How to transition into a comfortable retirement
Cash Flow and Retirement
You’ve been planning and saving for decades, and now retirement is looming on the horizon. As the time to implement your retirement plan approaches, there are several steps you should take to ensure that the transition is smooth and that your money will last as long as you do.
Ideally, you should check the following items off your task list before your last day of work.
Build an emergency cash cushion. If you haven’t already done so, set aside enough to cover at least two or three months of living expenses. This is a good idea at any stage of life, but it’s particularly important at retirement because there may be a time lag after you leave your job and before you begin receiving pension, Social Security or other payments.
Pay down debt. If possible, accelerate your mortgage payments and reduce your credit card debt. The less debt you have at retirement, the more manageable it will be. Plus, reducing debt will limit your need to tap tax-advantaged retirement accounts, allowing the funds to continue growing as long as possible.
Adjust your asset allocation. At retirement, as in other stages of your life, it’s a good idea to review your asset allocation in various investments. Work with a financial professional to make adjustments that reflect your changing circumstances, time horizon and risk tolerance.
Review health insurance options. This is critical, since health care will likely be a major expense as you get older. Once you reach age 65, Medicare will cover most of your routine expenses, but you’ll probably need supplemental coverage for nonroutine expenses and separately to cover long-term care.
Create a budget. Carefully analyze your expected retirement expenses and make adjustments to your preliminary budget if necessary. Developing a realistic budget is the best way to minimize the chances that you’ll outlive your savings.
Make a Social Security plan. You have a lot of flexibility in determining when to begin Social Security payments. For example, you can start collecting as early as age 62 or as late as age 70. But remember that the timing can substantially affect your financial plan. The later you start receiving benefits, the greater the monthly benefit. So it’s generally best to wait as long as possible.
However, you may need to start sooner if you have health issues or require funds for living expenses. It’s particularly important to delay Social Security if you continue working. If you collect Social Security benefits before you reach full retirement age and your earnings exceed certain thresholds, your benefits will be reduced.
Develop a retirement income timeline. Determine the timing of your income during retirement and the sources from which it will come, factoring in expected retirement expenses. If you have traditional IRAs or other retirement accounts, you’ll need to take required minimum distributions (RMDs) from these accounts starting when you reach age 70½, whether you need the money or not. If RMDs don’t cover your expenses, it’s generally best to withdraw funds from other sources in this order:
- Taxable investment accounts,
- Tax-deferred accounts, such as traditional IRAs or 401(k) accounts, and
- Tax-free accounts, such as Roth IRAs or Roth 401(k) accounts.
Withdrawals from taxable accounts generate mostly capital gains, which are taxed at a lower rate. This withdrawal plan allows funds in tax advantaged accounts to continue growing as long as possible.
It’s best to begin working on the transition several years before your planned retirement date. The sooner you begin, the more time you’ll have to make necessary adjustments. But if you get a late start or are unexpectedly forced to retire, a financial planning expert can be particularly helpful in getting you on track to a secure postwork life.
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