There’s a lot to consider as you prepare for retirement, so it’s wise to begin planning well ahead of time. The checklists below are designed to help you stay on track for the retirement you envision.
Five years to retirement:
Set your target date.
Envision your retirement.
Calculate your number.
Position yourself for a better retirement.
Consider purchasing long-term care insurance, if you haven’t already.
Pay off outstanding debt.
Three years to retirement:
Review your retirement benefits, including social security.
Review your retirement health care benefits and costs.
Review and adjust your retirement asset allocation.
Review your life insurance coverage.
Formulate a retirement lifestyle budget.
One year to retirement:
Record important dates and deadlines.
Contact the Social Security Administration.
Contact your employer.
Contact prior employer retirement plans.
Test-drive your retirement budget.
Consolidate your retirement accounts.
Transition your health care coverage.
Calculate your retirement income paycheck.
Determine your tax withholding or quarterly tax payment.
Adjust your budget.
Five years to retirement
Set your target date. Before making any plan, it’s important to have a clear end goal in mind. Setting a target retirement date will help you create a timeline and guideposts against which you can measure your progress. This doesn’t mean that the date is set in stone, however. In fact, many people prefer a “phased retirement,” which allows you to transition from full-time work to reduced hours. Before considering a phased approach, talk to your employer about how reduced hours will affect your pension, health insurance, and other employee benefits.
Envision your retirement. In order to determine when you can afford to retire, you need to consider what you want to do in retirement. When envisioning your retirement lifestyle, be as realistic as possible. What interests do you want to explore that you may not have had time for while you were working? What additional expenses might you incur? Do you want to start a business, travel, relocate, or help fund your grandchildren’s education? A clear retirement vision will help us understand where your accounts should be as you move through your pre- and post-retirement years.
Calculate your number. Once you know when you want to retire and what your life will look like, you can better estimate the amount of retirement savings you’ll need to support your lifestyle. When calculating your number, it’s also important to consider the financial risks you may face in retirement. Here are a few factors to keep in mind:
Expect to live longer than your parents. As life expectancy for many people stretches into the 90s and older, retirement assets must last longer.
Inflation will reduce your spending power over time. Plus, some costs, such as medical care, have historically increased faster than the Consumer Price Index.
An overly conservative portfolio can be just as risky as an overly aggressive one. If your portfolio grows at a rate slower than inflation, you could eventually have to dip into your principal.
Keep your withdrawal rate under 5 percent of your retirement investments. Conservative withdrawal rates can decrease your risk of running out of money.
Medicare won’t cover all of your health care expenses. A 2016 survey by Fidelity Investments found that a 65-year-old couple without employer-provided health insurance will need approximately $260,000 to cover their costs for medical and dental care, long-term care, and over-the-counter medications.
We may use sophisticated software to calculate the amount of retirement savings you’ll need and to test that number against various hypothetical scenarios. Although it’s impossible to predict the future, this analysis can provide a range of possible retirement account withdrawal options that your portfolio should be able to sustain over time.
Position yourself for a better retirement. Now is the time to eliminate the gap between your current retirement resources and your ideal amount of savings. Increase your retirement savings by taking advantage of the higher contribution limits for those age 50 and older. You can contribute an additional $6,000 per year to a 401(k) and an extra $1,000 per year to a traditional or Roth IRA. You may need to supplement your savings with other investments, such as brokerage accounts, annuities, and bank savings vehicles.
Consider purchasing long-term care insurance, if you haven’t already. People today are living longer but not necessarily in the best of health. Many individuals will require long-term care at some point in their lives. Medicare, Medicare Supplement Insurance plans, and retiree medical insurance pay very little, if any, of the costs for this type of care. According to Genworth’s 2016 Cost of Care Survey, the price tag for a long-term care event can range from $45,760 for a year of at-home care to $92,378 per year for nursing home care. Given those costs, it makes sense to devise a strategy to help manage the long-term care risk.
Pay off outstanding debt. Interest payments can have a draining effect on your retirement income. If possible, consider paying off your long- and short-term debt, especially loans against your 401(k) account. Loans from your 401(k) that are not paid off shortly after you leave your employer will be taxed as a distribution from your retirement plan.
Three years to retirement
Review your retirement benefits, including social security. Determine your optimal age for taking pension payments. Under federal law, pension plans automatically pay out as an annuity over your lifetime, with a survivor benefit for your spouse. But you may have other options that better fit your financial needs. It may even make sense to defer your annuity in order to increase your benefits. The same is true for social security. Although you can begin taking social security benefits as early as age 62, the benefits are reduced if you apply before full retirement age (age 65 to 67, depending on the year you were born). You can substantially increase your benefits by delaying them until age 70.
Profit-sharing and 401(k) plans typically do not offer annuities. You can keep the account with your former employer, but the investment and distribution options may be limited. Compare your employer’s plan with IRAs, which usually offer a broader range of investment choices and allow you to consolidate all of your prior employer plans into one.
Also, ask your employer about other benefits that may continue into retirement, such as life insurance, medical, vision, and dental benefits. Certain benefits are contingent upon the number of years you’ve worked for the company, so you may have to adjust your target retirement date in order to qualify.
Review your retirement health care benefits and costs. Many employees mistakenly believe that their employers will continue to provide health insurance after they retire. Even among employers that currently offer retiree coverage, many are reporting that it will not be available to new retirees or that the retiree’s share of the premium cost will be increased. If your employer does provide retiree health insurance as a benefit available to you after age 65, you need to determine if your coverage will replace or supplement Medicare.
Medicare serves as the primary health insurance policy for most retirees, but it doesn’t cover everything. A Medigap policy is designed to pay for Medicare co-pays, co-insurance, and deductibles. Also known as Medicare Supplement Insurance, it may be part of your employer-provided coverage. If not, individual Medigap policies are available. It pays to shop around, as you have a choice of several different standardized benefit packages with varying prices and options. You should buy your Medigap policy when you enroll in Medicare Part B to avoid late enrollment penalties and denial because of poor health. Also, be sure to take into account the cost of Medicare Part D prescription drug coverage.
Generally, you and your spouse are not eligible for Medicare until each of you has reached age 65 or qualifies as disabled. If you retire before age 65, you and your dependents may be eligible for continued employer benefits under COBRA at an unsubsidized cost. The number of months you can retain COBRA coverage depends on your state. Your employer will be able to provide you with more information about COBRA benefits.