One day you’re celebrating the first day at a new job. The next thing you know, toasts are being raised at your retirement party.
Taking action at these important milestones can help ensure that your post-work life is more relaxing than taxing. Here are four pre-retirement milestones and some strategic steps to consider taking at these stages.
10 years out: Revisit tax diversification
At this stage of planning, it’s time to ramp up your savings and ask your advisor how you could allocate your assets across three tax-related categories to help manage your tax burden in retirement:
- Tax-deferred: For example, 401(k)1, 2, 403(b)1, 457(b), traditional IRA1, 3, 4, pension plans1, annuities1.
- Tax-free: For example, Roth IRA1, 6, Roth 401(k)1, 6, 529 plan8, municipal bonds7, cash value life insurance5, 9).
- Taxable: For example, mutual funds, brokerage, managed, banking5.
Tax diversification can help you:
- Keep more of your savings: When you carefully choose the assets you will use to generate retirement income, you could pay less in taxes.
- Maintain control of your withdrawals: Tax-deferred investments enable you to choose how much you withdraw to fund your lifestyle — before you begin to take required minimum distributions beginning at age 72 (Roth IRAs are not subject to the required minimum distribution rule, however).
- Adapt for unexpected life events: For example, to pay for unexpected medical costs, you could adjust the timing or amount of withdrawals from taxable investments.
5 years out: Bring your retirement goals into focus
In the five years leading up to your retirement, ask yourself: What’s important to you? What would you like to do with the additional freedom and flexibility in your life?
Maybe you want to volunteer, focus on a hobby or work part-time. As part of ongoing retirement planning, it’s important to clarify how you will fund the activities that bring you joy and fulfillment. For example, if you haven’t already, this may be a good time to consider maximizing contributions to your retirement plans or paying down unsecured debt, such as credit cards.
2-5 years out: Plan for Social Security
Unlike other income sources, Social Security is income you cannot outlive. It also has the backing of the federal government and is protected against inflation.
Deciding when to file for it is a critical step in retirement planning. Although you can start collecting benefits at age 62, you may want to consider delaying, depending on your circumstances. With each year you delay, your overall benefit increases until reaching the maximum amount at age 70.
We can help you evaluate the Social Security benefit options that support your financial goals. We’ll account for your personal situation and factors such as:
- Varying tax rates on Social Security income
- Capital gains and IRA withdrawals
- Health issues and life expectancy in your family history
1 year out: Monitor your expenses
During the 12-month countdown to retirement, it’s important to appraise your monthly expenses. Consider keeping two running lists — either conceptually or literally using separate credit cards and checking accounts — to quantify two types of expenses:
- Essential needs, such as housing, groceries, utilities and health care
- Lifestyle spending, such as travel, hobbies and dining out
After a year you should have a good idea of how much income you’ll need for necessities, with extra money reserved for leisure and other lifestyle expenses.
Nearing a retirement milestone? Connect with us today
We can help you take the right steps now — before you stop working — to support your retirement income later. Reach out to us to factor tax diversification, Social Security income and lifestyle expenses into your financial picture.