A Countdown to Retirement

Do you have a timeline for your life?

For instance, do you have goals for the next five, 10, or 20 years?

Have you set your mind to own a ski house five years from now?

Or, in 20 years, do you plan to pay for your child's wedding?

Having goals and an achievement time frame is admirable. But you need to understand the interval steps to turn your aspirations into reality successfully.

Let’s take the example of retirement. Say you want to retire in 10 years.

What steps along that timeline do you need to take?

A 10-year retirement timeline

Assuming you’ll retire in your 60s, here’s a 10-year countdown:

Year 10 (and less): Does it look like I can afford to retire in 10 years?

Start by calculating what you need to retire. We recommend updating this calculation every two years as you count down to retirement and develop more precise forecasts of your spending needs and income.

Additionally, start getting your finances in order by reviewing your debts.

• All loans: Which should you pay off before retirement? For example, if you have 15 years left on your mortgage, should you accelerate your payments to eliminate that expense? In many cases, the answer is probably not.
• What about other debts, like auto loans or credit card balances? It may make sense to get rid of those costs before you retire.

• 401(k) loan: Did you take a loan against your 401(k)? If so, think about paying it off before you retire. Otherwise, it may become a taxable distribution. Additionally, if you have a loan on your 401(k), you may not be able to move it into an individual retirement account (IRA).

Lastly, start visualizing how you will spend your retired years. What will you do to fill your time?

Years 5 to 3: What will it cost to live in retirement?

Formulate your budget by following these three steps. Importantly, make sure you consider each component on an after-tax basis.

• Step 1: What do you expect to spend in retirement? Research concludes that you need roughly 80% of what you spend now since some work-related costs will cease. While that may be true in the long run, initially, your spending may rise instead of fall as you live out your dreams and pent-up demand for new hobbies or travel. So a better way to budget your spending could be to watch what goes out monthly. Subtract those expenses that will go away. Then estimate new costs. Net these out to get an estimate of your retirement expenses.

• Step 2: What income do you expect in retirement? Consider these sources: Contact your administrator to get your expected monthly payout if you have a pension. If you have a tax-deferred retirement account—like a 401(k)—roughly determine your required minimum distribution (RMD). Lastly, understand other retirement income sources to determine if any are guaranteed (like an annuity) or pay an income stream (potentially a life insurance policy or rental income). Also, keep track of taxable investment income.
  
  

• Step 3: What cash reserves do you need? Start by subtracting anticipated expenses from your stable income to determine if you have a shortfall. A cash reserve's key elements are understanding how many years you have until retirement, what asset level you’ll need, and how much risk you can tolerate. Fund that reserve as soon as possible.

In addition, consider if and when a Roth conversion makes sense for you. Thinking ahead could help you minimize taxes on this planning option.

Years 3 to 1 focus: Solidify your finances

In these years, you formalize your budget and button down your finances.

• Pension or other defined benefit plan: Revisit your estimate and understand the tradeoff between lump sum and annuity payments. Calculate which is more beneficial for your situation.
• Retirement accounts: Aggregate all your old 401(k) accounts so you have a complete picture of your RMDs. Don’t remember all your accounts? Contact your former employers. In addition, websites—such as unclaimed retirement benefits and the Department of Labor’s abandoned plan database—can help you find your lost accounts.
• Annuities and cash value or other life insurance: Contact your agent to know your options for starting or delaying payments.
• Asset allocation for retirement and taxable investments: If you have taxable investments that you have control over and retirement accounts in an employer-sponsored plan, you'll want to assess the asset allocation and risk of each. For example, you may want to take on more risk in assets you control and less risk in those you may wish to transfer soon.
  
  Think about a qualified retirement plan—like a 401(k)—that you plan to roll over to an IRA when you retire. If the market turns down when you’re ready to move those assets, you may not want to sell them at a lower value.
  
  To avoid this conflict, you may want to slowly transition those assets to a more conservative allocation so that the market environment won't be overly influential when it's time to sell.
  
  But as you move towards a conservative tilt with these assets, you may want to get riskier with the ones you control so that your overall risk profile remains unchanged.
• You may also want to revisit your living situation: Do you want to stay in your current state, or would you prefer to move elsewhere? For instance, many retirees choose to find a more comfortable climate, move to where their family resides, or find a state that offers low taxes. The decision to move states in retirement may impact your cost of living, so adjust your budget accordingly.

Year 1 to your last working day: Getting ready for lift-off

Ok, you’ve budgeted, reserved, and allocated. Now for the final year punch list.

• Talk to a Wealth Advisor about short-term or new sources of income like rents, royalties, post-sale contracts, corporate boards, and others. Understand how this new or temporary money can affect your budget and determine if adjustments are warranted.
• Verify where you are getting your healthcare coverage and how it coordinates with Medicare. At age 65, most people must go on Medicare unless they have employer-sponsored insurance for themselves and their spouse. But even with that coverage, some employers require that you use Medicare as the primary insurance. There are many (and often confusing) nuances with Medicare coverage, so explore this early so you don't miss deadlines and get hit with surcharges.
• Finalize how you will spend your time. Many early retirees find that moving from a regimented schedule to complete openness is hard. They also tend to miss the social aspects that work provides. So consider a retirement rehearsal.

Retirement planning doesn't happen overnight

We think mapping out the next decade, especially one in which you plan to make a significant life change, requires a solid plan of action. Because getting this transition right could mean the difference between living the retirement you want and worrying that you or your heirs will miss out. Unfortunately, there's a lot to think about, and many aspects are complex.

We recommend working with a Wealth Advisor specializing in pre-retirement (the Retirement Red Zone) and retirement planning. Here's a list of seven questions to find one that is right for you.