Six Financial Actions to Take the Year Before Retirement

Having your income, health care and tax plans in place before you exit the day job can make it more likely that you'll have a happy retirement.

A notebook with the words Action Plan at the top sits on a wooden tabletop with a cup of coffee and a calculator.
(Image credit: Getty Images)

Meet Steve. He is a partner with a big law firm in Washington, D.C. He is facing a mandatory retirement in just under a year, at age 65. Unlike so many of his partners, he doesn’t plan to lobby to stay on as a partner or counsel. He is ready for what’s next.

Steve was divorced over a decade ago, and his two kids are grown and financially independent (for now). In this article, I am going to detail what I think are six critical, and often overlooked, financial moves Steve should make before he retires.

1. Come up with a health care plan.

Steve’s retirement lines up with his Medicare eligibility, thank goodness! One of the firms he previously worked for provides health care for life to its retired partners, and while that would be even better than Medicare, Steve wonders what his peers who call it quits before 65 will do. He finds comfort in the fact that he will be on a government health plan but has no idea how much it will cost.

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No matter which survey you look at, health care is always one of the top three expenses in retirement. Yet very few people do any planning around what it will cost. Of course, it is impossible to know when it comes to long-term care, but you should be able to get a ballpark estimate of the monthly and annual costs of Medicare. Because of Steve’s sizable income, his Medicare Part B and D costs will be quite high. However, he is eligible to file Form SSA-44 to reduce his premium due to retirement. He will also want to work with a Medicare consultant to get advice on which Medigap plan makes the most sense for his needs.

2. Simplify your financial life.

Steve, like most people we help, has a long list of financial accounts that tell a life story. A few old 401(k)s tell the story of his life as a young associate and counsel before finally making the jump to partner. Two bank accounts that he never touches came about because he wanted to be able to easily transfer funds to his kids while they were away at school. Others were opened in an attempt to obtain higher interest in an environment where decent rates were almost impossible to find. He owns a whole mess of insurance policies, some of which he bought; others came from previous employers. His financial life has become somewhat like my streaming subscriptions: hard to track, expensive and confusing.

While many people will delay this step until after retirement when they have “more time,” I believe you should tackle this before then. This organization and simplification will paint a clear picture of your starting point, which really dictates how much you can spend in retirement. You can use this free tool to aggregate and track your accounts.

At this point, outside of one-off situations, you may be better off consolidating retirement accounts with a low-cost custodian. We believe that a simple financial life beats an optimal one. This may sound crazy, but I’d rather have one consolidated bank account yielding 2.5% than have five where the average rate is 3%. Obviously, when it comes to investments, we are seeking what is optimal, as small percentage changes can yield large results.

3. Figure out how much you spend.

Steve feels fortunate that he hasn’t needed to create a budget since he paid for his kids’ college educations. So, it’s tough for him to say what he spends every month or every year. He just knows that it is less than what he makes.

There are several ratios to help you guess what you will spend in retirement. I think a good starting point for Steve is just to start with current expenses to figure out if he can maintain his lifestyle in retirement. The easiest way to do this is to add up total debits across all bank accounts he uses and divide by 24. This should capture pretty much everything except for payroll deductions and will paint a pretty accurate picture of monthly expenses.

For our clients, we will further break out travel, health care, housing and anything else that will change significantly in retirement. I’ve seen too many advisers get so granular with this that it keeps the client from taking any action at all. Start high level by just figuring out total expenditures.

4. Check your asset allocation.

Steve has been handsomely rewarded for his ability to shut his eyes, save his money and do his job. Over time, his 90% allocation to stocks has really worked out. However, 2022 was scary, and he imagines that it would have been scarier if he were reliant on his investments.

As you approach your retirement, it is common to see investment swings positive and negative in multiples of your income. Therefore, it is key to make sure your asset allocation is aligned with your goals. I generally advise keeping two years of one-time expenses in cash equivalents. That should keep you from losing sleep in your early years of retirement.

Beyond that, you should have an asset allocation based on your risk tolerance and return needs. The longer the time horizon for the money, the more aggressively it should be invested, generally speaking.

5. Maximize deferrals.

Steve has seen his income consistently rise throughout the last decade. He is fairly certain that his last year of employment will also be his highest-earning year. He plans to stick with the savings plan he has elected in previous years: some to 401(k), some to deferred compensation and some to defined benefit plans.

We project out tax rates for all of our clients. I believe, it would be almost impossible to do the work well without having some sense of what taxes will be. One thing we see among almost all retirees who go cold turkey out of the workforce is a steep drop in the effective tax rate in the year after retirement. You usually go from a peak to a valley. In this situation, it is generally best to maximize your tax deferrals, i.e., kick the tax can down the road. Typically, this is best to do through employer retirement and health plans or charitably, through a donor-advised fund.

6. Come up with an income plan.

Steve knows that he needs a full financial plan, but he is most concerned at this point about figuring out where his income will come from once his paychecks stop. His situation is less than straightforward due to deferred comp, a pension and Social Security.

Should he elect for Social Security because he is retiring? Probably not. Steve is right that he needs a full financial plan to help ensure he is maximizing income, minimizing taxes and planning his estate. An income plan is one component of this. It should dictate two things: how much money he can afford to spend every year and where that money will come from.

Generally, you want to take advantage of the low-income years that come after retirement by doing partial Roth conversions and living off of cash and taxable investment accounts. You’ll get the highest amount of monthly income from Social Security by delaying until you’re 70, but this doesn’t make sense for everyone.

If you ask Steve today what he does, he responds, “I’m an attorney.” But what will Steve say a year from now?

Our identity is often created and reinforced by our career. I am a financial planner. Steve will probably say he is retired. Unfortunately, that says only what he doesn’t do. In a future column, I’ll tackle how to come up with who you will be next.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Evan T. Beach, CFP®, AWMA®
President, Exit 59 Advisory

After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification.  I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.