As Antoine de Saint-Exupéry succinctly paraphrased, “A goal without a plan is just a wish.” If your goal is to retire in five years (or less), be sure that your retirement is not simply a wish by starting with these five steps:
1. If you haven’t done so already, meet with a financial planner to see if you are on pace to successfully retire in five years. As part of the financial planning process, review your spending patterns and categorize which expenses will continue into retirement, which expenses will drop off, and new expenses that will begin in retirement. If you are planning to retire before Medicare eligible age (65), be sure to include private health insurance premiums into your budget.
Keep in mind that Medicare typically does not cover long-term care costs. Therefore, begin developing a plan to cover future long-term care costs. If your plan does not include insurance, be sure to incorporate the future inflated cost of self-funding.
2. Developing a retirement portfolio transition plan is an important element of your portfolio design given the potential of a market downturn. The fundamental steps of the plan focus on providing enough liquidity to maintain your standard of living until the market has an opportunity to recover, thereby preventing you from being forced to sell remaining invested assets during a down market. We recommend that you establish a retirement portfolio transition plan approximately three years before dependence on your portfolio for income.
3. Review your Social Security retirement benefit statement online at www.ssa.gov for accuracy and your potential future benefits. Be sure to note that the calculation assumes your previous year’s earnings continue until your normal retirement age. If you plan to retire before your Social Security normal retirement age, you will want to be sure to recalculate your estimated benefits.
4. Often we find that people are not adequately aware of the taxes they will face during retirement. Although you may not be paying FICA taxes anymore, you will likely still pay Federal and State taxes on IRA and 401(k) distributions, part of Social Security benefits, pension income and possibly capital gains on brokerage accounts.
One form of tax planning is to take advantage of the 0% long-term capital gains rate in the 10% and 15% marginal tax brackets. This can be helpful during years of low taxable income if you plan accordingly. Another strategy in years of low taxable income is considering Roth conversions. Be sure to review any tax strategies with your tax accountant.
5. You know what you are retiring from, but what are you retiring to? Retiring can be just as much an emotional transition as it is a financial transition. Often times people are anxious to retire simply to leave the stressful work force behind. However, we encourage you to begin envisioning what your weeks will look like in retirement. How are you filling your days? How will you find mental stimulation and social interaction? Where do you see yourself living and what kind of travel are you picturing? Exploring these ideas now will help make for a smooth transition into retirement.
We would be honored to help you begin your retirement planning. Call Sharkey, Howes & Javer at 303-639-5100 to schedule a complimentary meeting.