If you hope to retire within the next decade, now is a good time to map out a strategy. Having a well-thought-out plan will minimize the stress that comes with such a big transition — and maximize your financial security.
“It takes at least three years to run through all of the adjustments and thoughtful discussions to be had. There are quite a few variables, so it is important to build solutions rather than attempt to craft it all in a year,” said San Diego-based certified financial planner Leonard Wright.Here are five key issues to consider as you begin to tailor a plan.
1. Figure out what you’ll be spending
Most people want to be able to have enough money in retirement to maintain their quality of life. Well, how much is that quality costing you?Read More”The single biggest thing that someone can do to help themselves with retirement planning is figuring out what they spend now,” said Ann Minnium, a certified financial planner based in Margate City, New Jersey. More from Financial Empowerment
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Create a list of your present-day expenses. Then edit it to better reflect what you’ll likely be spending 10 years from now. So, for instance, cross off current expenses that won’t be an issue when you retire, such as those college tuition payments you no longer will need to make, or a mortgage that might be paid off. Then add new expenses you are likely to incur, such as the cost of unsubsidized health insurance if you retire before you qualify for Medicare. Think, too, about anticipated costs over time if your health declines.Consider as well what vision you have for how you want to spend your time in retirement, Wright suggested, like travel or hobbies. Then figure out the costs associated with those activities.Also if you’re someone who buys a new car every few years, put that on the list too.In terms of living expenses, do you plan to move to a lower-cost area when you retire?
“Do some reconnaissance first,” Minnium suggested, like visiting locations on your wish list to get a better feel of what things cost there.
2. Set up a more conservative portfolio
Unless you have a sizeable pension, your accumulated savings in a 401(k) or 403(b), IRAs and brokerage accounts are likely to be your biggest source of financial security, followed by Social Security.Your nest egg will be near its highest point as you approach retirement.
6 steps to avoid running out of money in retirementWhich is why you want to do all you can to protect it against major market downturns, which are inevitable. But the riskiest time for such a downturn is in the five years before you retire and the five years after because you will start drawing down from a portfolio that has not had a chance to recover, Minnium noted. So in the run-up to retirement, she suggests moving money away from stocks, and keeping a bigger portion in more stable investments, like bonds or cash. “Invest more conservatively during that time, with a smaller allocation to equities. You can start adding more equities again [once you’re several years into retirement.] It’s not a permanent decision,” she said.
3. Figure out how much in savings you’ll need to withdraw
The biggest psychological adjustment for everybody when they first retire is not having a steady paycheck anymore.”It feels like you’re taking away a security blanket,” Wright said.Another big adjustment is moving from an accumulation mindset — after all, you’ve been focused for decades on building up your savings — to a preservation mindset so that you don’t outlive your money.
I'm retired, how long will my savings last?To figure out how much you’ll need to draw from savings to help meet expenses, first figure out what fixed sources of income you’ll have coming in from pensions and Social Security benefits.(Consider, too, how your Social Security benefits will differ depending on when you first claim them — either early at age 62, at your full retirement age or at age 70, after which point your benefit will not increase further.)Then subtract that fixed income amount from your assumed monthly expenses to figure out how much you’ll need to draw from savings to fill the gap.
4. Strategize how to draw down your nest egg
The discussion about how much to withdraw from savings so that you don’t outlive your money often centers around withdrawal rates — is 4% a year feasible? What happens if I draw down 5%? But equally important is where you draw your money from and when.
How much do I need to save for retirement? That’s because you’ll likely have taxable sources such as a 401(k), and non-taxable sources like Roth IRAs, as well as market-dependent accounts (e.g. stocks and mutual funds) and non-market dependent income (e.g., pensions, annuities and cash).You also will have to take required minimum distributions from your traditional IRAs starting at age 72, whereas Roth IRAs do not have any such requirement. Your goals should be to minimize your tax bite and buffer yourself against any market downturn.”The key is not having to sell equities in a down market,” Minnium said. So, for instance, if your sources of non-market dependent income aren’t enough to fill the gap that your equity withdrawals provided, you might decide to use a home equity line of credit to tide you over, or tap the cash value of a life insurance policy, she suggested.
5. Get outside help creating a plan
Setting up a financial plan to retire within a decade can get complex.And it’s made more so by periodic changes to rules governing retirement vehicles, such as those in the SECURE Act of 2019 and its sister legislation currently under consideration called the Securing a Strong Retirement Act of 2021.
So even if you don’t want to pay someone else to manage your nest egg on an ongoing basis and charge you a percentage of your assets, you might invest a few hours to work out a roadmap with a fee-only certified financial planner who specializes in retirement issues. To find one, check the Garrett Planning Network and the XY Planning Network.
Source: edition.cnn.com