After several decades of hard work and stockpiling savings, you’re finally ready to enter the next phase of your life — retirement. But before you plunge into your bucket list, you’ll want to make sure you’re completely prepared from a financial perspective.
After all, retirement can bring significant changes to your income and lifestyle, and taking steps to ensure your finances are in check can help pave the way for a smooth transition. Scheduling a meeting with your financial advisor is the first step to taking some of that uncertainty off the table.
If you’re gearing up to retire this year, here are five tasks to keep top of mind:
1. Create a secure budget and spending plan
Before you enter retirement, it’s important to have a well-established budget in place. This will help you compare what you expect to receive in retirement income with your anticipated living expenses, and provide a framework for how much you will need to live comfortably in retirement. Typically, experts estimate that most retirees need at least 70 percent of their pre-retirement income to maintain their standard of living when they stop working (lower-income earners may require 90 percent or more of their pre-retirement income).1
You should also consider socking away funds to prepare for emergency expenses that your standard retirement budget may not cover, such as unforeseen health care costs, auto repairs or property maintenance. Try living off of your expected budget for at least six months prior to retirement to determine if the plan is reasonable.
Test-driving your plan in advance will also help you identify any gaps or expenses you may have missed, and make alterations as needed.
2. Determine when to enroll in Medicare and take Social Security benefits
Perhaps one of the most important decisions you will need to make is when to begin government benefits. The current eligibility age for Medicare is 65. It’s important to sign up for Medicare as soon as you are eligible, or begin submitting the appropriate paperwork as early as three months in advance. Failing to sign up before age 65 may cost you in fees and penalties. Additionally, it’s important to evaluate premiums, copayments (copays) and coinsurance to help determine what you will need to pay out of pocket.2
While Medicare can help cover most of your health care costs in retirement, it may not cover every expense. To pay for additional costs, you may choose to look into Medicare supplemental policies, also known as Medigap, which are sold by private insurance companies. A long-term care insurance policy can also help you pay for hospice care, assisted living and other expenses that Medicare may not cover.3
Determining when to begin Social Security benefits can vary depending on your individual situation. Many retirees begin benefits as soon as they are eligible, which can sometimes be the best choice, given their circumstances. In other situations, however, this time frame may not be feasible.
Some retirees require Social Security immediately to supplement their income during retirement, while others can afford to delay their benefits. Your benefits may be reduced if you decide to take Social Security before your full retirement age, which is age 66 for those born between 1943 and 1954, and increases to age 67 for those born in 1960 or later.4 If you don’t need the cash flow from Social Security, you may want to consider delaying your benefits until after age 62, as your benefit amount can grow by eight percent per year.5
If you’re married, you may be able to make the most out of your Social Security benefits by collecting spousal benefits or filing restricted applications. It’s important to consult with your financial advisor to determine the approach that best suits your specific situation.
3. Roll over your 401(k) into an individual retirement account (IRA)
Before making the move to retirement, you need to consider how you will access your retirement savings. It’s often more difficult to access your funds if you keep them in your employer’s 401(k) plan. Rolling over your dollars into an IRA allows for easier access and distributions. Account owners are often able to set up a monthly transfer into your checking account; think of this as a monthly paycheck replacement.
Additionally, rolling your savings over into an IRA might make more sense from a cost perspective, as many 401(k) plans are more expensive and often have a fee attached to any distributions made out of the plan to cover administration costs. For instance, a 401(k) plan may charge $50 per withdrawal, which could eat away at your account balance over time. Finally, rolling over your 401(k) into an IRA that is managed by your existing financial advisor allows for more streamlined distribution planning, since all of the assets will be in one place.
4. Develop a long-term investment plan
Like most retirees, you likely want to keep your nest egg safe. After all, you’ve worked hard to build up those funds over the years. However, that fear should not prevent you from investing for long-term growth. It’s important to ensure that you keep up with rising costs and don’t outlive your money.
Many retirees choose to stash their portfolios in bonds for the income; however, inflation can erode the purchasing power of coupon payments provided by bonds over time.6 As with any investment decision, this choice depends on your specific financial situation, but a well-diversified portfolio that includes a healthy dose of stocks and bonds can have a major impact on making your nest egg last throughout your retirement years. A highly diversified portfolio can also reduce your risk in the market and help improve your investment return over time.
It’s also important to consistently monitor your investment allocation, as it may change over time depending on your age, retirement goals and financial circumstances.7 Additionally, it’s important to consider tax efficiency when determining how you will spend your assets to avoid unnecessary taxes and fees. During retirement, the best strategy is often to spend taxable assets first and allow tax-deferred assets — such as funds held in retirement accounts — to continue to grow and compound until the funds are needed, or required minimum distributions (RMDs) begin at age 70 ½.
5. Decide how you will spend your time
How you decide to spend your time plays a huge role in determining your financial health throughout your retirement years. Your plans may vary, depending on your interests, hobbies and desired activities. Some retirees may opt to stay close to home and spend more time with their families, while others may choose to travel and volunteer around the world. Retirement can be very expensive, especially if you don’t have a plan in mind. Knowing how you will allocate your free time can go a long way in keeping you on track with your retirement budget and spending plan.
While this list is not exhaustive, these tasks can be catalysts to help you kick-start the retirement preparation process. If you’re planning to retire this year, it may be in your best interest to consult with your financial advisor to help you organize your goals and determine if your finances are on the right track. He or she can give you peace of mind and help set you up for the retirement of your dreams.