5-Years Out from Retirement Begin to Formulate Your Plan. Do you expect to enjoy the same income you have now after retirement so as to support the lifestyle you've become accustomed to? Are your savings adequate to do this, or will you continue to work to achieve that goal? Evaluate not only your expenses but your expectations of how you want to live. Expenses can be less at the outstart with careful planning, but inflation and unexpected costs must also be planned for.
Many financial web sites¹ offer excellent calculators that can help you determine your optimal retirement date.
- Decide the age that you would like to retire at? Are you working toward an early retirement or do you plan to work until 66, 70 or when you can begin social security payments...early or otherwise?
- A vital decision..."what is your plan after retirement? Take the time to make a realistic assessment of what you can or will do versus what you would like to do. Then begin preparation prior to retirement. The majority of people don't sit around. However if a second career, part-time work, and hobbies and leisure activities are important then you may need to limit volunteer work to allow time for those things.
- Assess your risks. A realistic retirement plan must take into consideration the financial risks that can or will impact you during retirement.
1. rising health care costs
2. inflation and it's impact on the purchasing power of today's dollars 5, 10 or 20 years down the road. Factor in a reasonable annual inflation rate (3% to 5%) into retirement savings calculations
3. an overly conservative asset allocation could cause the risk of your investments not keeping up with inflation
4. a too aggressive withdrawal rate that will exhaust your assets too quickly
5. the probability of a longer lifespan and the need of income to cover that probability
6. possibility of care for aging parents
7. taxes - local, state, federal income tax and personal property. Check history of increases...don't assume normal inflation
8. the retirement income of a spouse.
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- Review your savings strategy. Most investment web sites provide estimators where you can enter your income, savings and expenses and they then calculate the number of years you can expect to live off your income and savings. Whereas some people can live happily if not comfortably on half of their pre-retirement income, others require 100% or more to maintain, or even enhance their lifestyles.
- If eligible use the catch-up provisions to catch up on lack of prior savings. Increase your savings by investing the maximum into your 401k and 403(b) plan prior to retirement. Eligible workers aged 50 and older, when their plan allows; may contribute an additional $5,500 to their employee retirement plan over and above the allowed annual limit. IRAs also have a catch-up provision where older workers may contribute an additional $1000.
- Special Service Credit - If you are eligible and plan to purchase or transfer any eligible service credit, do so as soon as possible, as the service is only creditable to you if it is purchased prior to retirement or death.
3 to 5-Years Out Start Gathering and Organizing Information. Begin to familiarize yourself with what the process will be to transition into retirement. Start looking at a budget, what your asset allocation strategy is now and what it should be after retirement, and plan on what your withdrawal strategy will be during retirement. Determine if your ideals are achievable and if doubtful make the changes now that will help assure your goals.
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- Research the steps you need to take and seek out resources that are available that can guide you and those that offer support. Your employer will be one valuable resource for information, but also meet with other people who can help you plan a successful strategy...a retirement planner, your banker or investment firm, a tax attorney and impacted family members. It is also helpful to attend retirement seminars and to find other outlets of information.
- Review your benefits. Understand which benefits continue into retirement from your employer and if and when they will or could change. Consult with your employer to get answers to your questions regarding benefits, the best timing of your retirement and at what point final decisions must be made. Be sure to factor in your spouse and/or dependent's benefits as well when applicable as these can have a significant bearing on your plans.
- Obtain information on how Medicare and any employer-sponsored health benefits will provide coverage and if there is any co-ordination of those benefits in retirement. If your employer provided health benefits do not extend into retirement you will need to fund for this. One study shows that couples who retired in 2004 at age 65 could need $175,000 in savings to fund out-of-pocket medical expenses during retirement. If you will need health care coverage between your retirement date and when you are eligible for Medicare (generally age 65), find out the cost of coverage under COBRA and investigate other individual health insurance programs. If you belong to an Association check to see if they offer health insurance and if you qualify for coverage. If you are already receiving Social Security benefits, when you turn 65 your Medicare Hospital Benefits will begin automatically. If you are not receiving Social Security benefits, you need to sign up for Medicare close to your 65th birthday, even if you will not be retired by that time.
- Contact Social Security by mail, a phone call: 1-800-772-1213, a visit or go to http://www.ssa.gov and learn how Social Security works. Request a benefits statement to determine the optimal age to begin taking payments, and then learn what steps you need to take to activate your payments either at retirement, or at a later date if you decide to delay the age at which you collect in order to increase your monthly payment. If you decide to retire prior to age 62, order a revised statement with your planned retirement age so that you know what changes to expect in your payment.
