Speeding Toward Retirement? It’s Time to Consult Your Financial GPS

It’s rare these days to see anyone pull out a paper map to figure out how to get where they are going.

Instead, most of us plug our current location and our destination into our car or our phone, and GPS plots out a route, advising us of each turn and alerting us if we get sidetracked.

Retirement planning, when done right, can work in much the same way. If you are nearing retirement, it’s time to consult the financial version of a GPS – a step-by-step guide to help you arrive at and navigate through that last chapter of your life.

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Here are the steps you should take to get there:

Create clarity

This is the “where are you now, and where do you want to go?” portion of the trip. What are your goals and your concerns as retirement approaches? People often haven’t given a lot of thought to the specifics of retirement while they are saving, but now is the time to think about what you want retirement to be.

What kind of lifestyle do you want? Do you plan to travel? Do you want to buy a second home? Will you be spending a lot of time with the grandkids? The more specific you are with your retirement desires, the better you can make plans for achieving them.

Determine risk tolerance

Investing involves risk, but when you are near or in retirement, it’s best to limit your risk as much as possible. Young people have plenty of time to recover from a major loss. Those who are about to begin withdrawing money to live on from their savings do not.

Risk tolerance involves how much risk you are willing to take, but sometimes that risk level may not be enough to generate the returns you seek. For example, if you saved $1 million and need $50,000 a year from that investment to live on, then you must have a 5% return to replenish the fund. A portfolio with moderate risk should do the trick. But let’s say you have that $1 million, you hadn’t adjusted your risk from your accumulation days, and the market takes a 20% tumble. Now you just have $800,000, and it will require a 6.25% return to give you the $50,000 you need to live on. Achieving that will mean taking on more risk, which could cause you to run out of money before you run out of life.

Develop an income plan

Trek back in time a few years – or decades – and you will find that retirement income plans weren’t a necessity for many people. They had decent pensions that, when coupled with Social Security, supplied the income they needed for the rest of their days. Essentially, their retirement income had been planned for them, and it wasn’t imperative for them to meet with a retirement specialist.

But with each passing year, pensions become more and more a thing of the past. In fact, over the past 25 years, the number of people able to participate in a pension plan has fallen to only 20% of American workers (opens in new tab). That’s why it’s important to build an income plan based on such factors as the lifestyle you want and the income you need to sustain that lifestyle.

Creating an income stream for retirement could involve withdrawing money from your retirement savings in a disciplined way and figuring out your risk tolerance and taking on the risk you are comfortable with. A financial professional can explain options and the pros and cons of each.

Be proactive with tax planning

Like many of us, retirees too often approach taxes in this manner: As tax-filing time nears, they gather all their documents in a folder, visit a CPA and the CPA tells them how much they owe or how much to expect in a refund. But that approach is about looking at taxes on a micro level, when really you want to look at taxes on a macro level.

Are there things you could do with tax planning now that would benefit your family down the road? Are there strategies that could save you hundreds of thousands of dollars in taxes over your lifetime? As just one example of forward-looking tax planning, you could convert a tax-deferred account, such as a traditional IRA, to a Roth account, allowing your money to grow tax free.

Factor in healthcare, long-term care and estate planning

Healthcare costs can put a major dent in retirement savings. The average 65-year-old couple will need as much as $300,000 to cover their healthcare costs (opens in new tab) for the rest of their lives, so you need to consider how that fits into your overall budget.

Meanwhile, a big unknown in retirement is the potential need for long-term care. Nursing homes, assisted-living facilities and other types of care come with hefty price tags. Where will the money come from? Possibilities include long-term care insurance or a life insurance policy with a long-term care rider, but you will want to discuss with your financial professional what’s best for you.

Finally, you need to consider estate planning and take steps to make sure everything you leave to loved ones is done in the most tax-efficient manner.

As you consider all this, it may also be time to make sure the financial professional you are working with is well-versed in strategies for this stage of life.

Many advisers focus on wealth accumulation, which is optimal when you are in your 20s, 30s, 40s and perhaps into your 50s. But after that, your focus needs to shift to preservation rather than accumulation, so it’s crucial to connect with a retirement specialist who understands how to protect and get the most out of what you have saved.

That way, when you exit from working life and merge into retirement, you can continue your journey without so many worries about taking a wrong turn.

Ronnie Blair contributed to this article.