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Dispatches Retirement Planning Transition to Retirement

Actions to Take During the Five Years Prior to Retirement

Based on interviews with financial advisers, economists and retirees, The New York Times put together a list of tips to smooth the transition from a working career to retirement.

by AAII Staff | August 2018

Transitioning to retirement from a working career is challenge for many people. To help, The New York Times interviewed financial advisers, economists and retirees to create what they described as a “five-year countdown to retirement.” We’ll share their suggestions along with a few comments of our own.

  • Five Years Out: Review your current finances. In doing so, project both withdrawals from retirement savings (4.5% or less during the first year) and guaranteed streams of income (Social Security, pensions, annuities, etc.). At the same time, create a budget of what you think you will spend in retirement. If you are facing a potential shortfall, you still have time to increase your savings rate.
  • Four Years Out: Begin to plan for the later years of retirement. Look at potential retirement communities you might want to move into. If long-term care is a concern, weigh the costs versus the likelihood of using a long-term care policy. Review your estate documents. AAII’s “Investing at Level3” withdrawal strategy calls for allocating one-year of portfolio withdrawals into safe assets during each of the last four years leading up to retirement.
  • Three Years Out: Consider adjusting your lifestyle to practice for your retirement years by engaging in similar activities that you plan to be involved with. Consider your living arrangements too. Regardless of whether you plan to move or stay in your house over the long term, any necessary work is best done while you are still salaried. This can be a good time to refinance a mortgage or open a line of credit that can be tapped in the event of an emergency.
  • Two Years Out: Making Roth IRA conversions now can lower your taxable income once in retirement. Roth IRA conversions are taxable in the year they occur and withdrawals are tax free as long as the converted dollars stay in the account for at least five years. Rerun your retirement spending and income numbers again to ensure you are on track. Then practice living off of your projected cash flows.
  • One Year Out: Look into health insurance options; apply for Medicare if age 65. Review your allocation to ensure you can withstand a significant drop in stock prices.

Source: “Countdown to Retirement: A Five-Year Plan;” Peter Finch; The New York Times, July 6, 2018.

Discussion

S Alexander from OH posted over 7 years ago:

Nice points, however in my experience one should consider Roth conversions much earlier. It seems reasonable to perform Roth conversions at any time the extra income will be taxed at or below the rate anticipated in retirement rate.


Jean-Claude Rolin from TX posted over 7 years ago:

I am considering Roth conversion the 1st year I will retire. Lower tax that year as lower revenue and so that I can get my social security in later year tax free.


Robert Donlen from PA posted over 7 years ago:

Any suggestions? I'm 65, and still working. My Wife is on disability, and she is 63. She has her 401k still, with the company she worked for. I'm considering retiring at 66. What should we do with her 401k? About how much will it cost to close that account and put the money somewhere else? Thanks, for the help.


Charles Rotblut from Illinois posted over 7 years ago:

Robert, Have your wife contact her old employer, or better yet, the company that manages her 401(k) plan to find out if there are any fees to rollover the account. You should also taken into consideration what fees the plan is currently charging you and what the offerings are. Depending on the plan, you may be able to save by moving the savings to a discount broker or mutual fund firm (e.g. Schwab, Fidelity, Vanguard, TD Ameritrade, etc.) All of them will be able to assist you with the rollover. In doing the rollover, have a plan for how you will allocate the investments before making the rollover so the money does not unnecessarily sit in cash. Hope this helps, Charles


James Hogg from FL posted over 7 years ago:

Don't underestimate the health insurance situation.That needs to be addressed as a major issue. For example, My health insurance increased from $546/month to $2,573/month within a 7 year period. And, sadly, I still have 2 more years before I become eligible for Medicare. Fortunately, I was lucky enough to be able to afford it. Most can't. Beware!!!


Ramesh from MICHIGAN posted over 7 years ago:

Robert, Do you want to handle the 401K account after you transfer to the discount brokers. If 401K managing company charges you any fee the brokerage firm you are moving to, will repay you that amount, but you need to discuss that with the brokerage firm you are transferring to. If you transfer the 401K next year some of these firms will also offer you bonus for receiving the 401K account now called IRA account. Some will accept the account in KIND meaning transfer the stock, funds etc, without liquidating your portfolio. Call couple of broker funds as Charles listed above. I like Merrill Edge. check out this link for more detail. https://www.merrilledge.com/preferred-rewards Good Luck.


Gary Phillips from FL posted over 7 years ago:

When we retired I rolled my 401K into Vanguard and my wife's into T Rowe Price. Both companies were very helpful and did most of the work. I selected two different firms to be able to select the best funds from each firm. We only invest in Mutual Funds so we don't need a broker. Only started converting Regular IRA to ROTH after retirement when our tax rate fell below 15%. Each year converted enough to get to the top of the 15% tax bracket. Now at age 73 we might never have to pay any income tax again. With 2/3 of our retirement savings in ROTHs our Social Security + enough Regular IRA to meet RMD and not cause any income tax + ROTH withdrawals allow us to live on 65K a year tax free. With the 15% tax bracket now at 12% for a couple of years you can do this and pay less tax than I did.


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