Top Considerations Before Pulling the Retirement Trigger
The average retiree spends more time planning a one week vacation than they do on a 35 year retirement plan…yikes!
You have worked your entire life to provide and save so that you could one day enjoy the luxuries of retirement. The decision to pull the retirement trigger should not be taken lightly.
We understand the importance of making informed decisions when it comes to retirement planning.
As you consider turning your page to your retirement chapter that will be filled with opportunities and challenges, let’s dive into some of the top considerations you should think about before pulling the retirement trigger.
Be positive you won’t run out of money
Before making any decision to retire, it’s crucial that you understand your financial situation thoroughly.
The top two retirement questions we hear from those approaching retirement are:
Do I have enough money to retire?
Will it always be enough?
To answer these questions, you first must consider all potential retirement income sources such as:
Retirement savings
Investments
Pensions
Social Security benefits
Rental income
Part-time work
CDs
Life insurance you no longer need
Annuities
You must also fully consider your goals, lifestyle and how much you will spend in retirement each year. Typically, we see that most spending increases in retirement because you have more time.
When determining how much you will spend in retirement, it’s important to include monthly expenses and non-monthly expenses that people often forget about such as health care costs, car maintenance and car purchase costs, vacations, etc.
Then you have to determine if you have enough money to last you all the way until your end of life. We assume all client’s money needs to last to at least age 95.
We are able to do this with our software that runs 1,000 simulations of market returns to test your ability to fund all financial goals from now, until both spouses reach age 95. We then present our results as a percentage called probability of success.
For example, a 50% probability of success means that 50% of those 1,000 simulations did not see you run out of money at age 95. Our goal is to see you reach a 90%+ probability of success before you decide to retire.
Don’t wait until you’re ready to retire to do this analysis. Do it as young as you possibly can and revisit the analysis each year so that you ensure you’re saving enough to reach your goals.
Have a plan to not get killed in taxes
Tax planning and strategy is so important in retirement. Start planning for your tax strategy in retirement now if you haven’t already. The more time you have to plan, the more taxes you will save in retirement.
Make sure you have a plan so you don’t get killed in taxes in retirement. Some of our favorite tax planning strategies for retirement are Roth conversions, asset location and tax diversification.
Roth conversions:
Did you know you can convert your tax-deferred assets (401k and IRA dollars) to Roth? Those dollars can continue to grow tax-free and you are able to take tax-free distributions later on in retirement. You also avoid taking required minimum distributions beginning at age 72 when you convert to Roth dollars.
You will need to pay tax on the conversion at the time it’s completed, so Roth conversions are great to do in low income years. We are always looking for Roth conversion opportunities for our clients. Some of our favorite times to do Roth conversions are when clients have retired, when they have started a business or if they have a low income year for any other reason.
Asset location:
Asset location is the unsung hero of tax planning and can often save a ton in taxes if your assets are simply in the right location. There are three different types of accounts you can put your investments in.
Taxable accounts - these are brokerage accounts that are taxed when you earn dividends or interest or you realize capital gains by selling investments that went up in value.
Tax deferred accounts - these are 401ks, 403bs, and IRAs that allow payment of taxes to be delayed until later when the money is taken out. The distributions are taxed as ordinary income.
Tax-free accounts - these are Roth IRAs, Roth 401ks and Roth 403bs. Contributions are made with after-tax dollars, meaning you pay taxes going in, but the dollars grow tax-free and are distributed tax free.
You want to make sure you have the right investments in each different account type.
For example, Investments with lower tax implications, such as growth stocks or tax-efficient index funds, are best for taxable brokerage accounts.
Equity funds or stock positions that are expected to appreciate a lot in value are best suited for tax-free accounts since all dollars grow tax-free.
Investments that generate regular income, such as bonds and high-dividend stocks, are less tax-efficient and are better for tax-deferred accounts.
Tax diversification:
We can’t tell you how many people decide to work with us right before they are ready to retire and they have all of their assets in a 401k or an IRA from old 401ks that they have rolled over to an IRA.
This means that the majority of their assets, if not all of them, are tax-deferred.
But that is only 1 of 3 account types, or buckets, as we like to call them.
Before you retire, you really want to focus on filling all 3 buckets (taxable, tax-deferred and tax-free).
Having different account types and buckets to pull from in retirement can lead to major tax savings and gives you WAY more control over taxes paid in retirement.
Know your Social Security strategy
Picking the right Social Security strategy is a critical component of retirement planning because Social Security benefits impact your retirement income.
You want to make sure you take Social Security at a time that makes the most sense for your situation and hopefully maximizes your benefits.
Consider age, life expectancy, financial needs and other sources of retirement income when deterring the optimal age to begin claiming your benefits.
While you can start receiving benefits as early as age 62, doing so may result in reduced monthly payments compared to waiting until full retirement age, which is typically between 66 and 67, depending on the year of birth.
Alternatively, delaying benefits beyond full retirement age can lead to increased monthly payments, providing a higher income stream in retirement.
If you are married, make sure you and your spouse have maximized and coordinated your benefits as a couple.
Plan for your healthcare
Medicare starts at age 65 and you will have many choices when it comes to selecting your preferred type of health care plan.
Will you choose Medicare Advantage or Medigap + Medicare Part D? Which Medicare Advantage plan? Which Medigap plan?
Don’t forget about the enrollment deadlines that come with Medicare because if you don’t enroll in Medicare on time then there will be an enrollment lifetime penalty that is added to your monthly premium.
If you retire before age 65, then you will need to plan and budget for private health insurance until you’re eligible for Medicare.
Know what you’re retiring to
When people are considering retirement, they most often immediately go to the financial aspect of retirement and try to determine if they have enough money to retire.
While that is an important step in the retirement planning process, it’s just as important to determine what your purpose will be in retirement. We love to help retirees focus on retiring TO something, not FROM something.
Having purpose matters just as having money. Money can help you fund a purpose, but it can’t help you find a purpose, so it’s important to consider your purpose in retirement before pulling the retirement trigger.
Think about how you are going to want to spend your time in retirement and how you will pay for that. Many will say “I am going to play lots of golf. I’ve worked all these years and now I deserve to play.”
Golf may very well be a great way to spend some of your time in retirement, but it’s important to know there’s a law of diminishing return on leisure. When all you do is play, it can quickly become something you don’t want to do anymore.
Many retirees quickly find out that it’s vocation (work) that truly makes vacation fun.
So as you are thinking about retirement, be sure to think about:
What hobbies or interests do you have or do you desire to explore?
Are there any aspects of your work that you think you might miss?
People don't think about the structure, social interaction, solving problems, competing and achieving goals they have with their work that they will lose when they return unless they retire TO something.
Research shows that 27% of people who "retire" today go back to work within 4-6 months. Finding purpose in retirement is key to a happy, fulfilling retirement.
If you are wanting help with retirement planning from a Certfied Financial Planner, please reach out!
Looking for more things to consider before you or someone you know retires? Check out our blog: 25 Questions to Ask Before You Retire.
