After dedicating decades to building your career, raising a family, and securing your financial future, retirement is finally on the horizon. But what does retirement truly entail? Contrary to the simplistic portrayals in movies and commercials, it's not as simple as packing your desk and strolling onto the beach. The transition from a career to retirement requires careful thought and preparation. In this guide, we'll explore the essential considerations for a successful retirement, broken down into six key categories:
- General Planning
- Debt Management
- Income Planning
- Insurance Planning
- Investment Planning
- Estate Planning
General Planning
There are a few general planning items to consider when you’re approaching retirement. First is setting a retirement date. While this date may fluctuate slightly, this will serve as a guideline or “deadline” for the rest of your planning.
Next will be to get a clear understanding of your budget. You should have a good grasp on what your fixed expenses are monthly, as well as the variable expenses that fluctuate from month to month. This is also a good time to review how expenses will change in retirement. Some expenses such as clothing and commuting expenses tend to decrease, while others such as leisure travel and activities tend to increase. If don’t have one already, this is a good time to track your budget for a few months to see where cash flow is going and considering where changes may happen.
One other item to consider is, what will you to stay busy in retirement. Many of our clients have commented over the years that their “To-Do” list will keep them plenty busy in retirement, only to realize they when they’re not going to work, the list gets completed rather quickly. Clients have also told us that their hobbies will keep them busy, only to realize that their hobbies are great in limited quantities, but not full time.
Often, clients also comment on getting bored in retirement after a short time if they don’t have a clear picture of what they want to do in retirement and how they will stay busy. In fact, many of our clients through the years have gone back to some sort of employment purely to fill the time once they realized they didn’t have enough to keep them occupied and engaged in retirement.
The key question is: “You know what you are retiring from. Do you know what you are retiring to?”
Debt Management
Debt management is another key consideration when entering retirement. Many retirees have embarked on retirement, only to return to work due to stress caused by debt. Take the time to look at your debts and put together a plan for how you will manage them once you retire. Consider paying off some of your smaller debts. You may also want to look at the long-term impact of paying off your larger debts versus budgeting them into your needed income in retirement. In addition, look at those items which may incur new debt, such as a needing a new vehicle or a second residence.
Income Planning
Now that you have your budget in hand, it is important to look at your income sources in retirement. Social Security is a key component of income for many retirees, but when you take Social Security is not a one-size-fits-all solution. For some clients, taking Social Security early has made more sense, while others benefit from deferring to a later age. Reviewing your options for Social Security and analyzing the long-term impact on assets based on income needs is an important thing to do as you approach your retirement date. Once you have determined when you will start Social Security, you will want to file for your benefits approximately three months prior to when you want to receive them.
If you are eligible for pension benefits, it is also important to obtain an income calculation from your employer as this will likely have a few options to consider. You will want to weigh your options as part of your overall retirement income plan.
Will you still receive working wages in retirement? For many, retirement doesn’t mean the end of working. It just means the end of working full time on someone else’s schedule. Consider whether you will continue to work part-time, on contract, or seasonally for a few years. Depending on the age you retire, this can impact the route to take with Social Security as well as other early-retirement budgeting decisions.
Other sources of income such as annuities, rental income, and other business income will also play a factor in your income planning. List all of these out, look at how long these sources of income will last, and determine how they may or may not fluctuate. Also, if you are married, consider how the death of a spouse could impact these sources of income.
Once you’ve determined income from these other sources, it’s time to look at portfolio income. How much will you reasonably need to draw from your investments. Are there other anticipated major expenses which will require you to pull larger sums from your portfolio. Based on this, you will want to determine the safety and sustainability of distributions from your portfolio to safeguard against outliving your portfolio assets.
Now that you’ve determined your income needs and sources, it’s important to consider the tax impact. Look at where your income is coming from and determine a general estimate of the taxability of your income. Tax planning is an important consideration in retirement as taxes can play a large role in the longevity of your portfolio assets. Work with your tax professional to determine how income needs and sources may impact your taxes.
Insurance Planning
Insurance also plays a large roll in retirement. If you are over the age of 65, review your Medicare and Medicare Supplement options to determine your best Medicare strategy based on your personal health.
Long-Term Care is also a major consideration in retirement. Establish a plan for your Long-Term Health Care costs should the need arise. Planning tools may include, self-funding, long-term care insurance, life insurance with long-term care riders, gifting strategies, charitable strategies, or trusts. Your strategy will depend on your personal health and financial situation and may include a combination of some of these options.
Review your life insurance policies and the structure and type of each policy. Determine if they still serve the need they were originally intended for. Review your beneficiaries and confirm they are still in line with your wishes.
Investment Planning
As we discussed earlier, determining your portfolio health based on your long-term retirement needs, is key as you approach your retirement. Take the time to review your asset allocation to ensure it is aligned with your income needs and long-term objectives. Be sure to factor in inflation when determining your portfolio longevity. Too conservative of an approach can be equally detrimental as too aggressive.
Consider consolidating your retirement accounts to better manage income streams, required minimum distributions and taxes.
Estate Planning
The final area of consideration is your estate plan. Make sure that you have the appropriate Estate Planning documents in place that accurately express your wishes. Depending on your wishes, your family makeup, how and where your assets are held, and the types of assets you own will determine the types of Estate documents you will need.
In addition, clearly stating your wishes for your care should you be unable to speak for yourself is important to ensure your wishes are respected, as well as to help those who may be responsible for making decisions on your behalf.
Work with an Estate attorney to determine the necessary documents for your situation and review existing documents for accuracy based on your current wishes.
Summary
The transition from a career to retirement is both exciting and challenging. By taking the time to plan in key areas, you can approach retirement with confidence and peace of mind. Retirement isn't just the end of one chapter; it's the beginning of another.
For a PDF version of the Road to Retirement checklist, email [email protected].
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