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As you approach retirement, you are often overwhelmed by the vast number of decisions that need to be made. When should I retire? How much do I need when I retire? How should I roll over my 401k? What am I going to do in retirement? etc… It can be either a procrastinating or paralyzing time in your life as you contemplate the choices to be made. There are several critical “once-in-a-lifetime” decisions that are made within the 10 years leading up to retirement. These unique decisions can have life-lasting impacts, and we don’t want you to have a “regret period” in retirement. Here are six helpful considerations as you approach retirement:
1. Reassess Your Living Expenses
A step you will probably take several times between now and retirement is thinking about how your living expenses could or should change. For example, while commuting and other work-related costs may decrease, other budget items may rise. Healthcare costs, in particular, may increase as you progress through retirement.
Try to estimate what your monthly expense budget will look like in the first few years after you stop working. And then continue to reassess this budget as your vision of retirement becomes a reality. According to a recent survey, 38% of retirees said their expenses were higher than expected. Keeping a close eye on your spending in the years leading up to retirement can help you more accurately anticipate your budget during retirement.
2. Consider All Your Income Sources
First, figure out how much you stand to receive from Social Security. The amount you receive will depend on your earnings history and other unique factors. You can elect to receive benefits as early as age 62, however, doing so will result in a reduced benefit for life. The longer you wait, the larger it will be.
Next, review the accounts you’ve earmarked for retirement income, including any employer benefits. Start with your employer-sponsored plan, and then consider any IRAs and traditional investment accounts you may own. Try to estimate how much they could provide on a monthly basis. If you are married, be sure to include your spouse’s retirement accounts as well. If your employer provides a traditional pension plan, contact the plan administrator for an estimate of that monthly benefit amount as well.
Do you have rental income? Be sure to include that in your calculations. Might you continue to work? Some retirees find that they are able to consult, turn a hobby into an income source, or work part-time. Such income can provide a valuable cushion that helps retirees postpone tapping their investment accounts; giving the assets more time to potentially grow.
3. Pay Off Debt, Power Up Your Savings
Once you have an idea of what your possible expenses and income look like, it’s time to bring your attention back to the here and now. Draw up a plan to pay off debt and power up your retirement savings before you retire.
Entering retirement debt-free including paying off the mortgage will put you in a position to modify your monthly expenses in retirement if the need arises. If you don’t, you’ll have less of an opportunity to scale back your spending adding strain to your retirement plan.
In these final few years before retirement, why not save and invest as much as you can in your employer-sponsored retirement savings plan and/or IRA? Aim for maximum allowable contributions, and if you are 50 or older, you can take advantage of catch-up contributions, which enable you to contribute an additional income to your 401k plan and IRA.
4. Manage Taxes
As you think about when to tap your various resources for retirement income, remember to consider the tax impact of your strategy. For example, you may want to withdraw money from your taxable accounts first to allow your employer-sponsored plans and IRAs more time to potentially benefit from tax-deferred growth. Keep in mind, however, that generally you are required to being taking minimum distributions from tax-deferred accounts the year you turn 70½.
If you decide to work in retirement while receiving Social security, understand that the income you earn may result in taxable benefits. IRS Publication 915 offers a worksheet to help you determine whether any portion of your Social Security benefit is taxable.
If leaving a financial legacy is a goal, you’ll also want to consider how estate taxes and income taxes for your heirs figure into your overall decisions. Managing retirement income in the best possible tax scenario can be extremely complicated. Intelligent Investing strives to alleviate this financial stress by sharing and taking some of the burdens off you. Our financial planning provides probability statistics that allow our clients to know the success rate of their retirement plan.
5. Account for Health Care
As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although original Medicare will cover a portion of your costs, you’ll still have deductibles, copayments, and coinsurance. Unless you’re prepared to pay for these costs out of pocket, you may want to purchase a supplemental Medigap insurance policy.
Another option is Medicare Advantage (also known as Medicare Part C), which allows Medicare beneficiaries to receive health care through managed care plans and private fee-for-service plans.
Also think about what would happen if you or your spouse needed home care, nursing home care, or other forms of long-term assistance, which Medicare and Medigap will not cover. Long-term care costs vary substantially depending on where you live and can be extremely expensive. For this reason, people often consider buying long-term care insurance. Policy premiums may be tax deductible, based on a number of different factors.
6. Ease the Transition
These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier.
If retirement planning seems overwhelming, We would love to help. We love serving our high-net-worth clients by minimizing financial stress and maximize their lives using our proprietary Intelligrations™.
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Better yet, if you are finally ready to get some professional help, and want to collaborate or outsource this to qualified fiduciary professionals, please click here to reach out for a complimentary call or coffee. We’d be honored to spend some time with you to help you sort out your “financial junk drawers.”
Source: Broadridge Financial Solutions, Inc.
