As we run through our daily to-do lists — go to work, attend meetings, battle traffic, get home, spend time with the family, eat dinner, sleep, repeat — retirement might seem like a lifetime away.
The clutter and work of the everyday often makes us forget that soon we’ll be quieting down, moving at a slower pace and enjoying all those things we’ve been working towards over the past decades.
With that in mind, I have found it helpful to develop a to-do list for those planning to retire in the next five years.
This to-do list doesn’t involve finishing up projects or returning phone calls. It’s designed to ensure that when you retire, you’ll see continued financial stability and success and never have to look back.
Everyone’s list may look a little different, of course, but below are a few things that should get you moving in the right direction:
1. Pencil out your retirement budget and start adjusting your finances accordingly. When we daydream about our retirements, we like to think about breathtaking vacations and adventures we may not have had time for while working. But you need to take time to consider not only the fun expenses, but the monthly bills and day-to-day expenses you expect to face.
To that end, make sure you have an accurate, up-to-date financial plan. Once you stop working, you’re going to have to adjust to a retirement budget that could be tighter than the one you live on now. This could mean a big financial adjustment requiring changes in your lifestyle and some critical money decisions. The sooner you start preparing for them, the better.
2. Determine a mix of growth versus income for your investment portfolio.While you’ve been working full-time, your investments may have been focused primarily on growth (such as stocks), which makes sense. When you’re five years away from retirement, though, you may want to start shifting your investments to a more conservative asset allocation, raising the percentage of your portfolio in income investments.
Remember though, you’ll still want to own some growth investments. Being too conservative leaves little room for market growth potential, but taking on too much risk may lead to some difficult years if markets decline.
It’s often helpful to “bucket” assets for different time horizons, with conservative investments allocated for short-term needs, moderate investments for mid-term goals (3 to 5 years from now) and more aggressive for longer-term goals (5+ years away).
Since you’ll see a decrease in your employment income in retirement, as noted earlier, your retirement-age portfolio should provide a dependable stream of investment income. Having a diverse set of income investments, from annuities and Exchange Traded Funds to bonds and income mutual funds, during your retirement years will help keep your money working.
Having this “hard working money” can help you become more financially secure and give you more flexibility to travel the world, dedicate more time to family or settle somewhere peaceful and take up new hobbies.
3. Compare your taxes today to what you expect them to be during retirement. When saving for retirement, you may have been putting money away in a 403(b) or similar employer-sponsored plan. The challenge you’ll face in retirement is that when you need to withdraw from that account in retirement, the money will be subject to tax. So your retirement income might be lower than you had anticipated.
To avoid this heavy-tax situation, consider converting some of this pre-tax savings into a Roth 403(b) or Roth IRA before you retire. You’ll owe income taxes on the amount you convert, but future earnings won’t be taxed when you withdraw them, which means that they’ll be tax-free rather than tax-deferred.
You can also begin planning for the possibility of doing a series of yearly Roth conversions after retirement. With a reduced income in retirement, these may have less of a tax impact than if you made the conversions during your higher-income, working years.
Roth conversions are complicated, though, so discuss potential tax implications with your tax adviser before transferring assets.
4. Start making plans related to your real estate. Five years before retirement, it helps to begin planning where you’ll want to live in retirement, whether that means staying put, downsizing or relocating.
Run through estimates of expenses associated with different housing options including the cost of living; mortgage or rent; property taxes; closing and/or moving costs; condo fees and home maintenance or upgrades.
Couples need to discuss and agree on where they’ll live once they have the flexibility of retirement. If you expect to move to a new location, spend some time there in advance, experiencing the different seasons, to make sure you know what you’re signing up for. I’ve seen many clients relocate, only to return back home for at least part of the year after experiencing a few full years far away from family and friends.
5. If you expect to carry your mortgage into retirement, refinance your home before your income drops during those years.Conventional wisdom says it’s best to go into retirement without a mortgage, but sometimes that just isn’t possible. If it looks like your mortgage is going to stay with you, refinancing before retirement is something to consider — especially these days, when interest rates are low.
This could reduce your monthly mortgage payments, which could be a big help since your monthly income is likely to decrease in retirement and you’ll likely be looking for ways to lower your expenses accordingly.
By starting a 30-year mortgage over, you can also get an annual tax deduction now and offset taxable interest.
6. Evaluate your automobile needs and estimated costs in retirement. Cars are an expense that can really add up, especially since your income may shrink.
You want to enter retirement with as little overhead costs as possible, so it’s best to try to avoid car loans if possible. If not, and you have the ability to repay a car loan, you might consider getting one; just be sure the payments won’t throw off your retirement cash flow.
If you’re thinking about upgrading your wheels, it may be best to make that purchase before you retire, while you’re still making a higher income.
You should also think about reducing the number of cars you own as you move closer to retirement. This will not only save on expenses, such as gas and maintenance, it will boost your savings. By selling a car now and not replacing it, you may earn some additional dollars to tuck away for later — maybe even to upgrade the vehicle you decide to keep.
7. Give yourself a health insurance audit and find out whether you’ll be able to carry into retirement any group health benefits you now receive through your employer. When you enter retirement, you’re probably going to see a change in your medical insurance policies, and if you are under 65, you won’t qualify for Medicare. If understanding and managing health costs in retirement causes you confusion, you’re not alone. According to a recent study conducted by Voya Financial, 42 percent of pre-retirees would like advice on planning for healthcare costs in retirement.
So, sometime soon, sit down (ideally with your financial adviser) and study the health policies you now have. By determining which of your employer’s health benefits you’ll be able to keep in retirement, you may be able to maintain favorable premium rates and co-payments rather than paying more by purchasing a new policy on your own.
8. Take advantage of your current health program and benefits. Since it’s more than likely that your out-of-pocket health costs will rise when you enter retirement, take advantage of your employer’s medical benefits before you leave your job. Make those elective visits to your doctor, dentist and optometrist that you’ve been putting off.
9. If your employer offers pre-paid or discounted legal will and trust work, take advantage of this perk before you retire. When speaking with my clients, not taking advantage of this benefit — whether it’s updating your will or getting trust documents done — is one of their biggest regrets in retirement. This is an easy one to pass over, but in the long run you’re likely to be happy you made the time for it now.
10. Make a game plan. Speak with your spouse or partner, family and friends to figure out how you’ll fill your retirement calendar with activities that’ll keep you busy and help you stay active.
You deserve some R&R, but don’t let yourself fall into the habit of sitting on the couch every day. You might want to use your newfound free time to explore a new hobby, make new friends or get in touch with old ones. Establishing a routine that will be full of physically and socially-beneficial activities will ensure that you won’t find yourself bereft or bored when you aren’t going to work every day.
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