The 10 years leading up to retirement is a crucial time to determine whether or not you will be able to retire successfully and on time. Developing a comprehensive retirement plan is a critical step to ensuring you'll be able to live the retirement of your dreams. Here are 9 important financial issues to include in your plan to make sure you're on track.
1. Prepare a retirement spending budget.
This is the time to start thinking about the lifestyle you'll want in retirement, and what that lifestyle might cost. Will you stay in your current house or downsize? Will you relocate? Do you plan to travel or engage in other activities? Putting together an accurate retirement budget is one of the most important planning steps to take as it will drive most of the other aspects of retirement.
2. Maximize retirement plan contributions.
The years leading up to retirement are often your peak earning years, so it's important to maximize your contributions to your workplace retirement plan such as a 401(k), or if you're self employed a SEP-IRA. Retirement plan contributions during this period can help pad your retirement nest egg and be the difference between meeting your retirement goals or falling short.
3. Review Social Security.
This is the time to review your Social Security statement to ensure that your earnings history is accurate and complete. Any missing earnings can reduce your benefits. In addition, you want to begin considering different scenarios for claiming your benefits, and which fit best into your overall plan and the resources you'll need through retirement.
4. Plan for health care costs.
Health care will be one of the largest expenses in retirement. Along with your regular expenses like groceries, utilities, etc., you need to estimate what you anticipate your health costs to be in retirement. Medicare is the primary vehicle for health care coverage for most people in retirement, so you need to understand how Medicare works, and what the process is for applying.
If you would like to retire early, it's critical to plan how you will cover health care costs before you are able to apply for Medicare, whether that's purchasing independent health care coverage, or getting coverage through a spouse's plan. Effective use of a HSA (health savings account) can be a powerful vehicle to avoid taxes and help pay for medical expenses in retirement.
5. Take inventory of all financial resources.
This is the time to be sure that you have a handle on all financial resources that will be available to you to fund your retirement. These may include:
Income streams like Social Security, a pension, a payout from selling your business, etc.
Retirement plans distributions like Roth or traditional IRAs; employer plans such as a 401(k), 403(b) or 457 plan and deferred compensation plans SEP-IRAs.
Taxable investments, like individual stocks and bonds, ETFs and mutual funds.
Other assets, including an interest in a business, employment or self-employment income, an inheritance or life insurance death benefit, real estate or alternative investments.
It’s very important to get your arms around all resources and how they work, so they can be coordinated in your retirement plan projections.
6. Run some projections.
Use the information gathered above to develop a retirement plan and run several projections to see if your financial resources will support your planned retirement lifestyle. There are many different variables and factors to take into consideration when running projections, so this is where working with a fiduciary advisor to get professional help can go a long way to putting your retirement picture and different options into the right context.
If your projections indicate that you are at risk of outliving your money in retirement, adjustments will need to be made before it's too late. You'll want to revisit these retirement projections periodically in the years leading up to retirement in order to help ensure you're still on track.
7. Hope for the best, but plan for the worst
As we all know, life doesn't always go the way we've planned. This is true in the case of retirement planning also. It's important to look at your plan, and try to anticipate what could go wrong. What if your assumptions don't come true? What happens if you or your spouse gets sick? What if the market drops just as your starting retirement? Will your plan stand up to different scenarios that might happen? Without a comprehensive plan that looks at all of the items above, trying to understand if you will be OK under different scenarios is next to impossible.
8. Formulate a withdrawal strategy.
A key element in any retirement plan is a withdrawal strategy. This involves determining which accounts to tap and in what order. This is where items like RMD's (required minimum distributions), social security, pensions, etc. all need to be coordinated with your retirement savings. This is a key process to ensure you are minimizing taxes as much as possible. A retirement withdrawal strategy is not a “one and done” proposition, but rather something you will need to review and adjust as needed during retirement.
9. Review your estate plan.
Your estate plan can affect your retirement planning in several ways. If you're married, you'll want to be sure that everything is in place for whichever spouse is the survivor. This includes asset ownership, retirement accounts and insurance policy beneficiary designations and a host of other issues. In some cases, your plans for leaving assets to heirs may come into play in terms of which retirement assets to spend down first.
Whether you are 10 years, 5 years, or 1 year from retirement, it's never too early to start developing your retirement plan, to ensure that it will be able to provide you with the lifestyle you want in retirement. A comprehensive retirement plan that takes into consideration the steps above, combined with a professionally developed strategy for managing your investment portfolio, will give you the confidence to know that no matter what happens in the future, you will have the resources you need to live the retirement you've dreamed of.
Too busy to develop your plan, or not sure where to start? We can help! Schedule a call with us today to learn how we can create a plan for you to ensure you can live the life you want in retirement.
Mike Bink, AAMS®, CCFS®
Mike is the founder & president of Equivest Financial Advisors. He is a fiduciary advisor who is passionate about helping his clients take control of their retirement and reach their financial goals. Learn more about Mike.