Below are ten financial decisions to address before you retire. This checklist is a great starting point for pre-retirees but doesn’t account for your unique circumstances, lifestyle, or wishes. If your current advisor isn’t covering all these areas, we may be able to help.
1. Retirement Spending Plan
The primary goal of any retirement plan is to provide you with the income you need to enjoy a comfortable, stress-free retirement. To accomplish this, you need to know exactly how much income you will require during retirement. While it may sound daunting, creating a retirement spending plan is achievable with some effort and careful planning.
2. Investment Philosophy
What is your investment philosophy? Do you invest in individual stocks and bonds, actively managed mutual funds, or indexed funds? More importantly, do you have a philosophy you can stick with for the long term? Having a clear investment philosophy aligned with your retirement goals is critical. It’s worth exploring philosophies that can support your plan and provide stability during turbulent markets.
3. Investment Risk Tolerance Assessment
When markets are strong, we tend to feel more confident and aggressive; when markets decline, fear often takes hold. This is human nature, but understanding your risk tolerance can help you better manage emotions and behavior as your needs and circumstances evolve over time.
Your risk tolerance should also align with your financial goals. For instance, if you have a very low risk tolerance but require higher returns to meet your goals, you’ll need to either adjust your investments to accept more risk or revise your goals. A financial advisor can provide an objective perspective to help you navigate this balancing act.
4. Retirement Projection
Retirement projections estimate the likelihood of having enough money to retire and meet your goals. While not guarantees, they serve as valuable guidelines to assess your progress and set expectations. More importantly, they provide a framework for flexibility, allowing you to make adjustments and maintain realistic goals as circumstances change.
5. Income Generation Plan
How will you generate income from your investment portfolio in retirement? Most people spend their working years focused on accumulation—building their wealth. Decumulation, or spending down your portfolio, is far more nuanced. A solid income generation plan ensures that your portfolio provides the cash flow you need to sustain your lifestyle without running out of money prematurely.
6. Income Flexibility Plan
How much income should you withdraw from your investment accounts? These accounts need to last the rest of your life, and flexibility is essential to account for market fluctuations.
The popular "4% rule" is a starting point, but it’s based on assumptions that may not fit your unique situation. Several methods for income generation and flexibility exist, and the best approach will depend on your specific needs, goals, and risk tolerance.
7. Income Tax Optimization Plan
Early retirement often presents a unique opportunity to optimize taxes. Between the time you retire and when you are required to take minimum distributions (RMDs) at age 70½, you have significant control over your taxable income. Consider these strategies:
Roth IRA Conversions: Convert portions of your traditional IRAs into a Roth IRA to prevent your tax bracket from increasing dramatically in later years.
Low-Cost-Basis Stocks: Married couples can earn up to $77,200 (as of 2018) in capital gains and pay no capital gains tax.
Medicare Premium Management: Your Medicare premiums are income-based, ranging from $134 to $428.60 per month (as of 2018). Planning your taxable income before age 65 can help manage these costs.
Social Security Taxes: Depending on your total income, Social Security benefits may be tax-free, 50% taxed, or 85% taxed.
8. Social Security Plan
When should you start claiming Social Security benefits? You can begin receiving reduced benefits as early as age 62, receive full benefits at age 67, or maximize your benefits by waiting until age 70.
This decision often involves emotional considerations and opinions about the system. A well-thought-out Social Security plan evaluates the optimal claiming strategy based on your financial situation, health, and goals.
9. Medicare/Health Insurance Plan
What is your plan for healthcare in retirement? Most retirees will rely on Medicare starting at age 65. The typical scenario includes enrolling in:
Medicare Part A and Part B: Covering hospital and medical insurance.
Medicare Supplement (Medigap) Plan: To cover out-of-pocket expenses.
Medicare Part D: For prescription drug coverage (if not included in your Medigap plan).
Alternatively, Medicare Advantage (Part C) plans combine Parts A, B, D, and a Medigap policy. These plans vary by state and coverage options, so review your choices carefully. Medicare’s website is a great place to start.
10. Estate Plan
Your estate plan should include your end-of-life wishes and address the possibility of temporary incapacitation. Essential documents include:
A Last Will and Testament.
Durable Financial Powers of Attorney.
Durable Health Powers of Attorney.
A Living Will.
Additionally, your estate plan should consider your retirement goals. Investments used for retirement income often require different tax and risk strategies than assets intended for heirs.
Conclusion
A great financial planner will guide you through each of these decisions and help you revisit them regularly throughout retirement. Financial planning is an ongoing process—laws change, circumstances shift, and goals evolve. If your advisor isn’t addressing these critical aspects of retirement, let’s see where we can help you create a comprehensive, personalized plan to secure your future.
Disclaimer: This content is for informational purposes only and is not intended as personalized financial, tax, or investment advice. While we strive to provide accurate and up-to-date information, all investments carry risk, and past performance is not indicative of future results. Any strategies or insights discussed may not be suitable for your specific situation. If you’d like to discuss how this applies to your financial plan, feel free to reach out.