You’re Retiring in 5 Years – Are you ready?
About five years beforehand, most people start to see retirement as a reality and begin seriously planning for it. This is the time when every future retiree should meet with their Financial Advisor (if they are not already meeting with them regularly) with the goal of fine-tuning and finalizing their plan. These meetings should include reviewing and discussing a variety of factors. To make the most of your time with your financial advisor, consider discussing these 10 steps for transitioning from the preservation phase to the distribution phase.
1) Evaluate your finances
- Evaluate your income and expenses and whether you will have a significant increase in both during retirement.
- Consider large purchases you’ll make during retirement (Ex: Traveling, second house, etc.)
- If you would like assistance with budgeting for retirement, our Personal Finance program may be beneficial for you. (Click here to learn more about our Personal Finance Program.)
2) Finalize Your Retirement Plan
- Review debt payoff plans for loans, credit cards, and mortgages.
- Identify whether your income sources will include pre- or post-tax money.
- Review your portfolio risk tolerance and adjust as you near retirement.
- Complete an income gap analysis to determine shortfalls in what you might still need based on your projected lifestyle. Click here to watch our video about completing a gap analysis.
3) Plan your Withdrawal Strategy
- Ask your advisor, “Which accounts should I draw from first?”
- Discuss whether you should start with pre- and/or post-tax accounts.
- Ask your advisor about withdrawal strategies that could help lower your income ahead of time and avoid spikes that could increase Medicare premiums or Social Security taxation.
4) Max Out and Catch Up on Retirement Contributions
- Max out your contributions so that you can have more compound growth for the future.
- Use any year-end bonuses to top off contributions for the year.
- Ask your advisor about the contribution limits for 401(k)s and IRAs – they change each year.
5) Determine if a Roth Conversion Makes Sense for You
- Convert to a Roth IRA to possibly reduce future RMDs and minimize the tax you pay, as these accounts grow tax-free and are not subject to RMDs.
- Converting to a Roth IRA gradually over 5 years might avoid jumping tax brackets.
- Note: A Roth conversion may not be ideal for every situation, depending on what your tax strategy is and how close you are to retirement.
6) Simplify and plan for Required Minimum Distributions (RMDs)
- Consolidate multiple IRAs or 401(k)s to potentially avoid hefty RMDs.
- Consider using Qualified Charitable Distributions (QCDs) to offset RMDs after you are 70.5 years old.
7) Review Insurances and Healthcare
- Consider what insurance is right for you based on your intended lifestyle (Ex: long-term healthcare, life insurance, travel insurance, etc.).
- Discuss enrolling in or delaying Medicare depending on your current healthcare plan, if you’re still working, or if you contribute to an HSA.
- Contribute to an HSA to fill the gaps of what Medicare doesn’t cover and secure funds for future medical expenses. Note: Once on Medicare, you cannot contribute to an HSA.
8) Determine your Social Security strategy
- Understand what your benefits are and how much you will receive based on your income/earning statement.
- Discuss whether it is tax-advantageous to delay Social Security.
9) Create your Estate Plan
- Create and finalize an estate plan, which can include establishing a will, beneficiaries, and trust – all while keeping tax minimization in mind.
- Understand that a properly designed estate plan allows you to designate who will gain control over your medical care/assets and make decisions for you if you become incapacitated.
10) Create a Family Binder
- Store all your financial information, including account details, your estate plans, final wishes, and letters to loved ones in a family binder. (Click here to learn more about creating a family binder.)
Of course, your action steps five years before retirement may differ based on your current needs, any significant life events that occur, or shifts in tax legislation that might affect your risk tolerance and withdrawal strategy. This is precisely why you should meet with your advisor each year to keep your plan in line with your goals, whether you are far from retirement, nearing it, or finally living the non-working lifestyle at last. We’re here to make sure your plan is structured to benefit the life you desire to live.
Want to know Greg Storen’s other thoughts on steps you should take five years before retirement? Our team interviewed him for a sneak peek at what he regularly tells clients. Watch now to learn more. (Click here to watch this video.)
If you’d like to learn more about how to plan for retirement and other related topics, check out our Financial Planning blogs where you can access these great resources. (Click here to read more.)
As always, if you have any other questions, please contact us. (Click here for contact information.)
Blog by Kiran Sharma – Partner, Wealth Advisor
Learn more about Kiran and the rest of the Storen Financial team here.