Your Money: 10 Smart Moves Before Retirement

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Advisory services offered through Wealth Enhancement Advisory Services LLC, a registered investment adviser and affiliate of Wealth Enhancement Group.

Retirement may be one of the biggest financial transitions you’ll make, but it is also a significant life transition. Instead of thinking about retirement as a finish line, consider it the beginning of a journey that could last 20 or 30 years — or longer.

That makes the years immediately before retirement especially important. The decisions you make now can affect not only how much money you have, but how confidently you can use it once your regular paycheck stops. Here are 10 smart moves to consider before you retire.

1. Clarify Your Retirement Vision and Goals

Start by asking what you actually want retirement to look like. Do you want to travel? Volunteer? Pursue hobbies? Work part time? Move or downsize?

The answers have financial consequences. A retirement plan should connect those goals to realistic cash flow projections, a strategy for withdrawing assets, and a plan for managing risks such as inflation, market volatility and healthcare expenses.

2. Maximize Your Retirement Savings

Your final working years may offer valuable opportunities to strengthen your retirement accounts. Take full advantage of an employer match and catch-up contributions available to older workers.

This can also be a good time to consider whether you have the right mix of taxable, tax-deferred and tax-free assets. Roth conversions during lower-income years — particularly after retirement but before required minimum distributions begin — may help diversify your future tax exposure. But conversions can also increase taxable income and potentially affect Medicare premiums, so they should be considered as part of a broader tax plan.

3. Strengthen Your Rainy-Day Fund

The traditional guideline of keeping three to six months of expenses in emergency savings may not be sufficient once you retire. Consider maintaining enough safe, liquid assets to cover unexpected expenses without having to sell investments during a major market downturn.

4. Get a Handle on Your Spending

Knowing what you spend today is useful. Knowing what you expect to spend in retirement is essential.

Separate non-discretionary expenses from discretionary ones, and put realistic numbers around travel, hobbies and other “bucket-list” goals. Retirement spending can be lumpy and may also change over time, so build some flexibility into your assumptions.

5. Prepare Your Portfolio for Retirement

Your investment priorities may change as you approach retirement. Accumulating assets may no longer be your main objective; preserving enough capital to support decades of withdrawals becomes increasingly important.

Review whether your portfolio is effectively diversified across different sources of risk, including inflation, interest rates and market volatility. Some investors seeking to mitigate inflation risk or market volatility may benefit from additional asset classes or strategies, such as commodities, private equity and hard assets. Keep in mind that these can add cost and complexity to your portfolio and are not appropriate for everyone.

6. Create a Tax-Efficient Withdrawal Strategy

Saving for retirement and spending from retirement accounts require different skills. Before you retire, understand where your income will come from and how withdrawals will be taxed.

Your strategy might coordinate taxable accounts, traditional retirement accounts, Roth assets and required minimum distributions. Your long-term objectives should go beyond cutting this year’s tax bill to managing your overall tax exposures and generating income that lasts throughout retirement.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

7. Make Social Security and Pension Decisions Carefully

When you decide to claim Social Security can significantly affect lifetime and survivor income. Married couples should consider their claiming decisions together rather than treating each benefit independently.

If you have a pension, you may also face a choice between lifetime monthly payments and a lump sum. Guaranteed income can help cover fixed expenses, while a lump sum may provide greater flexibility and legacy potential — but also transfers investment risk to you. Health, longevity, taxes and survivor benefits should all factor into the decision.

8. Plan for Health Care

If you retire before age 65, you’ll need to determine how you will bridge the gap until Medicare eligibility. Once you reach Medicare, remember that Parts A and B do not cover every expense.

Consider Medicare supplemental coverage, prescription costs, dental and vision expenses and the possibility of long-term care. Health care deserves its own place in your retirement cash flow projections rather than being treated as an afterthought.

9. Pay Off Inefficient Debt

Entering retirement debt-free isn’t necessarily the goal. Eliminating expensive or unproductive debt may be.

High-interest credit card balances can consume cash flow that could otherwise support your retirement. Lower-cost debt used for an asset with lasting value may deserve different treatment. Evaluate debt based on its interest rate, tax treatment, purpose and impact on your monthly cash flow.

10. Review Your Life Insurance Needs

Finally, revisit life insurance. Start with the financial need rather than the insurance product. Who still depends on you? Would a surviving spouse need income? Do you have debts, business obligations or estate and legacy goals?

Your insurance needs should evolve along with your financial plan. Coverage that was appropriate while raising children and paying a mortgage may look very different after you retire.

The original article was published in Pioneer Press. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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