Your Most Important Job Before Retirement

You plan to retire within 5 years. But can you?

There are over 76 million “baby boomers” in the U.S. - 1 out of every 4 people - born between 1946 and 1964. The Social Security Administration defines retirement as age 67, which means most baby boomers are closing in on retirement. If this is you, you may be asking yourself...

“Have we saved enough?”

Hopefully the answer is yes, but for many boomers the answer is unclear. Consider this your most important job yet.

Of all the retirement goals we hear among baby boomers, there is one that is universal: Peace-Of-Mind. That sense of comfort, of not worrying about money in retirement. Here are 10 financial planning areas that you can focus on ahead of retirement, to achieve peace-of-mind before you transition from the office chair to the lounge chair:

#1. The Nest Egg

What will your assets and debts look like on Day 1 of retirement? This baseline reveals how balanced you are. Wealth that is concentrated in real estate may pose a liquidity concern if you need cash. Wealth that is concentrated in your company stock poses specific company risk should the company's value decline. Wealth that is concentrated in bank savings may not earn enough in retirement.

WHAT TO DO: Tally up the value of all assets and debts you own and estimate what you think they will be worth at retirement. List out your retirement accounts, stocks, bonds, properties, pensions, annuities, life insurance, cash, mortgages, etc. If you are still a few years from retirement, be modest with your growth assumptions.

#2. Monthly Retirement Spending

How much will you spend each month during retirement? This could vary dramatically from your working years. Traveling and dining out are just two of the areas where you may splurge in retirement. Debt payments may decline if, for example, your mortgage is nearly paid off.

WHAT TO DO: Make a list of your anticipated retirement expenses – both needs and wants. Some expenses are likely to spike and then fall over time (e.g. travel & leisure) but others will rise (e.g. health care). A good financial adviser can help identify unexpected costs and also budget for them as they evolve with age.

#3. Sources Of Retirement Income

Where will money come from? You should seek a tax-efficient withdrawal strategy if you own 401k or IRA accounts. You should maximize your Social Security payout by delaying benefits, while making use of the spousal rules (if married, divorced or widowed). If you prematurely retire you may need to increase your retirement plan withdrawals, which shrinks the life of your savings.

WHAT TO DO: This is another area where an adviser can help you navigate decisions like how to take IRA withdrawals in a tax-efficient manner, or when to file for Social Security so that you get the highest payout in retirement. You should be aware of the required minimum distribution (RMD) rules on tax-deferred 401k/IRA accounts. The RMD rules kick in when you turn age 70 ½ and can be costly if ignored.

#4. Maximizing Social Security

Do you know your Social Security benefits and payment options? Social Security comprises 39% of the average retiree’s monthly income (per the Social Security Administration). You must decide whether it is best to:

  1. Take reduced benefits starting at age 62

  2. Take your full benefit at normal retirement age, which is 65, 66 or 67 depending when you were born (find your retirement age here);

  3. Take increased benefits by delaying payments until age 70

WHAT TO DO: Obtain your latest benefits estimate through the Social Security website. You can view your projected benefits and check your earnings history for accuracy (to ensure your benefits are not short-changed - the SSA does make mistakes!). Married couples should coordinate the timing of when they claim their respective benefits. The goal should be to obtain the highest, collective payout that accommodates when you need income.

#5. Health Care Costs

Medicare does not kick in until age 65. Will you retire before then? If so, budget for paying medical expenses. Individual insurance can be expensive and provide inferior coverage to what you have through your employer.

WHAT TO DO: Before retiring early, seek out health care options and budget accordingly. If one spouse continues working that helps you delay or avoid the need for individual insurance if his/her employer provides it. To prep for age 65, estimate your Medicare Part B premiums and research additional coverage such as Medigap and Part D prescription coverage.

#6. Long-Term Care

This need is swelling by the year, as baby boomers see their aging parents experience chronic illness, such as Alzheimer's, dementia or the physical decay that comes with age. Retirees are getting squeezed by the costs of in-home care, assisted living and nursing care due to people living longer and the general rise in health care costs.

WHAT TO DO: If you are under age-60, explore options for long-term care policies. Long-term care insurance can help bridge the budget gaps that arise from paying for chronic illness. The wealthier you are the easier it will be to self-insure your risk of living too long. Assisted living can run $3,000 to $5,000 per-month and nursing care is typically even more expensive. Medicare does not pay for assisted living facilities but it will subsidize the first 100 days in a nursing home (with a pricey co-pay after Day 20).

#7. Investment Needs

What must you earn to keep pace with withdrawals? Get too aggressive and a major investment loss could risk you outliving your savings. Get too conservative and you may not earn enough to combat your life longevity. These opposing paths lead to the same bad result.

Do not sleep on inflation, either. Your returns are actually less after you account for the general rise in goods and services (transportation, groceries, health care, etc.) that occurs over time. Also, if you intend on leaving money behind to family or charities that may increase your earnings needs.

WHAT TO DO: Forecast various returns and the investments needed to get there. Consider how much you can stomach if your portfolio falls by a certain percentage and always adjust for inflation. This is specifically an area where a smart adviser will provide big value.

#8. Housing Plans

Are you in your "forever home" or do you plan to move at some point? If you live in a big house those long staircases and unused rooms could become burdensome with age. If your primary residence makes up most of your nest egg, you may need to sell/downsize in order to obtain spending money.

WHAT TO DO: Look ahead and map-out what you think you will need in a home. Forecast your home’s equity over time to gauge your options, including negative outcomes that could result from a housing downturn.

#9. Remaining Debts

Where do you stand on your mortgage or other debts? It is okay to have a mortgage in retirement, but you should be close to paying it off. Make sure any debt will not be burdensome to your surviving spouse if you predecease him/her.

WHAT TO DO: Develop an aggressive plan for paying off your mortgage and other debts, particularly if you have the excess funds to do it -- meaning your current take-home pay exceeds your monthly living expenses.

#10. Life Insurance

If you already own life insurance, does it still meet the reasons you bought it? If you own a permanent policy – such as whole life, variable life or universal life – what is the policy's cash value? If you do not own life insurance, your surviving spouse may need it to bridge an income gap or pay off a mortgage balance.

WHAT TO DO: Review your existing policies for usefulness/need. If cash value exists within a policy, consider using that as a source of retirement income.

Take initiative now to identify where your retirement gaps lie in these 10 areas. A trusted financial adviser can guide you. Tackle these now and increase your peace-of-mind that the transition from your working years into retirement will be a smooth one.

Now get to work!


Brian E Betz, CFP®