Preparing for a Retirement Transition
Preparing for retirement is like mountain climbing. As you scale your way to the peak, you hope to see a glorious view of retirement on the other side. But, just as with actual mountain climbing, you don’t get to revel in that view for long before it’s time to start your descent — actual retirement. That’s when many people run into trouble. Having a well thought out, comprehensive plan ensures your accumulated retirement savings will be able to support your retirement lifestyle. Without a comprehensive plan, that descent can get mighty treacherous. When creating such a plan, including these key components will be vital to the success of your retirement transition.
-Create an Income Plan
For most of our lives, we depend on that regular paycheck, so we can pay our bills on time. When you retire, the paycheck stops, but the bills continue. Social Security typically will cover only about 40% of pre-retirement income. As you create your retirement income plan, you need to answer these five questions:
How much money do you have?
How much do you need?
Will it last forever?
Are you taking too much risk?
Are you overpaying in taxes?
The key with income is to create strategies for your savings to cover the gap in income between what Social Security provides and your required monthly expenses. That’s where investments come in, your money should be divided into three categories: safety, income, and growth. The safety category is for those unexpected moments we all encounter. The income category provides the money to pay for your lifestyle and monthly bills. For example, you could use some of your retirement savings to purchase a fixed index annuity that would provide a steady income stream each month in addition to Social Security. Finally, the growth category is where you can be more aggressive with your investments in the market since you already have your safety and income categories accounted for
-Get a Handle on Your Taxes
Even in retirement you will pay taxes, but there’s no reason to pay more than you truly owe. Many retirees encounter problems with taxes owed because much of their savings is in tax-deferred accounts, such as traditional IRAs or 401(k) accounts. That means they paid no taxes on the income they contributed to the accounts each year — but they will pay taxes when they start withdrawing money in retirement.
One way to avert a potentially large tax blow to your savings in retirement is to open an Roth IRA now. Roth accounts grow tax-free, and you pay no taxes when you make withdrawals in retirement. You will pay taxes when you move your money from the tax-deferred account to the Roth. But it could be better to pay those taxes now, when tax rates are relatively low, rather than wait until later, when taxes could be increased.
-Prepare for Health Care Costs
At age 65, you are eligible for Medicare, but not all Medicare plans are the same, so you want to study your options carefully to make sure you choose a plan that fits your needs. What is covered? How much are the deductibles and copays? Are your doctors in network for the plan you are choosing? In addition, on the health care front, it’s a good idea to consider strategies for paying for long-term care. Among the options are long-term care insurance or a life insurance policy that can be converted into an income stream to help cover long-term care costs.
As you near retirement, it’s important to work with a financial professional who specializes in the retirement journey. Even if you already have an adviser who worked with you during the accumulation phase, that doesn’t mean they are right for the distribution phase that you are about to enter.