Top Things to Consider When Approaching Retirement

Posted Feb 8, 2010 | Kyle D. Findlay

Everyone who has not yet retired has at the least thought about retiring and come up with an idea of what it will “look like”. Some people envision spending time with the grandchildren. Some want to travel all over the world. Some are ready to start their own business and do what they’ve “always wanted to do”.

No matter what your perception is of retirement, our nation has entered into a period where our demographics are being revolutionized. The United States’ population is roughly 300 million, and there are approximately 78 million baby boomers (or more than 1 baby boomer for every 4 people)! 2008 was the first year when individuals from this generation turned 62, the earliest eligible age for Social Security benefits. Over the next decade there will be millions of Americans who will retire. It is critical to prepare now in order to avoid costly mistakes later. Listed below are some important considerations that need to be taken into account.

Make a Plan

Earl Nightingale once said “As in all successful ventures, the foundation of a good retirement is planning.” There could not be a more truthful statement. Unfortunately many people wait until their retirement party before they begin preparing for retirement. The very first step for someone approaching retirement is to create an inventory of all assets and liabilities. Understand what you have and what you will be able to dedicate towards retirement expenses. Some prefer to go into retirement debt free. Adequate preparation may be necessary to accomplish this goal.

Many people who close in on retirement have a large purchase in mind, like a vacation home, boat, or new car. In most cases it is wise to make these types of purchases before you retire when you still have income and flexibility to adjust to surprise situations.

The next thing you need to do is be able to understand what income is going to be available during retirement. This includes pensions, social security, investment income, real estate income, etc. Once you know your income sources, it’s time to determine your expenses. A rule of thumb for retirement expenses is 70% of your gross income. As with any rule of thumb, be careful lumping yourself in with the averages. For some people expenses will go down during retirement. For others, expenses go up (think about healthcare, hobbies, etc.).

After you have calculated your expenses and your income sources, you will be able to approximate your monthly deficit. Your investable assets will need to be able to provide for this gap. It is important that you have assets liquid to satisfy short term needs – you can call this an emergency fund or a cash bucket, but the big idea is to have these assets in stable, secure investments. Depending on your risk tolerance you will need to keep anywhere from 2‐5 years of assets liquid to satisfy this “income gap”.

Social Security

If you’ve been in the workforce long enough to accumulate an adequate amount of credits (10 years or 40 quarters) you may be eligible to receive Social Security retirement benefits. Every year you will receive a statement from the Social Security Administration (SSA) that estimates your retirement benefits. The statement provides a retirement benefit for three different ages to begin your payments (the earliest age to receive benefits is 62). As expected, the longer you wait to receive benefits, the larger your monthly check will be. You should file your SSA application approximately three months before your retirement date.

Note that there are penalties for taking your retirement benefits before your full retirement age if you are still earning income, and your full benefit is reduced if you take benefits before your full retirement age. If you are married and are a different age than your spouse, talk to your financial advisor about strategies that can maximize your Social Security retirement benefits.

Pension

If you are one of the lucky ones who will retire with pension benefits, you will have much more cash flow predictability during your retirement years than those who do not. Pension income may allow you to consider different investment strategies upon retirement. For example, if you do not plan on taking withdrawals from your portfolio in the early years of your retirement, the assets can be positioned in a way that can continue to put emphasis on growth.

Make sure you know your options before you begin taking your pension. If you have a spouse, you will need to consider the joint life options rather than single life in order to provide for your spouse in the event that you die prematurely. Sometimes it may be more economically sound to take the single life option and buy a life insurance policy with the excess monthly payment. You should consult with your financial advisor before executing this strategy.

Does your pension have a cost of living adjustment in order that you can maintain your spending power in later years? Many people today are spending 30 or more years in retirement. A 3% inflation rate will decrease your spending power by 50% over a period of 24 years. This should be taken into consideration and discussed when doing your retirement planning.

Consolidation

Many people retire with numerous accounts that are spread out all over and lack any strategic investment approach. This is a great time to gather all of the IRAs and 401(k)s and consolidate them into a strategy that takes your entire financial picture into consideration. If you have a trusted advisor it may be helpful to move all of your investment assets under one roof. This can simplify your life and reduce paperwork.

Other Considerations

With rising healthcare costs and increased longevity, a long‐term care insurance policy may be worth considering. A policy that covers both spouses reduces the guess work of who will need the policy and can possibly save you some money along the way.

Finally, it is a good idea to prepare or readdress your estate planning documents. Consider updating current beneficiaries. Does your current will reflect your legacy goals? Have you appointed a power of attorney to manage your financial matters in the case that you are no longer able to make these decisions? Do you have a health care directive? If you are worried about estate taxes, you should talk to an attorney and begin putting estate tax minimization strategies in place.

As you close in on retirement, make sure you consult others for advice. You’ll want to speak to your CPA, financial advisor, estate attorney, spouse, friends, and others who have already made the move. A strong team of advisors will give you the highest likelihood of success.