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Steps to Take as You Approach Retirement

By Jane Young, CFP, EA

Once you are within five years of retirement it is time for some serious financial planning and analysis to ensure a happy, worry free retirement.  This begins by defining your ideal retirement.  Will you be climbing Mt. Kilimanjaro, tending a beautiful vegetable garden, playing with grandchildren, or building a vacation cabin?  Think about the type of lifestyle you desire and where you plan to live.    

These decisions will drive your retirement budget.  Before retiring, you should have a clear idea of your projected retirement expenses.  Depending on your situation, this runs about 80% of pre-retirement expenses for most retirees.  When developing your retirement spending plan be sure to include expenses for additional travel, new hobbies, home remodeling, charitable contributions, and new vehicles.  Also be sure to designate funds for home and vehicle maintenance, replacement of appliances and unexpected emergencies.  

You will also need to project health care expenses and make arrangements for medical insurance if you are retiring before 65.  Start researching and evaluating Medicare options at least six months before you turn 65 and plan to enroll about 3 months before your 65th birthday.    Medicare premiums are variable based on income.  If you anticipate receiving a generous pension, Social Security benefit or other retirement income you should anticipate paying a higher Medicare premium.

Review your retirement income sources and compare them to your projected expenses.  As a rule of thumb, you can pull about 4% from your investment portfolio per year to supplement your other retirement income.   However, as you approach retirement run some detailed retirement planning scenarios with a reputable retirement software program to get a more accurate picture of your situation.  You may need to hire a financial planner who practices as a fiduciary to assist with this.  

This is the time to start evaluating when to take Social Security.  Most retirees benefit from waiting until 70 if circumstances allow.    Your Social Security benefit will increase 8% per year between your full retirement and age 70.  

Take advantage of the last few years before retirement to maximize contributions to your retirement plans including a Roth IRA and HSA plans if you are eligible.  Try to reduce or eliminate debt including your mortgage to minimize your non-discretionary retirement expenses.  

As you transition into retirement make some adjustments to your asset allocation.  Most retirees keep at least 30% to 40% in safer investments outside of the stock market to buffer against market volatility.  Once in retirement keep at least one year of expenses plus an emergency fund in cash-based accounts.  Maintain a diversified portfolio comprised of stock mutual funds and interest earning investments to help your portfolio grow and keep up with inflation.

Consider the tax implications of your financial decisions during retirement.  A significant increase in income can impact your tax rate as well as the taxable portion of your Social Security, your Medicare premium and the rate you pay on capital gains.

Jane Young