8 money moves to make before retirement

If grades were given to Americans saving for retirement, many would get an F.

A little more than half of households are at risk of being unable to maintain their preretirement lifestyle in retirement because they aren't setting enough money aside, according to reports from the Center for Retirement Research at Boston College. And a separate GAO analysis released this year found that among households with members age 55 or older, nearly 29 percent have no retirement savings or pension plan.

While catching up financially at that stage is a difficult task, there are several strategies financial advisors suggest undertaking to make sure your golden years are as stress free as possible. Here are eight smart money moves to make now to ensure you can enjoy retirement later.

— By Lucy Maher, special to CNBC.com
Posted 16 Oct. 2015

With pensions becoming a thing of the past, and Social Security checks totaling an average of $1,336 a month for retired workers, most retirees will be relying on their employer plans to make ends meet. If you haven't saved as much as you'd like and your retirement is on the horizon, consider maxing out your contributions so you have as much pre-tax income saved when you can start dipping into your plan without penalty (at 59 1/2 years or older), and you maximize the amount your employer matches.

The contribution limit for employer retirement plans in 2015 is $18,000. But those 50 and older may contribute an additional $6,000 "catch-up" contribution.

The average 65-year-old couple retiring this year will face health-care costs of more than $266,000 in their golden years, according to a recent report from HealthView Services. (The company, which helps financial advisors forecast health-care costs for their clients, used data from more than 50 million actual health cases to formulate its estimates.)

Health savings accounts and health reimbursement accounts, usually meant to cover short-term out-of-pocket health-care expenses, are getting more popular as a way to set aside money to cover those expenses. Last year, U.S. adults kept $22.1 billion across 10.6 million HSAs and HRAs, according to the Employee Benefit Research Institute, a more than fivefold increase from 2008.

HSAs have many benefits that make them attractive accounts to cover expenses in retirement. Leftover HSA funds roll over year after year, with tax-free investment growth. Withdrawals for medical expenses are tax free at any age (distributions after age 65 for other purposes will be taxed at regular income-tax rates).

And the accounts allow you to save thousands of dollars each year. Individual HSA holders under 55 years old can save up to $3,350, and families can save up to $6,650 in 2015. And HSA holders 55 and older can invest an additional $1,000 this year.

If you've gotten an unexpected bonus, tax refund, gift or inheritance, it may be tempting to use some or all of it to splurge on something.

"Avoid the temptation ... especially on an item that will increase your fixed costs over time," said Becky Krieger, CFP, CPA, and senior director for wealth management teams at Accredited Investors Inc. "If you want to splurge, set aside 10 percent of the windfall to pamper yourself. Put the rest to work for you in a tax-advantaged account … that will grow for you and allow you to have access to tax-free funds in the future."

If you're approaching your golden years, you may have already pulled together a projected budget you plan to stick to in retirement, including costs for travel, entertainment and general expenditures like cell phone bills and dry cleaning. Still, it's a good idea to take a year to test this out. If you typically eat out five nights a week, for example, but plan to cut back to two once leaving the workforce, see if this is a realistic goal by adhering to it for a set period of time.

"Budgets are easy to make and hard to follow for most people," said Jason P. Flurry, CFP, president of Legacy Partners Financial Group. "The important thing is to have a handle on how much it is going to take in today's dollars to live the kind of lifestyle you desire in retirement."

He recommends breaking expenses down by whether they're core expenses like food, clothing, mortgage payments and insurance, or flexible costs like upgrading a car, taking a vacation, or spending on Christmas and birthday gifts. "Make sure you have enough income to cover your core expenses at all times and most of the flex expenses, regardless of what situations may come that threaten your income streams, like market declines if you are using investment income. That way you know you will never be without the basics."

Almost three-quarters of Americans over age 45 said they feel strongly that they want to stay in their current home as long as possible, and another 13 percent believe that to some degree, according to research by AARP. But that may require some costly modifications.

As you think about the long-term plan for your home — particularly if you hope to remain in it for the long term — consider making the improvements before you retire, while your income is greater. Assess major repairs that will be needed in future years, such as a new roof or furnace, as well as modifications that you may need as you get older, and determine how these large expenses will be covered before you leave the workforce.

"I have heard a few clients remark, 'I wish we would have updated our home years ago!' " said Krieger. "Improve your home for your enjoyment today, and you can avoid taking on a significant project later in life that is costly."

For many Americans, an IRA is essential to a comfortable retirement.

Unlike a contribution to a traditional IRA, a Roth IRA contribution is never deductible. But when you withdraw the money from a Roth IRA, none of it (including earnings) will be taxed, assuming that the Roth IRA has been open for at least five tax-years and you are older than age 59 1/2. That said, Roths aren't an option for everyone. The phase-out range for making contributions in 2015 is $183,000 to $193,000 in adjusted gross income for married couples. For singles and heads of household, the income phase-out range is $116,000 to $131,000.

But there are no income limits for traditional IRAs. Another benefit? The money you deposit in your IRA isn't taxed. And whatever earnings you have on your contributions won't be taxed until you withdraw that money many years later. So interest income and that from dividends and capital gains compounds tax-free. You pay after age 70 1/2, when mandatory distributions begin. Those under 50 can contribute up to $5,500 a year into IRAs. But if you're 50 or older, you can contribute an additional $1,000.

Folks that are self-employed or own small businesses might consider enrolling in one of these plans. They are similar to a traditional IRAs in that contributions made reduce your taxable income, and your investments grow tax-deferred until you start making withdrawals. It's important to note that since contributions are above-the-line deductions, not Schedule C deductions, you save on income tax but not on self-employment tax.

For 2015, if you have a SEP, you can contribute 25 percent of your compensation, or $53,000. If you have a Solo 401(k), you can contribute as the business owner and employee, up to the annual contribution limit of $18,000, or $24,000 if you're over 50.

The potential drawback? "This is a great way to shelter some money from the IRS while you are working, but tax rates are likely to rise in the future, so you have to consider the long-term implications of adding funds to an account like that," said Flurry. "If you are in a really high income tax bracket now, it might make more sense than if you are in a middle or lower range tax bracket. Even if your income stays the same in retirement, an increase in taxes could negatively impact your lifestyle."

Living on a fixed income doesn't mean being a shut-in, but for many, it will mean making lifestyle changes. Take travel. Those used to jetting off at peak times may plan on going abroad in the shoulder seasons, or may opt to partake in a home-swapping club to cut down on expenses rather than sinking thousands into a hotel stay. Before you make this part of your plan, try it out while you are still working so you can adjust your budget accordingly in retirement.