- Get borrowing out of the way. Once you have retired, banks and other lending institutions may hesitate in lending you money. Your income may not be as high, or if your spouse is also retired or unemployed, this could hamper your eligibility or the amount you can borrow. You may have planned carefully and have your home paid off, however you may want to set up a home equity line of credit so that you will have extra cash in the event of an emergency. And if interest rates are down, this may be an opportune time to refinance for a shorter-term mortgage at a fixed rate.
1 to 3-Years Prior to Retirement...Create Your Plan. Ask questions and do your research. Work with your employer to clarify the details of your benefits and the decisions that you need to make, including your payout options. Keep in mind that some decisions are irrevocable, and cannot be changed once you have retired.
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- Plan out your retirement budget. Put down on paper a detailed plan of your estimated expenses in retirement. Unpaid loans, mortgage, medical, travel plans and your normal day to day expense. Make the effort to eliminate debt and pay off obligations. When developing a budget be certain to factor in inflation. In doing this exercise you may discover that the lifestyle you hope for will be more costly than you assumed. As a result you may need to either postpone your retirement or consider working part-time in order to meet your expectations.
- What will be your sources of income? Factor in pensions, Social Security benefits, 401k's, IRAs, any other retirement plans, non-pension savings (i.e. mutual funds, certificates of deposit, bank accounts, money markets, etc.), and any inheritance. Determine how much you need to withdraw from your investment portfolio annually, using as conservative a rate as possible, particularly in the early years of retirement. Withdrawal rates above 4 percent begin to increase the likelihood that retirees will deplete their assets prematurely. Determine when you can withdraw money from your retirement accounts without penalty (most individuals can withdraw from tax-deferred savings plans without penalty at age 59 1/2...you may be able to withdraw earlier). You may also want to consider whether an annuity may be an option for you to supplement your income.
An annuity is a series of equal payments over equal intervals of time. A life annuity guarantees payments for the lifetime of one or more individuals that is larger than what the annuitant would receive by putting money out at simple interest. A group annuity differs from an individual annuity in that the annuity payments are based upon the assumed length of lives of members of a given group. Payment size is determined on:
1. the assumed interest rate
2. the life expectancy of the individual(s) making up the group
3. the duration of the period for which payments are guaranteed, the length of time prior to the start of payments, and the number of lives on which the payments are continued. An example: payments guaranteed for 20 years to a 65 year old annuitant will be substantially smaller than if they were guaranteed only for the remainder of that person's life.
- Asset allocation. Check the asset allocation of all savings and investment accounts you expect to use to generate retirement income. Workers nearing retirement who are still investing in a 401k, 403(b) or IRA may want to consider maintaining a diversified portfolio with a mix of investments. A balanced portfolio that includes a significant portion of equities can help promote potential future growth, and protect against inflation, rising health care costs and longer life spans. Consider a Lifecycle Fund can also make age-appropriate investing easier by using a pre-determined asset allocation strategy that becomes more conservative as the fund's target retirement date approaches.
Lifecycle Fund - definition: A highly diversified mutual fund designed to remain appropriate for investors in terms of risk throughout a variety of life circumstances. Accordingly, lifecycle funds offer different risk profiles that investors can shift invested funds between in order to manage risk effectively as they move from youth to middle age to retirement. Although lifecycle funds all share the common goal of first growing and then later preserving principal, they can contain any mix of stocks, bonds, and cash.
- If your employer retirement plan includes a cost of living adjustment you may want to coordinate your date of retirement to take advantage of the earliest date this could take effect.
- When applicable...decide how you will invest the proceeds from your company retirement. If you or your spouse are currently in a 401(k) type plan you may be able to roll it over into your private retirement plan (i.e. IRA). Don't cash it in and spend it! You will need the income during your retirement years. To hedge against inflation, hold some investments that will provide growth.
- You may want to delay your retirement date if you will become eligible for a longevity payment or if there are plans to offer an early retirement buy-out to eligible employees.
- If you are enrolled in a VEBA (Voluntary Employee Beneficiary Association). HRA (Health Reimbursement Account), or HSA (Health Savings Account) medical expense reimbursement program, check to see how your account will be affected by your retirement. Additionally make sure that you use up any money you've been able to set aside for medical or other approved expenses in an employee Cafeteria Plan.
