This post was last updated on January 15, 2021, to reflect all updated information and best serve your needs.
Are you looking forward to the day you retire? Many dream of retirement, counting down the days when they can leave the cubicle life behind. But, before you turn in your work badge, make sure your finances are in order first.
Not being prepared financially could mean having to get back to work or worse - running out of money. Going down the checklist below will ensure you’ve covered all the major issues you need to consider before you retire.
Checking all the boxes means you can actually enjoy your retirement without worrying about your finances.
Basic Retirement Checklist At Any Age
As you get closer to retirement, it’s time to start thinking about what that looks like for you and your spouse, if you have one. Having a plan will help you feel more secure - mentally and financially - as you take the next step in your life.
Within the last five to 10 years before you retire, it’s important to start thinking about retirement. Not just about traveling or playing golf but the day-to-day logistics of being retired. Will you downsize or stay in your current house? Do you want to volunteer and, if so, in what capacity? Will you and your spouse retire at the same time? What will you do every day with your time?
In addition to the lifestyle questions above, here are some financial considerations you should review before making the transition.
Review Your Retirement Income
One of the most important things you need to review is your retirement income. Talk to your company’s Human Resources department to get an idea of your benefits package, if you don’t already have all the information. Do you have a pension plan? Find out what your payout options are so you can decide when to start receiving it.
There may also be coordination strategies that can be applied between pension, social security or life insurance. Talk to a professional who can help you figure out what you may be missing.
Review all retirement accounts including 401k plans from your current and previous employers, traditional and Roth IRAs, SEP-IRAs, Solo 401k, pension plans from previous employers, and so on.
If you’re retiring early, congratulations! Keep in mind that social security benefits may be reduced if you earn more than $17,640 and are collecting benefits prior to your full retirement age or earning more than $46,920 in the year you reach full retirement age (as of 2019).
Social security benefits also will be reduced if you start collecting them prior to your full retirement age.
If you leave your employer after turning 55, you can access the money in your 401k penalty-free.
If your spouse will receive a government pension for which you did not pay FICA taxes, consider the impact of the Social Security Windfall Elimination Provisions or the Government Pension Offset. Also, think about social security claiming strategies to maximize your benefits.
Married previously and currently unmarried? If the marriage lasted 10 years and ended in divorce, you may be eligible for benefits under your ex-spouse’s record. If the marriage lasted nine months and ended due to your spouse passing away, you may be eligible for benefits under your deceased spouse’s records.
Determine Retirement Health Insurance Needs
Not figuring out your health insurance before retirement can cost you dearly. As you get older, you’ll need to ensure you have a plan in place to cover the increasing cost of taking care of your health.
If you are retiring before age 65, consider your health insurance needs. You are not eligible for Medicare until 65. However, you may be eligible for a Health Insurance Marketplace premium assistance tax credit.
Also, if your MAGI will exceed $85,000 for single filers and $170,000 for married filing jointly, you may be subject to Medicare IRMAA surcharges. Talk to a qualified financial advisorqualified financial advisor on how this can affect your retirement income.
Will you need to change your employer-sponsored health insurance upon turning 65 or upon retiring from your employer? If so, and you are under the age of 65, you may need to look to the Health Insurance Marketplace. If over age 65, you may need to sign up for Medicare.
Consider additional insurance coverage such as vision or dental. These policies will need to be purchased separately from your health insurance policy. If you are contributing to a Healthcare Savings Account (HSA), consider HSA and Medicare coordination issues.
Disabled workers may be eligible for certain benefits or have the ability to access benefits early.
This is also the time to review your life insurance needs to see if they have changed and make adjustments accordingly. In addition, consider how you will fund long-term care (LTC) and consider LTC insurance, self-insurance strategies, and assisted living communities.
If you do have LTC insurance, review it to ensure it still meets your needs.
Look At Assets And Debts
Your assets and debts are an important piece of the retirement puzzle. If you have stock options, grants, or restructured stock units, consider how they will impact your tax liability and your cash flow planning.
As you get closer to retirement and thus need to start drawing down the funds in your account, consider your risk tolerance. Think about how you may want to rebalance your retirement portfolio to account for this change.
Are you a business owner? You may need an exit strategy or a succession plan to ensure your business continues chugging along. If you’re considering closing down shop, put together a plan for how to do that and how to smoothly transition your customers.
