Retirement Readiness Part 2: Preparing for the Transition

In our Retirement Readiness Part 1, we addressed a number of common financial areas you should address in order to make the most of your pre-retirement period and  to become “retirement ready.”  You may recall that we addressed the following areas:

  • Assessing your current and possible future spending levels.

  • Considering your Social Security options and optimizing your choices.

  • Making strategic pension decisions that are consistent with your personal circumstances and preferences.

  • Strengthening your personal balance sheet by reducing debt and super charging your retirement savings.

In this article, we would like to continue on our retirement readiness journey by examining a few more important areas.

How Much Money Will You Need To Cover Retirement?

How much money will you need to secure a comfortable retirement? In other words, what is your “number?”

Answering this seemingly simple question is actually quite complex.  There are many unknown variables.  Here are a few:

1. What will be your primary sources of income?

2. What will investment returns be during your retirement period?

3. Is your portfolio allocated in a manner that will achieve acceptable returns?

4. What  are your annual expenses?

5. Will inflation have a meaningful impact on living expenses?

6. Will you have average medical and long term care expenses?

7. How long will you live?

To make confident and informed financial decisions leading up to retirement, you need to actually “simulate” your retirement through retirement planning/scenario planning.

The purpose of going through the retirement planning process (Beacon calls this a Retirement Feasibility or Portfolio Sustainability Analysis) is to obtain a realistic idea of how long your money will last and also identify areas that could increase your probability of a successful retirement.

The sooner you go through this process with a capable professional advisor, the more time you will have to make adjustments to your plan if necessary.  Common areas we scrutinize for our clients include:

  • Which accounts are you saving towards and is this the most effective choice given your current (and future expected) tax rates and spending needs?

  • Should you save more, or should you be contributing to different “buckets?”

  • Is your portfolio allocated in a manner that will maximize returns, while limiting investment risk?

  • Should you consider long term care insurance? If so, what type of policy is best and where should you go to obtain cost-effective coverage?

  • How should you approach Social Security and any available pensions?

Managing Taxes in Retirement

As you think about when to tap your various accounts for retirement income, remember to consider the current (and possible future) tax impact of your strategy.

For many, the impact of taxes should drive their distribution decisions. We make it our goal to help our clients manage and minimize income taxes when possible. Here are a few questions to analyze:

  1. Should you consider withdrawing money from your taxable accounts first to allow your 401(k) plans and IRAs more time to benefit from tax-deferred growth?

  2. Should you execute Roth Conversions to take advantage of low tax bracket years early in retirement (before taking Social Security)?

  3. Is it appropriate to delay Social Security, in order to reduce the tax impact of accepting this benefit?

  4. If leaving a financial legacy is a goal, is it important to consider how future income (and estate) taxes will impact your heirs?

  5. What impact will required minimum distributions (at age 70 1/2) from IRAs and qualified plans have on your future tax rates?

  6. Retirement income planning to effectively manage income taxes can be extremely complicated. Furthermore, tax laws and personal circumstances change just about every year. 

Therefore, for most, we recommend annual tax planning to decide exactly which retirement account is best for withdrawals to cover your personal expenses in retirement. For more information, see our article, “Considerations for Retirees:  Which Account?”.

Health Care Expenses

In 2015, the Employee Benefit Research Institute reported that the average 65-year-old married couple would need $213,000 in savings to have at least a 75% chance of meeting their insurance premiums and out-of-pocket health-care costs in retirement. This figure illustrates why health care should get special attention as you plan the transition to retirement. See our article, “Projecting the Cost of Health Care In Retirement” to learn more about how we make projections in this area.

As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although Medicare will cover a portion of your costs, you’ll still have deductibles, co-payments, and coinsurance.

To help pay for these costs, most choose to purchase a Medicare Supplemental insurance (Medigap) policy.

These standardized policies are sold by private health insurers and are regulated by both state and federal law. These plans cover certain specified services, but offer varying combinations of coverage. Some cover all or part of your Medicare deductibles, co-payments, or coinsurance costs.

There are many health-related expenses that Medicare and Medicare supplement policies will not cover. 

The most significant of which could be the cost of assisted living and nursing care.  These long-term care costs can be extremely expensive and vary substantially depending on where you live. For this reason, people often consider buying long-term care insurance.  While the cost of long term care insurance can also represent a hurdle, there are ways to control the costs by limiting certain policy features—like the elimination period.

Long term care insurance can provide an especially valuable tax-free benefit to those whereby the majority of their invested assets are held in (taxable) qualified plans like 401(k) and IRAs.

For more information on when you need to consider buying long-term care insurance, see the article, “At What Age Should I Obtain Long Term Care Insurance?”.

Ease the Transition

These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier.

Most people also need to think about how they will spend their time in retirement. The happiest retirees are those that fill their days doing the things that they have postponed for years: golf, travel, volunteering, visiting family, and so forth.

Beacon strives to help our clients in the years leading up to retirement to be prepared for the years to come. Let us help you develop your retirement plan today!