- Consider purchasing long-term care insurance. Some actuarial studies show that there is a 50% chance that today's 60 year-old couples could live well into their 90s. One can expect that health care costs will continue to rise and this along with inadequate health care coverage in place can lead to a devasting impact on assets and/or retirement income.
- Review your estate planning.
- Draw up or update wills or trusts. Do you plan to tranfer any of your assets to family members or other beneficiaries (consider a gifting program) and if so, will you do this during your lifetime or after?
- Consider setting up trusts for children, grandchildren, charities or others if appropriate.
- Consider a medical Power of Attorney to have someone you trust make health care decisions for you if you are unable to do so.
- Consider having a limited financial Power of Attorney on file that would take effect if something happens and you are unable to sign financial documents.
- A living will can let your loved ones carry out your wishes as to how you would want to be treated if something happens to you. You may also want to set aside dollars for funeral expenses and have instructions as to your wishes in this regard should you die unexpectedly.
- And...be aware of how your property passes to others under the laws of the state you reside in.
1Year to 4-Months from Retirement Start Putting Your Plan in Motion. Take the check list of all the sources of retirement income you have identified. It's time to contact those sources and where appropriate or timely to do so begin to consolidate them into fewer accounts. Most accounts also allow automatic systematic withdrawals right into a savings or checking account. If you are eligible and plan to start taking your Social Security benefit have your check direct deposited in a savings or checking account as well. Look into automatic bill payment of internet service, insurance premiums, mortgage payments, etc. and use a service that allows you to view all accounts from one location.
- When you've decided on your date, notify your employer in advance and in writing. Make certain you have checked with your Human Relations or Personnel department regarding how much notice you must give them and contact the
Office of Retirement Services
(State of Michigan).
- Schedule major medical and dental work to be done prior to retirement. There may be a waiting period for pre-existing conditions if you switch companies.
- If eligible and planning to start Social Security payments contact the U.S. Social Security Administration to obtain the necessary paperwork to file for your payments and start the income flow. You need to contact them and complete paperwork at least 3 months prior to your retirement date or the date you wish to start receiving payments.
- Work with your employer to finalize all retirement account payout options and make arrangements for payments to begin according to your income plan.
- Ask your employer how any unused leave time will be paid and what options are available.
- Consider your spouse and dependents if applicable. If you die, will there be enough income to meet their needs and where will it come from? What options are available to protect income for them?
- Re-evaluate your life insurance needs in comparison to your coverage and consider increasing employer sponsored life insurance prior to retirement and also check on the conversion rights of any employer paid life insurance. If conversion is available and health or other circumstances make the purchase of individual life insurance cost prohibitive or you are now ineligible for individually purchased life insurance a conversion option can be an important advantage.
- Contact your auto insurance carrier. If you will no longer be driving to work you may be eligible for a reduction in your auto insurance premium.
- Build your retirement "paycheck." Finalize what your withdrawal strategy will be and how much income will be drawn down from assets each month to cover your expenses. Decide which sources you will withdraw from first for expenses. For most individuals this will be from taxable accounts first so as to keep any tax-deferred accounts growing for as long as possible. There are tools online as well as tax consultants who can help you build a tax-advantaged plan that will best suit your circumstances.
- If income will drop at retirement, decrease discretionary expenses as necessary.
- Make certain your health care coverage is in place. Work with your employer to move from your current plan into what if any retiree health benefits are provided. If necessary activate COBRA or supplemental coverage you will need until you qualify for Medicare. Contact The Centers for Medicare & Medicaid Services (CMS) (www.medicare.gov) to activate your Medicare coverage as soon as you are eligible.
- If you plan to work after retirement make certain it will not impact your pension and stay informed about the Social Security earnings limits and the benefit offset that occurs when you exceed those limits.
- Make lists. Let a trusted family member or friend know where they can find this information.
List all your key contacts (names, addresses & phone #'s)
· Beneficiaries (include their social security numbers)
· Financial advisor
· Compile a list of account numbers you hold
· Keep a record of where a copy of your will, financial information and life insurance policies can be found
DO IT! Make the change...out of the workplace and into the next stage of your life, well-prepared and with the knowledge that you've taken important steps to ensure a more secure retirement.
Disclosure: MEA Financial Services/Paradigm Equities, Inc. does not give tax or legal advice. The comments regarding the law and tax treatment simply reflect our understanding of current interpretations of such laws. Since laws are always subject to interpretation and possible changes, we recommend that you seek the counsel of an attorney, accountant or other qualified tax advisor regarding these matters as it applies to your particular situation.