An Exit Strategy from Your Working Years Can Lead to a More Secure Retirement
Once you get the basics of a retirement plan nailed down, you may discover you can retire earlier than you thought.
The approach of retirement can be exciting – as well it should be.
Finally, you will have more time to travel, read, volunteer, indulge in a hobby or do whatever it is that represents the ideal retirement for you.
But, of course, you also want to make sure that you have taken the proper steps to give yourself the best chance financially of achieving your retirement goals. That raises a couple of questions: Do you have an exit strategy that will help you navigate a smooth transition from working life to retirement life? If so, what is that strategy?
Plenty can go wrong in retirement – or anytime in life, for that matter. Later, when your regular paycheck is gone and your health may take a turn for the worse, you will have fewer options. Fortunately, there are things you can begin to do now to try to prepare for those unexpected moments that may lurk in retirement. As you plan, you may even discover problems you were unaware of and can fix them before they snowball into something more devastating.
Here are a few things to consider when you are about five to seven years out from retirement and begin to craft that exit strategy:
Plan your retirement income
How you invest in retirement is different – or should be – from how you invested while you were working. You are asking your money to do something you never asked before – provide you with a regular income. You want to make sure you are balancing your portfolio correctly, reducing the volatility in your holdings and moving the money into more stable investments. You want to protect what you have so that, ideally, it can provide you an income for the rest of your life.
Beyond that, you have decisions to make about when to take Social Security, another significant part of your retirement income. Many people like to begin drawing Social Security early at age 62, but that comes with drawbacks. You get a reduced monthly check, and there are limits on how much you can earn annually from a job until you reach your full retirement age. Most people are better off waiting until their full retirement age (66 to 67 for most people) because you’ll get a bigger check. And you may be better off still by waiting until age 70, because the checks will be even bigger if you delay claiming that long.
Similarly, if you have a pension, you have choices to make. You can elect to take the full amount, which gives you the largest monthly check the rest of your life, but those checks will end when you die. Alternatively, you can elect to take your pension with survivor benefits. In that case, you receive lower monthly benefits, but after you die your spouse will continue to receive a monthly check for life
Be aware of tax implications
Many people put a large percentage of their retirement savings into tax-deferred IRAs or 401(k) accounts. That helps with your tax bill now, but when you arrive at retirement and begin to withdraw money from those accounts, the tax bill comes due. One added twist is the potential that tax rates in the future could be higher than they are now. If your employer offers a Roth 401(k), that could be the better option.
Part of your retirement exit strategy could be to consider a Roth conversion – moving your money from tax-deferred accounts to a Roth. You will pay taxes when you make the conversion, but the money can then grow tax-free and you pay nothing when you withdraw it in retirement.
Understand health care options and long-term care
A sudden decline in health can dramatically change the trajectory of your retirement. Health care costs and long-term care costs both can be devastating to your bank account. At age 65, you are eligible for Medicare, but making decisions about Medicare coverage choices can be complicated, so the sooner you learn how it works, the better.
If you retire before you are eligible for Medicare, you could opt to keep your employer-sponsored health insurance. Some employers may offer insurance for retirees, but even if yours doesn’t you may be able to continue the coverage under the federal government’s Consolidated Omnibus Budget Reconciliation Act, commonly known as COBRA. You are responsible for the full premium, though. Another potential option: If in retirement you start your own business, becoming self-employed, you can deduct your health insurance premiums from your income for income-tax purposes.
Beyond concerns about paying for health care, there’s more than an even chance you eventually will need some form of long-term care. That’s a potentially massive expense, so sorting out a plan to pay for it – such as long-term care insurance among other methods – is important.
Often when I meet with people who are a few years out from retirement, they are worried about income during their retirement years and whether they will be able to make their money stretch out the rest of their lives. But once we develop a strategic plan, sometimes they retire a couple of years earlier than anticipated. A plan can give you what I call the three Cs. It provides you with clarity, confidence and the comfort you need to move forward into your retirement.
Ronnie Blair contributed to this article.
All investments are subject to risk including the potential loss of principal. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Pinnacle Retirement Advisors, LLC is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Pinnacle Retirement Advisors, LLC are not affiliated companies. 979101 – 07/21
About the Author
Co-Founder, Pinnacle Retirement Advisors
Gary W. Crawford, co-founder of Pinnacle Retirement Advisors, is a dually licensed investment adviser representative. He is certified in long-term care (CLTC) and has been a vital resource for aging clients and families looking for long-term care resources in the community. Crawford and his team believe that retirement is a journey; you should have a written plan on how you will handle extended health care costs as you age.
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.com. Kiplinger was not compensated in any way.