While the thought of retiring may trigger excitement or trepidation, it also requires careful planning to ensure a smooth transition from paychecks from the workforce to retirement savings and Social Security. Retirement brings new challenges like managing your assets differently, adjusting your lifestyle, and ensuring your savings can support your retirement lifestyle for the next 30 years, given healthier lifestyles and medical advances helping millions live longer.
One important tool is a comprehensive pre-retirement checklist that can help ensure you enter this next phase of life confidently and with a realistic financial plan that can evolve with your circumstances.
At Brown|Miller, our team of Washington, DC CFP® professionals can guide you through retirement planning, helping you create a plan that enhances your life and reflects the legacy you want to leave behind for your loved ones. We understand that your goals and financial circumstances can change over time. That’s why our retirement plans are designed to be flexible, allowing for adjustments based on your future needs and current economic and market conditions. We strongly believe a one-size-fits-all plan does not fit everyone.
Here are a few pre-retirement planning tactics that will help you get started:
Read our latest Quick Guide: Washington DC Retirement and Wealth Transfer Strategies
1. Review Your Retirement Income Sources
One of the first steps is to assess all your sources of retirement income. This may include Social Security, pension plans, retirement accounts like 401(k)s and IRAs, taxable investments, other saving accounts, and any passive income streams from real estate or other types of alternative investments.
Projecting how much each source will provide on an annual basis helps you create a clear picture of your retirement income on a year-to-year basis. You also have to create a conservative estimate for your investment performance that offsets distributions and the erosive impact of inflation.
What you don’t want to do is set your lifestyle objectives first and then realize you may not have the necessary income to support the lifestyle you want after the retirement of both spouses.
2.Assess When is the Right Time to Begin Taking Social Security Benefits
Deciding when to begin receiving Social Security benefits is another important element of your pre-retirement planning process. If you live long enough, this can be a million dollar-plus source of retirement income.
The age at which you start receiving benefits can significantly impact your overall retirement income, particularly later in life. If you start benefits as early as age 62, your monthly payments will be lower than if you wait until full retirement age or delay until age 70, when initial benefit payments are at their maximum.
Understanding how Social Security fits into your broader retirement income strategy is crucial to determining the optimal time to start based on your unique circumstances, including health, financial needs, expected longevity, and other sources of income.
This decision is an important checklist item because it influences the long-term sustainability of your retirement plan.
3. Plan for Taxes
Something many people take for granted and don’t include in their pre-retirement checklist is tax planning. Once you stop working, your tax situation may change. Many assume they’ll be in a lower tax bracket during retirement, but that’s not always the case.
Required Minimum Distributions (RMDs) from retirement accounts, Social Security benefits, and other income sources can push you into a higher tax bracket than expected.
Without careful planning, you may find yourself paying more in taxes than you anticipated, which can reduce the net income you rely on to support your lifestyle in retirement.
RMDs, in particular, can create a few tax-related surprises for you. For example, once you reach age 73, the IRS requires you to withdraw a set amount from your traditional retirement accounts each year, even if you don’t need the funds. Combined with other sources of income, such as pensions, rental properties, or investments, these distributions can elevate your current tax bracket.
By planning with the help of a Washington, DC, financial advisor, you can develop tax efficient strategies to minimize the impact of RMDs and avoid unintended tax increases during retirement.
4. Create a Post-Retirement Budget
Another component of your pre-retirement checklist should be developing a realistic budget for your post-retirement lifestyle. This should include your primary expenses (housing, food, transportation, healthcare) and discretionary expenses (travel, hobbies, activities). Compare your budget with your expected retirement income to ensure you’ll have enough to cover your costs comfortably. Make room for unexpected expenses, such as medical expenses and home repairs.
5. Assess Healthcare Costs
Healthcare is often one of the largest expenses you may experience in retirement, so it’s important to plan. Research Medicare options and any supplemental insurance you may need. If you plan to retire before you’re eligible for Medicare, make sure you account for health insurance premiums until you can enroll in this program.
Talk with your financial advisor to see if long-term care insurance options or other strategies can help offset potential medical expenses during retirement.
6. Maximize Retirement Contributions
As you near retirement, be sure you are taking full advantage of catch-up contributions if you’re over 50 and still working. This allows you to contribute more to your 401(k) or IRA, helping to boost your retirement savings in the few remaining years before you retire.
Review contribution limits and take advantage of any employer matching programs.
7. Pay Off Debt
Entering retirement debt-free or with minimal debt can help relieve financial pressure and free up more of your income for your cost of living. Focus on paying down high interest debt, like credit cards or personal loans, and work towards eliminating larger debts—for example, a mortgage payment on a second home.
Prioritize debt with the highest interest rates first and consider consolidating or refinancing for better rates whenever possible.
8. Create a Retirement Withdrawal Strategy
How and when you withdraw from your retirement accounts can significantly impact your overall financial health and taxes during retirement. Develop a plan for tax-efficient withdrawals, whether using taxable accounts first, deferring Social Security, or taking required minimum distributions (RMDs).
9. Plan for Inflation
Many retirees do not include inflation in their retirement plans, but it can significantly erode the purchasing power of their savings over time. As prices rise, the money they’ve saved may not stretch as far as they originally expected.
Without accounting for inflation, your expenses for necessities like healthcare, housing, food, and utilities can increase significantly, potentially straining your retirement budget in your latter years.
Including inflation in your pre-retirement planning can create a more realistic strategy for long-term financial stability. Adjusting your investment portfolio to include assets typically hedging against inflation, such as commodities or real estate, can help protect your purchasing power.
Additionally, including future inflation estimates when budgeting for retirement allows you to plan for the rising cost of living, ensuring you won’t outlive your savings or be forced to make difficult lifestyle adjustments down the road.
10.Review Your Investment Strategy
As you approach retirement, your investment strategy may shift from growth-focused to more income-focused. This doesn’t mean you should eliminate all types of investment risk but rather adjust your asset allocation to balance the need for income with the need for capital preservation.
Ideally, your plan will help avoid spending principal that produces the income you depend on to pay the bills.
Rebalancing your portfolio before and after retirement can help reduce risk exposure while maintaining the possibility for improved returns. A Brown|Miller financial advisor can advise you on the best asset allocations.
11.Update Your Estate Plan
Estate planning is an important part of retirement preparation. Review your will, beneficiary designations, power of attorney, and any trusts already in place. Ensuring these documents are up to date can help your family avoid probate and other legal complications after you are gone.
Regularly reviewing your estate plan, especially after major life changes, ensures your wishes will be fulfilled as you and your spouse intended.
Connect with Brown|Miller today to discuss your pre-retirement planning needs.
