Planning for Retirement

You can retire within five years — right?

If you’re planning on retiring in five years or so, now is a crucial time to evaluate your savings and plans to determine if you’ll have enough money to make the move.

Map out an accurate retirement budget

You’ll likely start by thinking of the expenses associated with the activities you dream about – travel, new experiences, and entertainment – but it’s just as important to plan for your monthly expenses. Be sure to carefully think these through and create an accurate financial plan that includes mortgage/rent, utilities, vehicle expenses, groceries, and basic goods.

Keep in mind that once you retire, it’s possible you’ll have a tighter budget that may take some getting used to. If need be, think about the lifestyle changes you’d be comfortable with making – and those you wouldn’t – to make your future budget work for you. After all, you retired to gain some peace of mind, so being stressed about money each month isn’t part of the plan.

Think About Social Security

Many experts predict that you’ll need about 70% to 85% of your pre-retirement income to maintain your current lifestyle through retirement. For many people, Social Security may only provide about 40% of total retirement income needs.

One of the biggest decisions you’ll have to make about Social Security is when to start collecting your benefits. You can take a reduced benefit at 62, wait until you’re eligible to receive your full benefit (at 65 to 67 years old, depending on when you were born) or postpone your first payment to qualify for a larger amount. The federal government requires you to start your benefit no later than 70; it offers no bonus for waiting longer than that.

Evaluate Your Investment Mix

While you’ve been working full time, your investments may have been focused primarily on growth (such as stocks), which makes sense. If you're within five years from retirement, though, you may want to start shifting your investments to a more conservative asset allocation, raising the percentage of your portfolio in income-oriented investments like bonds and cash equivalents. You’ll still want to own some growth investments — being too conservative leaves little room for market growth potential — but taking on too much risk may lead to some difficult years if markets decline.

It’s often helpful to “bucket” assets for different time horizons, with conservative investments allocated for short-term needs, moderate investments for midterm goals (3 to 5 years from now) and more aggressive for longer-term goals (5+ years away).

At this juncture, make sure you also carefully reassess your risk tolerance, time horizon, goals and other personal factors.

Taxes Today vs. In Retirement

When saving for retirement, you may have been putting money away in a 401(k) or similar employer-sponsored plan. The challenge you’ll face in retirement is that when you need to withdraw from that account in retirement, the money will be subject to tax. So your retirement income might be lower than you had anticipated.

To avoid this heavy-tax situation, consider converting some of this pretax savings into a Roth 401(k) or Roth IRA before you retire. You’ll owe income taxes on the amount you convert, but future earnings won’t be taxed when you withdraw them, which means that they’ll be tax-free rather than tax-deferred.

You can also begin planning for the possibility of doing a series of yearly Roth conversions after retirement. With a reduced income in retirement, these may have less of a tax impact than if you made the conversions during your higher-income, working years.

Roth conversions are complicated, though, so discuss potential tax implications with your tax adviser before transferring assets.

Plan Your Living Arrangements

Five years before retirement, it helps to begin planning where you’ll want to live in retirement, whether that means staying put, downsizing, or relocating.

Run through estimates of expenses associated with different housing options including the cost of living; mortgage or rent; property taxes; closing and/or moving costs; condo fees and home maintenance or upgrades.

Couples need to discuss and agree on where they’ll live once they have the flexibility of retirement. If you expect to move to a new location, spend some time there in advance, experiencing the different seasons, to make sure you know what you’re signing up for. It's common for people to relocate, only to return back home for at least part of the year after experiencing a few full years far away from family and friends.

Refinance Your Mortgage?

Conventional wisdom says it’s best to go into retirement without a mortgage, but sometimes that just isn’t possible. If you expect to carry your mortgage into retirement, refinancing now could reduce your monthly mortgage payments, which would be a big help when your income drops in retirement.

By starting a 30-year mortgage over, you can also get an annual tax deduction now and offset taxable interest.

Consider Car Needs & Costs

Cars are an expense that can really add up, especially since your income may shrink in retirement. It's best to enter retirement with as little overhead cost as possible, so it’s best to try to avoid car loans. If you have the ability to repay a car loan, you might consider getting one; just be sure the payments won’t throw off your retirement cash flow.

If you’re thinking about upgrading your wheels, it may be best to make that purchase before you retire, while you’re still making a higher income.

Evaluate Health Insurance

Give yourself a health insurance audit and find out whether you’ll be able to carry into retirement any group health benefits you now receive through your employer. When you enter retirement, you’re probably going to see a change in your medical insurance policies, and if you are under 65, you won’t qualify for Medicare. If understanding and managing health costs in retirement causes you confusion, you’re not alone. According to a recent study conducted by Voya Financial, 42% of pre-retirees would like advice on planning for health care costs in retirement.

So, sometime soon, sit down (ideally with your financial adviser) and study the health policies you now have. By determining which of your employer’s health benefits you’ll be able to keep in retirement, you may be able to maintain favorable premium rates and co-payments rather than paying more by purchasing a new policy on your own.

Finally, since it’s more than likely your out-of-pocket health costs will rise when you enter retirement, take advantage of your employer’s medical benefits before you leave your job. Make those elective visits to your doctor, dentist and optometrist that you’ve been putting off.

Plan how you'll use your time

Talk with your spouse, family, and friends to figure out how you’ll fill your retirement days with purposeful activities that will keep you busy and active. You deserve some downtime, but don’t let yourself fall into the habit of sitting on the couch every day. You might want to use your newfound free time to explore a new hobby, volunteer, get back in touch with old friends or make new ones. Establishing a routine that will be full of physically and socially-beneficial activities will ensure that you won’t find yourself bereft or bored when you aren’t going to work every day.

Consult a Financial Planner

When you retire, you’ll probably share a common experience with almost everyone who has already made the change: You won’t get a paycheck anymore. Somehow you’ll have to replace this steady stream of earned income. Don’t forget to factor in income sources such as alimony or disability payments. They can really make a difference in your retirement plan.

To help you figure out the best way to replace your income, discuss these questions with your financial advisor:

  • What sources of income are you confident that you can count on?
  • How much income will they provide each year?
  • How will you coordinate payments from different sources to create a steady stream of income so you can pay your bills when they’re due?

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