Getting Ready for Retirement? We Explain Key Elements and Options

Retirement savings are just one component of your financial profile once you hit your golden years.

A retired man works on his hobby of woodworking.
(Image credit: Getty Images)

You worked 40 years, and finally, you’re getting ready for retirement. Unfortunately, many retirees are downright confused about the key elements of retirement, such as what their retirement benefits are and how they work. That lack of insight can lead to poor decisions.

As an example, some people are confused about the difference between a pension and a retirement savings account, such as a 401(k) or 403(b). One of my clients, who had a 403(b) plan, thought her pension and her 403(b) were the same thing. After I explained they are two separate items, she did some checking and discovered she had almost $1.5 million in assets she had been unaware of. She thought she needed to work another year or two before retirement, but, of course, that discovery changed her timeline.

Now, don’t get your hopes up. Not everyone is going to discover $1.5 million in benefits they previously didn’t know existed. But everyone can make better decisions about retirement if they understand all the terms and factors involved.

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The Path to Retirement Readiness Includes:

Pensions. Fewer people have pensions today than a couple of decades ago, but if you have one, it’s important to understand how it works and any options you have. A pension provides a monthly check in retirement, usually for life. But sometimes you can take a lump sum in lieu of the monthly check. That’s worth exploring because the lump sum allows you to invest and manage your asset as you see fit. For example, you could buy an annuity to set up an income stream while still investing a portion of the money for growth.

This also provides you money to draw on in an emergency, and it gives you control over how your money goes to your beneficiaries when you die.

Beyond the lump sum, another pension option to consider is whether you can take a lesser monthly payment and, in exchange, provide a lifetime check for your spouse after you die. A financial professional can help you work through the pros and cons of your options to determine what’s best for you.

Retirement savings plans. Depending on where you work, you may have a 401(k) plan, a 457 plan or some other retirement savings plan. But do you have a strong grasp of how your plan works? Is it a tax-deferred plan, or is it perhaps a Roth plan?

If it’s tax deferred, you get a tax advantage right now, but you will pay taxes on withdrawals in retirement. If it’s a Roth, there is no immediate tax advantage, but the money grows tax free, and withdrawals aren’t taxed. It’s important to know whether your plan is tax deferred or tax free, because when you reach retirement, that will make a significant difference in how much of your money is available to you – and how much is available to Uncle Sam.

Taxes. Speaking of Uncle Sam and his share of your money, it’s no secret that the tax code constantly evolves. Right now, we are still enjoying the 2017 tax cuts, but those are scheduled to sunset at the end of 2025 and revert to the previous, higher rates. And it’s possible they could go even higher in the future.

Financial professionals like to say that, at the moment, taxes are on sale, which makes this an opportune time to convert tax-deferred assets to a Roth IRA. You will pay taxes when you make the conversion, but you’ll do so at today’s lower rate rather than a potentially higher future rate. Understanding tax ramifications – and taking actions related to them – can make a big difference in how much money you have in retirement.

Health care. Medical expenses can add up quickly as you age, so having a good plan for health insurance in retirement – and understanding what is covered – is a must. Just where will your medical benefits come from after you reach age 65? Can you keep the insurance from your current job, or does that go away, requiring you to switch to Medicare?

Medicare has different options itself, so you want to understand those and what your out-of-pocket medical expenses could be anytime you see a physician. With people living longer, you want to make sure you make informed decisions about health insurance.

Inflation. People talk about inflation quite a bit, but they don’t always think about what it means – especially over the long haul. Too often, retirees don’t take inflation into account when they make their retirement plans.

For example, you might think you need $5,000 a month to live on, and you work out a plan to take care of that need. But $5,000 today almost certainly buys more than $5,000 will in 10 or 20 years. Those dollars start to erode over time, so your plan needs to take inflation into account lest your money disappear more quickly than you anticipated.

Spending habits. Imagine you arrive at retirement with a substantial nest egg. Based on that savings, you and your financial professional work out a plan that allows you to age to 100 comfortably.

But then life happens – along with spending temptations. Your daughter wants an expensive wedding, so you dip into the retirement savings to pay for it. Your son needs help with a house down payment, so the savings take another hit.

Before you know it, your nest egg is evaporating, and there is nothing coming to help replenish it. Be cautious about large ticket items or helping family members and friends in ways that are beyond your means. If you have a plan, stick with the plan.

Retirement readiness covers a lot of territory and can seem overwhelming. But it doesn’t have to be. If you find a fiduciary adviser to work with, that person can make sure you consider factors you may have overlooked and can help navigate you through the process.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.


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.

Cory Chapman, Investment Adviser Representative
Founder, Managing Partner, EFC Wealth Management

Cory Chapman of EFC Wealth Management has previously passed his series 6, 7, 63, 65 and 24 securities licenses. He is still currently utilizing his Series 65 securities exam as a registered Investment Adviser Representative. He also holds his life and annuity insurance licenses as well as a real estate license in the state of California and has over 10 years of experience in the mortgage banking industry, with an extensive knowledge of estate planning and taxation.