Most of us spend much of our adult lives saving for retirement, yet as it approaches, many of us feel unprepared for this next chapter.
Because retirement involves both a mental and financial shift, you may want to find a qualified financial advisor (FA) to work with. A good FA will encourage you to consider your lifestyle—where you want to live, whether you’ll need to downsize, and how you’ll spend your time. Many FAs report that planning how to spend your time is often overlooked, but it is equally important; boredom or depression can set in for those whose only goal is to not work.
The main benefit of an FA, however, is their practical financial advice that helps you maximize your money during retirement. Here are eight FA-recommended financial moves to make before you say goodbye to your 9-to-5.
- Calculate your cash flow and create a budget
Identify your “paycheck replacement sources,” suggests Mark Ziety, a CFP at WisMed Financial in Madison, WI. “Retirement income may be a combination of three categories: steady, such as Social Security, pensions, and annuities; variable, including dividends, interest, rental income, or maturing bonds; and volatile, such as stocks or stock funds.”
When you decide to file for your Social Security benefits—at age 62, at full retirement age, or at 70—will affect the amount of your monthly check for the rest of your life. Choose wisely.
With most retirement plans, you can start taking withdrawals as early as 59½ without a penalty. However, you must take Required Minimum Distributions (RMDs) from your 401(k), IRA, SEP IRA, or SIMPLE IRA when you reach age 72. Roth IRAs do not require withdrawals until after the owner’s death. Consult your financial advisor to avoid mistakes, as these rules can be complex.
Once you’ve identified your sources and their potential yield, “Estimate your cash flow and create a budget for your retirement years,” advises Dana Menard, a CFP at Twin Cities Wealth Strategies, Inc., in Maple Grove, MN. Menard, like many FAs, recommends living within your “retirement budget” for a while before fully retiring to ensure you’re comfortable with your allocations.
- Estimate your lifetime needs
Besides a monthly or annual budget, you’ll need to estimate how long your assets need to last. More people are living into their 90s and beyond, so consider your family’s longevity and your health.
Ask your advisor to estimate how much money you’ll need or use a retirement calculator. Most financial services companies provide them on their websites, offering estimates based on various market scenarios.
If you have a shortfall, it’s better to know now so you can plan to address it, possibly by working longer.
- Tidy up your balance sheet
Pay down as much debt as possible. “Eliminating your single biggest monthly expense—your mortgage—will give you a lot of freedom in retirement,” says Matthew Benson, a CFP at Sonmore Financial in Chandler, Arizona. “Pay it off, or at least make a dent.”
However, David Mendels, CFP at Creative Financial Concepts in New York, NY, suggests you shouldn’t rush to pay off your mortgage. “It might be nice to not have to make those payments, but it might be a whole lot nicer to have the cash,” he says.
In either case, reduce your credit card, student loan, or personal loan debt as much as possible before you stop working.
- Review your investments
Are your retirement accounts all at one employer or financial institution? If not, work with your advisor to locate any old plans and roll the funds over directly to a specified 401(k), IRA, or Roth IRA account within 60 days to avoid withholding taxes.
If a previous employer has closed, look for plans dating back to 2010 at the U.S. Department of Labor. You can also search for your money, which may now be categorized as unclaimed property, at databases like https://unclaimed.org/ or missingmoney.com. Both have links to state treasurers, comptrollers, and other officials who update their databases regularly.
Once your accounts are consolidated, your financial advisor can rebalance your portfolio if needed and determine if your investment strategy aligns with your goals and risk tolerance.
- Build a cash reserve
Just as you need an emergency fund now to cover unexpected expenses and protect your nest egg, the same applies to retirement. Some advisors recommend keeping up to two years of cash to cover expenses in case the market declines and you don’t want to sell investments, according to Tess Zigo, a CFP at Emerge Wealth Strategies in Palm Harbor, FL.
- Estimate your taxes
After projecting your retirement income, will your tax bill be higher or lower than it is now? Remember, Social Security benefits are subject to federal taxes, and some states tax them while others don’t. You will also owe federal and state taxes on any withdrawals from retirement accounts funded on a pre-tax basis, such as a 401(k) or an IRA. Contributions to a Roth IRA were made with after-tax income.
- Plan for healthcare
If you plan to retire before age 65, when you become eligible for Medicare, you’ll need your own health insurance unless you’re on your spouse’s plan. Once you are eligible for Medicare, know that it doesn’t cover everything, and you’ll likely need additional coverage, such as Parts B and D or Medicare Advantage. “Also have a plan for long-term care,” advises Zigo. Someone turning 65 today has almost a 70% chance of needing some type of long-term care services in their remaining years, so it’s important to plan for how you will pay for that support should the need arise.
- Organize your other affairs
In case of death or cognitive incapacity, it’s essential to have your affairs in order. Ensure the beneficiaries of your financial accounts are correctly listed and update your will, estate plan, and advanced healthcare directive. Designate a personal representative or executor with power of attorney. This preparation increases the likelihood that your wishes will be carried out and helps avoid long probate processes, reducing stress on your survivors and protecting your assets.
