Financial Planning

4 Must-Dos Before Retirement

I've seen too many people get too late a start on these four essential retirement checklist items.

There is a laundry list of financial items you should tackle before you retire. After meeting with several hundred people who have recently retired, or are about to, I have concluded that the vast majority of people are not overthinking it. In fact, I met with two people last week who told me they had just retired and were now ready to plan. Try to avoid that sequence.

To help prospective retirees prepare for this major change in their lives, I have compiled a list of four essential steps to take before that paycheck stops coming.

1. Brainstorm and experiment with what’s next.

When I ask recent retirees how it’s going, I tend to get love/hate responses. Those who spent the most time planning for the non-financial components are getting the most out of it. Those who drop from 50 hours/week to zero struggle to find a rhythm and can suffer without proper structure.

If you’re wondering where to start, ask yourself this question: “If I went to the doctor today and he told me that I was going to die tomorrow, what goals went unfulfilled and what did I miss?” George Kinder, who is known as the father of financial life planning, has written books on putting together your life plan that may serve as a good starting point. These “bucket list” items can be the goals you work toward in retirement. Odds are, these are things you have thought about your whole life. It’s time to put them down on paper — and then cross them off as you make progress.

If you’re married, it is critical that these conversations happen together, preferably before retirement. Retirement can look totally different even for those who have spent a lifetime together. Focus on location and lifestyle. You must come to an agreement about where you’ll call your home base even though it doesn’t have to be permanent. For lifestyle, start with overlapping bucket list items. The first few years of retirement are referred to as the “go-go” (followed by “slow-go” and “no-go”) years. This is the time when you should be checking the boxes on all the things you weren’t able to do during your working years. Who knows, maybe you’ll find a new passion.

2. Figure out expenses — now and in the future.

Your location and lifestyle dictate your expenses now and in the future. They often are the driver of your financial success or failure in retirement. If you’re getting close to retirement and don’t already track your expenses, it’s time to start. Technology has made this task (but not the monthly amount) much easier to stomach through websites like Mint.com.

Your expenses will change in retirement, and it’s a mistake to use a textbook ratio to estimate your monthly outlay. Therefore, there should be two columns: one for expenses now and the other for expenses in retirement. The second column will be an educated guess. Travel, entertainment, gifts and health care expenses increase for many retirees. Transportation, clothing and food may decrease when you’re not in the office every day. Don’t assume that you’ll spend less in retirement than you do today.

Those who are really on top of their spending plans will add two more columns to project what each surviving spouse would spend if left alone. It’s a reality that will have to be faced at some point.

3. Increase your cash in the bank.

Your paycheck is about to vanish. That is usually jarring. Having a little extra in the bank will provide much-needed emotional security as well as help to reduce what is called sequence risk. In its simplest form, sequence risk is the risk that you will experience negative returns early in retirement as you are starting to spend your savings. If you lose 37% (as the S&P 500 did in 2008) in year one and withdraw an additional 5%, it’s going to be tough to overcome that 43% decrease.

Having extra cash in the bank will allow you to sit out the downturn and wait for things to rebound. In addition, having this cash may allow you to defer retirement account distributions, which will help keep your taxes low for a certain period of time, thus providing a good opportunity to consider Roth conversions. (I know your bank is paying you peanuts. It’s still worth it.)

4. Pay someone to put together a plan.

Most of the financial questions you’ve been asking yourself can be answered through a financial plan. Those questions include the most common: Do I have enough money to call it quits? If you’re a do-it-yourselfer, odds are you’ve been playing with the numbers on an Excel spreadsheet. If so, it’s worthwhile to pay someone for a second opinion. Excel often cannot account for the volatility and somewhat random sequence of market returns.

A full financial plan, if done properly, will go far beyond this. It should be the intersection of your cash flow, insurance, investments, retirement, tax and estate planning. That financial planner should be able to identify any glaring gaps in your plan as well as put you on the right track. If you’re going to run out of money, do you want to know now or 20 years from now?

Account owners should consider the tax ramifications, age and income restrictions in regards to executing a Roth conversion. The converted amount is generally subject to income taxation.

About the Author

Evan T. Beach, CFP®, AWMA®

Wealth Manager, Campbell Wealth Management

Evan Beach is a Certified Financial Planner™ professional and an Accredited Wealth Management Adviser. His knowledge is concentrated on the issues that arise in retirement and how to plan for them. Beach teaches retirement planning courses at several local universities and continuing education courses to CPAs. He has been quoted in and published by Yahoo Finance, CNBC, Credit.com, Fox Business, Bloomberg, and U.S. News and World Report, among others.

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