Photo by 401(K) 2013 
Are you thinking of leaving your job soon but unsure whether you are retirement ready? Follow these tips and you’ll be on your way to a financially secure retirement.
But before the financial tips, the most important part of retirement is how you spend your time now that it is not structured as when you were working nine to five. Make sure you know how your days will unfold. Don’t wait to figure it out once you have retired. Do a practice run to envision your retired life by, for example, taking a stay-at-home vacation and actually living your “retired” lifestyle. If you are planning on new activities or volunteer work, start them now to ease the transition. You’ll be better prepared to enjoy retirement if you have a glimpse on how it feels to be retired.
Once you’ve figured out how you’ll spend your time, answer these questions to make sure your finances can support your retired lifestyle.
Tip 1: Understand your Spending
Do you know how much you spend annually? The most important aspect of a secure financial retirement is to understand your expenses – what cash goes out each year. Once you know this amount, you can make sure your retirement income matches or exceeds this amount.
You can use one or two ways to determine your annual spending.
- Top Down Approach: Start with your annual salary and subtract the items you won’t be paying in retirement. The resulting figure is your annual spending amount. This method assumes you spend everything that you don’t save. You probably won’t be contributing to your retirement plan or paying Social Security and Medicare taxes once your retire. By contrast, you may have new expenses that you will want to add to this amount. For example, if you have a salary of $135,000 and contribute $18,000 to your 401k plan and pay $8,400 in Social Security/Medicare taxes, then you are annual spending would be $101,600/year (135,000 – 18,000 – 8,400). But if you plan on travelling more than you did when you were working, you should add your travel budget to this figure.
- Bottom Up Approach: Add up your expenses, category by category, to arrive at the spending amount. A good tracking tool is Mint.com that will categorize all of your expenses. And most important, it will give you the amount you spend each month. Multiply this monthly amount by 12 to get your annual spending.
Whichever approach you use, it is critical to get a handle on your annual spending.
Tip 2: Health Care in Retirement
What health insurance coverage will you have during retirement? At age 65, most people become eligible for Medicare and may need a Medigap policy. In addition, many folks are still covered by their former employer’s health plan. Regardless of which situation you are in, see my blog on four questions to ask regarding how to obtain the best health care coverage once you are Medicare eligible. Of course, you’ll want to make sure that you count these expenses in your annual retirement spending amount discussed above.
Tip 3: Long-Term Care
Do you have an arrangement in place if you need long-term custodial health care? One of the biggest unexpected expense for retirees is long-term nursing home care or home health care. Medicare does not pay for long-term custodial care such as care in a nursing home or home care to help you with the activities of daily living such as bathing, getting dressed, and feeding yourself. So it’s best to have a plan in case you need this type of care. This blog post explains how to handle these expenses if you need them.
Keep in mind that long-term care may not involve outside care you pay for but rather involve a family member or spouse providing the care. You also may self insure if you have sufficient assets to do so rather than purchasing a long-term care insurance policy. In other cases, a slim long-term care policy that provides some protection but that doesn’t cost an arm and a leg may provide coverage at a cost that won’t deplete your assets. The key is to know how this type of care will be provided if you need it.
Tip 4: Retirement Income Sources
What are the sources of your retirement income? Traditionally, folks relied on income from three sources during retirement: a pension, savings, and Social Security. Nowadays many retirees are living off their savings and Social Security and, to an increasing amount, additional income from part-time work.
If you have a pension, make sure you understand how it is calculated. This blog post provides considerations on when to claim Social Security to maximize the likely benefit over your lifetime. In addition, this blog post provides two strategies on how to withdraw from your retirement savings so that you don’t outlive your assets. The critical point is to understand your retirement income streams.
Tip 5: Simplify Your Savings and Retirement Accounts
Are your financial assets at more than two or three banks or institutions? If you have had a varied career with many jobs, you probably have various investment accounts and retirement plans. You may want to consolidate like accounts based on their tax status to ease your retirement finances. For example, you may want to combine all of your 401k assets into one account, which could be your current employer plan or into a rollover IRA. Likewise, all Roth IRA accounts could be moved to one brokerage. Any sales of your existing assets when you consolidate tax-deferred accounts do not incur capital gains taxes.
In addition, you may want to move your taxable assets into one account. So if you have various brokerage assets you could consolidate them by moving them “in-kind” from one brokerage to another. By moving them in-kind, you won’t be selling the assets, which could trigger capital gains tax. Finally, you may want to consolidate your banking (checking and savings account) at one bank.
So when you retire you will have three pools of money: (1) savings/checking account used primarily for day-to-day expenses; (2) taxable assets at a brokerage which are more long-term in nature; and (3) tax-deferred retirement assets. As you withdraw money from your retirement assets, you will place it either into your savings/checking or your brokerage assets.
Tip 6: Retirement and Investment Account Asset Allocation
How are your taxable and tax-deferred assets allocated between stocks and bonds? If you have been savings for the future and have been in accumulation mode, your portfolio may be heavy on stocks, which can be very volatile. The key is to get a handle on how much you will need to withdraw each month/year and then to allocate your investments between stocks and bonds based on when you will need your funds. A future blog will explain one popular approach that uses three different buckets (short-term, medium-term, and long-term) based on when you plan on tapping the money.
So, with these tips, you can begin to determine whether you are retirement ready.
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