If you have any loans on any employer retirement plans, you will need to plan for how to pay them back. Be mindful before rolling the balance into another plan.
For those with deferred compensation plans, look at coordination strategies between your pension, social security, or life insurance. If you have multiple accounts with similar tax treatment (multiple 401k or IRA accounts), consider consolidating them to reduce complications.
Do you plan to move from your current residence? This may impact your tax liability, cash flow planning, and your Medicare Advantage Plan if you move out of the network. It’s important to consider all angles before making a big change.
Plan For Taxes
While taxes are not a fun subject, they are an important consideration for retirement planning. Once you retire, you will no longer be earning a regular income from an employer. Instead, your income will come from a number of tax-advantaged accounts.
Setting up a good draw-down strategy can help you minimize the taxes you pay on your income and help you with qualifying for Health Insurance Marketplace tax credits. This is especially important if you plan to retire early.
If you expect your income to be lower in retirement, consider doing Roth IRA conversions in low-income tax years. If you anticipate having large Required Minimum Distributions, Roth conversions can help you reduce them.
You should also talk to a trusted financial advisor about state-specific tax issues that you may need to consider. For example, if your state has an estate tax liability, you should learn more about how that can affect your retirement plans.
Develop A Retirement Budget
Your budget in retirement will likely look very different from your budget today. Once you no longer have to commute or buy fancy clothes for work, you can expect those expenses to go down significantly.
On the other hand, you may want to increase your travel or spend more time on pricier hobbies such as golf. Make sure to account for these types of expenses into your retirement budget so you can enjoy them guilt-free.
Use your current spending as the base for your budget. Regular spending such as utility bills or food will likely not change too much so you can use those to estimate your expenses. Build a hypothetical budget that accounts for all changes and gives you sufficient cushion to do the things you enjoy.
Make sure to include inflation in your calculations, which can be between 3 to 4 percent per year. Compare your budget with your current spending for the past six months to check if you missed any big categories. Certain expenses such as your car insurance premiums are paid every six months and can easily be overlooked.
When creating your budget, calculate how much you can comfortably withdraw from your portfolio in retirement. Label certain categories as discretionary so you can cut back in those areas if the market takes a downturn and you need to cut back. This will give you peace of mind since you know you can stay flexible and adjust your spending as necessary.
Review Long-Term Plans
It’s important to consider both short-term and long-term plans when thinking about retirement. Hopefully, you already have your estate plan in order, including your will. If any of that needs to be updated, this is a good time to go over all documents.
For example, if your children are grown and out of the house, it may be time to update your will and remove any guardians you have named. In addition, you may want to change the beneficiaries for your retirement accounts, life insurance policies, and so on.
As you look at your estate plan, do a financial review. Do you expect your estate to exceed threshold exemptions? If so, consider implementing some strategies to plan for a possible federal estate tax liability.
For the charitably inclined, this is a good time to strategize how to do your planned giving so you can reduce your tax burden.
Talk To A Financial Advisor
If going through this checklist seems a little overwhelming, keep in mind that this is not meant to be accomplished in one day or even one week. Start your retirement planning well in advance before you actually plan to retire so you can devote enough time to the process.
Ideally, you should start thinking about retirement five to 10 years before the actual date. As you get closer, start going through some of the items on the checklist so you don’t have to do everything at once.
This way you will only need to do some quick adjustments before you actually make your formal retirement announcement. Make sure you coordinate with your spouse, if you have one, and that both of you are on the same page.
If you still feel overwhelmed by all of the information and planning that needs to take place, talk to a qualified financial advisor. They can help you figure out your priorities and put together a step-by-step plan to ensure you’re on track.
Having someone who is experienced with all the issues you need to consider before retirement will give you peace of mind. It will also ensure you don’t miss any big issues that can create problems once you’re already retired.
In addition, an advisor can help you understand the rules and regulations of your retirement accounts and prevent you from making costly mistakes. If you have multiple types of accounts, each one may have a different requirement for when you can draw down funds.
The Bottom Line
Preparing for retirement doesn’t need to be stressful. While there are a number of things to consider before you pull the trigger, if you plan in advance you can be well prepared. Follow the checklist outlined above so you don’t forget to address any important financial aspect.
Consider meeting with a qualified financial advisor who can help you review your retirement plans and point out any issues. Go over your projected income, retirement budget, and types of retirement accounts to solidify your retirement plan. This will help smooth the transition into your golden years. Best of luck on your journey!