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.
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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.
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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.
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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.
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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.
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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.
