Michael McDaid, CFP®
When I have an initial conversation with prospective clients, one of the most common topics of conversation is whether or not they are on track for retirement. As you might guess, there are a lot of things that go into answering that question and although everybody’s situation is unique, one thing holds true in all situations: the sooner that question gets answered, the easier it is to make any needed adjustments. And if no adjustments are needed, then they can sleep better at night knowing things are looking good.
In order to help breakdown what can be a pretty complex topic, I’ve put together the following general thoughts on things to consider and when you may want to start thinking about them relative to your target retirement date.
10 Years Prior To Retirement
About 10 years prior to your target retirement date, you should start to consider your sources of income in retirement. This would include all of your work-related retirement plans (i.e. 401k, 403b, 457) as well as non-qualified deferred compensation and stock option plans. Additionally, you will need to consider your estimated Social Security benefits as well as any pensions you are eligible for and any annuities you may have. Finally, any savings and/or regular investment accounts will obviously be considered.
When going through the process of compiling this information, it may be a good time to start consolidating assets, particularly assets held in former employer-sponsored plans. Generally, you can either consolidate into an IRA or your current employer’s plan but since there may be tax implications, I recommend you consult your tax professional prior to making any decisions on consolidations.
If you are working with an advisor, you should review the total asset allocation over your entire portfolio of investment accounts. This is a particularly helpful exercise when there are multiple accounts that need to be considered in your plan. When I go through this process with clients, it’s not uncommon to have the actual total portfolio allocation look a lot different than how the client thought they were invested.
Regarding Social Security benefits, if you have not done so yet, now would be a good time to download a copy of your Social Security Benefits statement from the Social Security Administration. You can go to www.SSA.gov create an account and download a copy of your latest statement. In addition to reviewing your estimated benefits, you should also review your earnings history to make sure everything looks accurate.
Five Years Prior To Retirement
Somewhere around the five-year pre-retirement mark you should have a pretty good idea of what your retirement income needs will actually be. Hopefully by this point you have put some thought into what you want your retirement to look like. Do you want to travel? How often and how much will it cost? Do you want to buy a boat or a vacation house? Do you want to help pay for grandchildren’s education? How about leaving assets to your heirs? All of these things could have a significant impact on your plan so it is important to put some thought here and have multiple conversations with your spouse to make sure you are both on the same page before taking a bite out of that “Congratulations on Your Retirement” cake at the office.
If you are planning to retire prior to being eligible for Medicare, the cost of private health insurance cannot be overlooked. This is a good time to start exploring what those costs will be. Because health insurance cost can be volatile (usually up!), it’s too early to set the cost in stone but it is a good idea to have a general idea of what those costs will be. Conversely, if you plan to retire after being eligible for Medicare, it is very important that you understand the rules relating to signing up for Medicare. Those rules are beyond the scope of this blog but I think AARP does a good job of explaining things and you can review that information here.
Finally, you should begin to formulate a tax strategy as it relates to drawing down your retirement assets. Because tax implications are different between the three major asset “buckets” (Pre-Tax, After-Tax and Taxable) and because Required Minimum Distributions beginning at age 72 may trigger significant tax liabilities, it is important to be as tax efficient as possible. This can be complicated so if you are not one who takes pleasure in reading (and understanding) the IRS code, this is probably something you should leave to the professionals.
Three Years Prior to Retirement
Within three years of retirement, you should start taking a look at your investments and begin to pare back some of your risk exposure. You may know somebody who had their retirement plans turned upside down during the 2008 financial crisis. There were plenty of stories in the media about people who either had to put off retirement or had to go back to work because the value of their investments was reduce by 30% - 50%. As unfortunate as this is, it could have been avoided. When I am working with clients on their retirement income plan, I want to be confident that any assets needed to support income requirements over the next three years or so years are going to be available without having to sell something at a loss.
One Year Prior to Retirement
Alright, this is Go Time! Within a year of retirement, you should now have all of your big questions answered and be ready to embark on the next great stage of your life. The year leading up to retirement should be stress-free and you should enjoy the time you have with your co-workers and depending on your profession, your customers/clients. From a planning standpoint, you should know when you will start claiming Social Security benefits. Generally speaking, if you are in good health, you will get a larger lifetime benefit by holding off on collecting Social Security until age 70 but that may not hold true based on your own personal situation so you should review your options with an advisor. Now would also be a great time to review your tax strategy and make sure there haven’t been any changes to the tax laws that will have a negative impact on your plan.
Conclusion
All of the above is a generalization of things to consider when trying to understand what your retirement plan looks like and whether or not you are on track for the retirement you will have spent your entire career working toward. In the financial planning world, there is no “one size fits all” so your timing and needs may be much different than what I’ve outlined here. If you would like to schedule a no obligation review of your current plan, feel free to reach out. I’d be happy to take a look and make any recommendations that are appropriate given your personal situation.