You’ve planned well and you’re within 1-3 years of retirement.  What are the key issues to secure a successful retirement?

Tracking your Plan for Retirement

Retirement planning is an ongoing process, not a destination.  By the time you’re ready to retire, you should have a strong handle on your assets, liabilities, income, and expenses.  You’ll want to have a comprehensive financial plan that projects your situation into the future.  Be sure to stress-test this plan for various scenarios, including early retirement, working longer, premature death or disability, long-term care expenses, and more.  Whether you are three years from retirement or yearsear into retirement, you should actively track how your plan is trending and make adjustments as needed.

Retirement Savings

Review available savings options and determine which retirement plans you should be maximizing while still working.  Although maximizing pre-tax 401k contributions is a likely scenario, it’s not always the right answer.  Maximizing IRA and/or Roth IRA contributions is another consideration, but this should be evaluated relative to your liquidity needs, tax situation, and asset distribution.  A strong savings rate prior to retirement not only increases your assets, but it also leads to lower spending.  The goal with any retirement is to maintain your lifestyle throughout retirement, so save accordingly.

Taxes

It’s possible your last few years of full-time employment may be the highest income years of your life which means they are also the highest income tax liability years of your life.  There are various strategies that can be employed to minimize taxes during these high tax years.  Some of these include maximizing pre-tax 401k contributions, bunching tax deductions such as property taxes into certain years, making larger charitable contributions, and other strategies.  These strategies should be reviewed in context of your overall goals, with the objective of lowering taxes over your lifetime.  Facilitating tax planning over an extended period of time can lead to significant savings and enhances the longevity of most financial plans.

Charitable Planning

Related to taxes above, there are two strategies to consider that will help lower your tax situation and satisfy your charitable desires.  First, instead of writing checks to charities, you should consider gifting appreciated securities directly to the charity.  By giving securities, you avoid the capital gains tax you otherwise would realize when the security is sold.  Charities are able to sell appreciated securities for no tax liability, so there is no detriment to the charity in receiving these shares.

Making a charitable contribution during high tax years provides greater ‘bang for your buck’, as the contribution reduces your tax liability to a greater degree than when your income is lower.  To best leverage this opportunity, there is a way to pre-fund future charitable contributions during high tax years.  You can do so by contributing into a Donor Advised Fund (DAF).  You receive the charitable deduction the year you contribute to a DAF, and you are able to gift to the charities of your choosing during the current OR future years.  Frequently clients will pre-fund 5-7 years of future charitable contributions to the DAF, and then distribute them in future years. To take the strategy one step further, be sure to gift appreciated securities to the DAF to avoid paying capital gains taxes on appreciated assets.

Investments

Having the proper asset allocation before retirement is critical to the success of your financial plan.  Relative to your entire life, you should be the most conservative with your investment mixture 2-3 years prior to retirement and 2-3 years into retirement.  The reason is that a market downturn will have the greatest negative impact just prior to or in the early stages of withdrawal (retirement) when your life expectancy is long but your earnings future is limited.  The appropriate mixture for each person is different and is impacted by several considerations.  These may include the amount and strength of guaranteed income sources during retirement, the extent of your fixed expenses relative to income and assets, longevity, and more.

Health Insurance

For those who retire at age 65 or later, Medicare is a relatively well defined and reasonably affordable health insurance.  Although there are lots of options to choose from, Medicare is an incredible asset to retirees.  For those retiring before age 65, choosing between various health insurance options can be confusing.  For the select few, whose employers offer continuation of health insurance after retirement, it’s important to identify all of your options from this benefit and how and when you might transition to another plan.  For most people, buying individual health insurance is the only option.  It’s important to identify your various options, how they work, what they cost, and what the best plan is for your situation.  It’s critically important we budget an appropriate healthcare expense into your financial plan to avoid future problems.

Social Security

Social Security is a critical piece to most retirement plans and is incredibly complex. Prior to retirement, we’ll want to review the various Social Security options available at different ages and stress test those in your financial plan.  Keep in mind few critical pieces of Social Security:

• Drawing SSI Early:  If you draw SSI before your Full Retirement Age (age 66+), your benefit will be reduced by 8% each year you take it early.  If you draw your SSI at age 62, it will be 32% lower than if you were to wait until 66.
• Taxes:  Your social security benefit is subject to taxes above certain income levels.  Consider other income sources such as wages, pensions, dividends and interest income, and retirement plan distributions when calculating how SSI will be taxed AND the impact SSI income will have on your overall tax situation.
• Coordinating Benefits with Spouse:  If you’re married, making a decision on your social security benefit should be coordinated with when your spouse will begin their benefits.

Debt/Mortgage

Although most people want to be mortgage free prior to retirement, and we support that philosophy, it’s been proven that financial plans work better when clients have mortgages.  Stress testing your financial plan, with or without a mortgage, is a great starting point in determining if you should have a mortgage in retirement.  Most importantly, it’s much easier to obtain a mortgage while you’re working so answering the ‘mortgage question’ should be done prior to retirement.

Retirement Expenses

It’s critically important to have a firm grasp of your expenses prior to retirement.  Track your monthly reoccurring expenses as well as occasional expenses (property taxes, insurance payments, etc.) to determine an annual budget.  Although spreadsheets of expenses are preferred, simply reviewing six months of credit card balances and bank statements is a quick and easy way to determine an annual budget.  Don’t forget to budget for one-time expenses such as car purchases, home repair and remodeling, weddings, vacations and more.

Advanced Strategies for Retirement Planning

There are numerous advanced planning strategies to consider prior to retirement.  These may include:

– IRA Contributions

– Roth Conversions

– Gifting of Assets

– Net Unrealized Appreciation if you own company stock inside your 401k plan

– Estate planning Strategies

– Non-qualified plan distributions

– Stock option exercising

– Funding HSAs

– Contributing to 529 accounts,

– more, more, more.

Begin the Retirement Process

Navigating the multitude of issues by yourself is treacherous.  It’s time to work with an advisor who understands the technical aspects of retirement planning and knows how to apply them.  In doing so, the burden of knowledge and implantation will be removed from your shoulders and you’ll achieve the confidence and peace of mind you’re striving for.