Solid Pre-Retirement Planning Advice
As One Nears Retirement There are Ways to Ensure a Smooth Transition
Nov 7, 2009
As Americans get within a few years of retirement there are several things they can do to help make sure that the transition into their “golden years” will be smooth and financially successful. Unfortunately too many people end up backing into retirement, preferring to daydream about long days on the golf course rather taking a little time to prepare for those days of fairways, greens and cocktail hours.
The biggest question one needs to ask is whether they are really saving enough to retire in comfort. With Americans living longer and longer, a person who retires at 65 may easily need to support themselves for another 20 years or more. That requires a significant financial commitment.
Maximize One's 401(k) Contribution
Unfortunately, many Americans are not making the maximum contribution to their workplace retirement plan, usually a 401(k) plan. This is inexcusable, especially if an employer offers any matching contribution to the plan, as most do. In addition to this, for those who can afford it, opening a separate IRA account can be a good way to build savings. Remember, after the age of 55 an individual can contribute up to $5,000 per year, instead of the usual $4,000. Make that maximum contribution, even if it involves tightening the belt a little now. There will be a significant benefit later.
How About Continuing to Work?
Many people want to work on a part-time basis in retirement. In fact, the AARP says that 70% of pre-retirees plan to work after they retire. The question then becomes what to do. Some people decide to do something that has always intrigued them. But they may have no training. Now is the time to take the classes needed, part-time, to have the training needed upon retirement. But remember, if a person has not yet reached full retirement age (currently age 66 and 67 for those born after 1942) Social Security benefits are reduced by $1 for every $2 of earned household income over $12,960. For those who have reached full retirement age there is no reduction in benefit.
Examine Investment Portfolios
Next, it's time for most people to take a good look at their investment portfolio with a financial adviser. If it has not been rebalanced in some time (say five years or so), there's a good chance that adjustments are in order. Most people nearing retirement will generally prefer to tilt their portfolio more heavily toward bonds and other income-producing investments, and to move away from large exposure to equities, or stocks. As people age, their taste for risk often goes down. And after they retire, as their income often shifts dramatically, few have the stomach for the ups and downs of equities.
Now It's Time to Live
Now ask where it is that one plans to live in retirement. Is there an intention to downsize, perhaps in a new location? Or does one want to stay in their current home? Start thinking about these things now. Let’s say the plan is to downsize into a two-bedroom condo in the area where one lives now. The best option may be under construction now, and in five years a person may regret they didn’t purchase before they retired.
Some Caveats for Successful Retirement
There are also some things that should not be done in the years leading up to retirement. Do not take money out of a retirement plan before retirement, even in the case of an emergency. Utilize home equity or any other source before withdrawing retirement funds early. Too much future security is lost, and there may be stiff penalties to pay.
Do not rely on Social Security for support in retirement. Most Americans can expect something, of course, but it will not be enough to live on. Similarly, don’t rely on a spouse’s retirement plan for support. If one spouse dies earlier than expected the surviving spouse could be stuck. Also the period right after retirement does tend to see its fair share of divorce, which could leave both spouses out in the cold. Each spouse needs a separate retirement plan.
Lastly, don’t forget to review retirement plans regularly with a financial adviser. Things change, both in life and among retirement investments. It’s the job of every American to make sure they adapt to those changes so that when they do hit the links all they really need to worry about is making that 12-foot putt on the 18th hole for par.
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