Retirement marks the climax of your career and the beginning of a new life episode. Whatever your age, it should be a focal point of your financial planning. Making prudent wealth decisions over time helps to establish a solid foundation for your retirement. However, once the countdown to retirement begins, some 5-10 years out from your intended retirement date, it’s time to stop, take stock, and confirm that you’re financially and emotionally ready for your future. Here’s what you need to consider financially during the countdown to retirement.
Estimate Your Retirement Income
You may be transitioning out of the workforce, but there are still various income sources to consider as you countdown to retirement:
Your retirement benefits depend primarily upon your earnings history. You can begin receiving retirement benefits early at age 62, but deferring until full retirement age (66 or 67) or up to age 70 increases your monthly benefit payment. If you are, or have been married, you may also be eligible to receive benefits based upon your spouse or ex-spouse’s earning record, which may be higher than your own. View your personal estimated retirement benefits at www.ssa.gov.
Employer-sponsored Pension Plans
If you participate in an employer-sponsored pension program, ask the administrator for an estimate of your monthly benefit upon retirement, and consider your options regarding a lump sum payout versus regular monthly payments.
If you’re part of a couple, your spouse’s retirement benefits may stop upon their death, unless they elected a survivor benefits feature. Make sure your retirement budget accounts for this potential loss of income, or existing benefits if you’re a widow or widower.
Investment properties you already own can be useful streams of income during retirement, or a cash drain due to repairs and vacancies. Make sure to account for realistic rental finances as part of your retirement planning.
You may be able to work part-time during retirement, but be aware of potential tax and Social Security implications.
Some people leverage a hobby or talent into extra income during retirement e.g., selling used goods on eBay, homemade items on Etsy, or homegrown produce at local farmers’ markets. Be careful to monitor costs, though, so that you don’t end up operating at an out-of-pocket loss.
Individual Retirement Accounts
If you’re 70 ½ or older, know the amount of your Required Minimum Distribution (RMD). If you’re younger, but at least age 59 ½, you can take penalty-free distributions. Just be sure to keep distributions within reasonable withdrawal rates to ensure longevity of your assets and to minimize tax impacts.
- Unless you’re 70 ½ or older, or in an ultra-low tax bracket, you might be better served by deriving supplemental income from traditional savings and investment accounts which entail less tax exposure.
- If you’re 70 ½ or older, and subject to RMDs in excess of your true cash needs, consider contributing a portion of your RMD to charity.
Analyze Your Living Costs
Gauging your spending habits during the countdown to retirement can help estimate future expenses.
Some Expenses Will Decrease
You’ll no longer have work-related expenses like commuting costs. Retiring to an area with cheaper housing, a lower cost of living, and/or low or zero state taxation may also help reduce your costs. However, be sure to research and plan carefully if you’re considering a retirement move.
For many people, retirement community living is an attractive option. However, there’s a lot to consider when choosing the right retirement community. One of the key priorities is whether you can afford it.
Health Care And Other Expenses
Other costs increase during retirement, particularly healthcare costs. Medicare covers some costs, but you’ll still be responsible for out-of-pocket expenses like deductibles and co-pays. Use the countdown to retirement to research Medigap policies or Medicare Advantage (Medicare C), both of which can help offset healthcare costs in retirement.
Long Term Care
Medicare and Medigap don’t cover long term care costs for home help, nursing home care, or other sustained types of life assistance. Consider obtaining long term care (LTC) insurance to help mitigate care costs and, if this is important to you, to preserve assets for your heirs.
Develop A Budget
Develop a flexible budget during the countdown to retirement, one that’ll position you financially for the future.
Pay Off Outstanding Debt
If you still owe money on your mortgage, car, other loans, or credit cards, these payments will still need paying, even once you retire. Paying off smaller debts now, plus all credit card debt, provides greater financial flexibility during retirement.
Your salary will likely peak in the years immediately prior to your retirement, so increase your savings accordingly. Take advantage of tax-deferred contributions into retirement accounts, including any employer matches. You can begin catch-up contributions at age 50.
Monitor Non-Recurring Expenses
It’s easy to isolate your recurring budget items such as your mortgage, utilities, and cable bill, but most budgets include non-recurring items like your car insurance, new tires, vacations, home repairs, etc. Make sure the budget you’re using for retirement planning accurately reflects your true spending and lifestyle. SageVest Wealth Management helps clients to identify this number in an easy manner on an annual basis.
Optimize Tax Opportunities
There are a number of tax strategies to consider during the countdown to retirement.
Which Retirement Accounts To Draw Down First
We typically recommend withdrawing money from taxable accounts first. This allows accounts like employer-sponsored plans and IRAs to continue accumulating tax-deferred growth. However, excepting Roth IRAs, you must begin Required Minimum Distributions (RMDs) at age 70 ½.
If you continue working, some of your Social Security benefits may become taxable.
If you wish to leave a legacy, now’s the time to consider how estate and other taxes will impact your wealth transfer decisions.
Focusing on your finances during the countdown to retirement helps to ensure that your finances can support the active and fulfilling retirement that you anticipate. SageVest Wealth Management specializes in retirement planning for successful retirees throughout the Washington, DC Metro area, and beyond. Please contact us to find out how we can create a customized, dynamic, and flexible wealth plan that supports your personal retirement goals.