You've been planning and saving for decades, and now retirement is looming on the horizon. As the time to implement your retirement plan approaches, there are a variety of things you should do to ensure that the transition is smooth and that your money will last as long as you do.
Ideally, you should create an action plan with a goal of checking of each of its items before your last day of work. Here are some critical tasks to include:
Build an emergency cash cushion. If you haven't already done so, set aside enough to cover at least two to three months of living expenses. This is a good idea at any stage of life, but it's particularly important at retirement because there may be a time lag after you leave your job and before you begin receiving pension, Social Security or other payments.
Pay down debt. If possible, accelerate your mortgage payments and reduce your credit card debt. The less debt you have at retirement, the more manageable it will be. Plus, reducing debt will limit your need to tap tax-advantaged retirement accounts, allowing the funds to continue growing as long as possible.
Adjust your asset allocation. At retirement, as in other stages of your life, it's a good idea to review your asset allocation in various investments. Work with a financial professional to make adjustments that reflect your changing circumstances, time horizon and risk tolerance.
Review health insurance options. This is critical because health care will likely be a major expense as you get older. Once you reach age 65, Medicare will cover most of your routine expenses, but you'll probably need supplemental coverage for nonroutine expenses and separately to cover long-term care.
Create a budget. Carefully analyze your expected retirement expenses and make adjustments to your preliminary budget as necessary. Developing a realistic budget is the best way to minimize the chances that you'll outlive your savings.
Make a Social Security plan. You have a lot of flexibility in determining when to begin Social Security payments. For example, you can start collecting as early as age 62 or as late as age 70. But remember that the timing can substantially affect your financial plan. The later you start receiving benefits, the greater the monthly benefit. So, it's generally best to wait as long as possible — particularly if you continue working.
However, you may need to start sooner if you have health issues or require funds for living expenses. Bear in mind, if you collect Social Security benefits before you reach full retirement age and your earnings exceed certain thresholds, your benefits will be reduced.
Develop a retirement income timeline. Determine the timing of your income during retirement and the sources from which it will come, factoring in expected retirement expenses. If you have traditional IRAs or other retirement accounts, you'll need to take required minimum distributions (RMDs) from these accounts starting by a certain age, whether you need the money or not. Ask a qualified professional advisor for help determining precisely what age that is for you.
If RMDs don't cover your expenses, it's generally best to withdraw funds from other sources in this order:
Withdrawals from taxable accounts generate mostly capital gains, which are taxed at a lower rate. This withdrawal plan allows funds in tax-advantaged accounts to continue growing as long as possible.
It's best to begin working on the transition several years before your planned retirement date. The sooner you begin, the more time you'll have to make necessary adjustments. Your financial advisors, including your CPA, can be invaluable resources in laying out your action plan and spending your money wisely.
Get in touch today and find out how we can help you meet your objectives.
