a 401(k) or defined benefit plan must be opened before year-end to be eligible for a 2022 contribution.

For 2022, the client can contribute a combined total of $61,000 (rising to $66,000 in 2023). If they are 50 or older, the client can add another $6,500 in 2022 and $7,500 in 2023.

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5. Rerun Monte Carlo Simulations

Noah Rubin, managing director and financial advisor at the Rubin Wealth Management Group of Wells Fargo Advisors, says many pre-retiree clients feel like the market results of 2022 have made retirement in 2023 or 2024 unattainable.

In reality, he says, a single bad year in the market “hurts but doesn’t necessarily kill” a given client’s near-term retirement ambitions. He recommends that advisors and their pre-retiree clients sit down and rerun their retirement income assumptions to see exactly what they are dealing with as an individual.

With the growth of interest rates this year and the commensurate opportunity to invest in higher-yielding, safer assets, the actual long-term impact of this year may not be as negative as many assume.

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6. Revisit the Bond Portfolio

According to Rubin, retirement investors have indeed experienced a lot of pain while watching their bond portfolios lose substantial book value this year, but that pain masks a major opportunity.

“After many years sitting at extremely low interest rates, we are now at a point where you can get that 5% annual return with safer assets,” Rubin says.

In Rubin’s experience, the big bond portfolio question for the end of 2022 is whether to stay shorter in duration in the hope that yields will rise even more next year — or if it’s better to lock in today’s rates for five or 10 years by purchasing longer maturity bonds.

Rubin says the right decision will depend on the individual client and their needs and risk tolerance. In his view, clients who are not trying to invest their way out of a projected retirement income gap are probably better off locking in today’s attractive yields for as long as possible.

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7. Consider a Roth Conversion

Rubin says another silver lining hiding in 2022’s sizable portfolio losses is the opportunity to make a Roth IRA conversion.

“When account values are down by 15% or 20%, this presents a great opportunity to finally pull the trigger on a Roth conversion you have been considering,” Rubin says.

The deadline for converting traditional IRA funds into a Roth is Dec. 31, 2022, and not, as many people believe, the tax filing deadline in April 2023. As Rubin points out, taxpayers who execute conversions in 2022 will pay taxes on the conversion at their 2022 rates, which are relatively low and could rise in the future.

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8. Consider Like-Kind Transfers While Making 2022 RMDs

For a client that may have retired in 2022 and who is set to begin making required minimum distributions, Rubin says, it is important to explore the possibility of making “like-kind” exchanges between tax-free and taxable accounts.

Such an exchange could be attractive for IRA owners who don't need to spend the required minimum distributions and who don’t want to sell investments at a significant loss merely to fund their RMDs.

“That’s where like-kind distributions can come in,” Rubin says. “The client will still face the same tax bill, but assuming they don’t need the cash value of the RMD for living expenses, this kind of transfer of securities from your IRA to a taxable brokerage account can make a lot of sense.”

This approach will help the client maintain the same market exposure, Rubin adds, and the transfer may also reduce the taxes due on future appreciation when the client eventually does liquidate the asset.

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9. Review Tax Opportunities and Capital Gains

Danny Michael, founder and CEO of Satori Wealth Management, says tax-loss or tax-gain harvesting from taxable accounts should be performed, depending on the investor's household income in the current tax year.

Additionally, Michael says, it is a good idea to evaluate the taxability of capital gains. For example, for investors in the two lowest tax brackets, the federal long-term capital gains tax rate is currently 0%. So, realizing capital gains in a year where income is lower should be evaluated.

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10. Run 2023 Income Projections

Michael also advises running income projections for 2023, both for tax planning purposes and to determine income needs for the year.

If there is a shortfall, the next step is to determine from which accounts the client should make distributions in order to minimize taxes. Tax implications will vary depending on which type of account withdrawals are coming from.

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