Financial Issues as Retirement Draws Near
Photo Credit: Aaron Burden, Unsplash
Key Points
Consider reducing or eliminating credit card debt before you retire.
Make sure to determine which accounts you will withdraw from first.
Remember to work with your financial advisor or investment professional to develop an appropriate asset allocation strategy.
You may be pleased to find that you can finally afford to stop working after years of saving and planning for retirement. Proper planning in the months leading up to retirement can assist you in making the transition from employee to retiree as painless as possible.
If you have decided to retire, you have most likely already discussed several financial concerns with your financial counselor or investing specialist. You have accounted for your savings, retirement plans, and Social Security benefits to decide if you can afford to quit the workforce. You have already determined an initial yearly withdrawal amount you can remove from your assets without draining your funds before you die. If you are under 65 and not eligible for Medicare, you have likely decided how to meet your healthcare needs. Your focus has naturally switched to making lifestyle selections. What will you do in your free time? Will you begin volunteering or pursue a new hobby? How often will you travel? Will you spend the winter somewhere warmer?
The transition period from the workforce to retirement will raise many financial concerns. While it is easy to become distracted by all these exciting possibilities, you must maintain sight of the reality that only some of your financial preparations have been completed. Here are some ideas to consider when you work with your financial adviser or investing expert to make a move as painless as possible.
Reduce or eliminate your credit card debt
A large credit card debt might result in a monthly charge of several hundred dollars. Paying that bill may require additional withdrawals from your assets each year, potentially depleting your retirement nest egg quicker. You'll probably never regret getting rid of the weight of a large credit card load, even if it means staying in the workforce for a few more months.
Get advice on how to take payouts from your pension plan
Defined contribution plans, such as 401(k) plans, have been more popular in recent years than traditional pensions, defined benefit plans, which give you a specific monthly sum. Yet, if you work for a firm that still offers an old-fashioned pension plan, you may have a say in how your monthly benefit is computed. For example, if you are married, your everyday use will be based on your and your spouse's joint life expectancy. Other choices, such as a monthly payment based solely on your life expectancy, may be available if your partner consents. A single-life expectancy option will provide a more substantial monthly benefit. Still, the opportunity of a joint life expectancy will provide lifetime income and more security for you and your spouse. Before choosing, you should speak with your financial adviser or an investing specialist. They may scrutinize your plan options and assist you in selecting the distribution type that best matches your overall financial strategy.
Carefully weigh your options for handling your mortgage
If you get a significant lump-sum payment from your retirement plan, you may be tempted to spend some of it to pay down your mortgage. This might significantly cut your monthly expenditures. However, talking with your financial counselor or an investing specialist may be worthwhile before making a significant choice. If you still have a few years left on your mortgage, a large percentage of your monthly payment is undoubtedly going to interest. If you itemize your deductions, the interest you pay each year may be tax deductible.
Ease your way into your new lifestyle
When you are ready to start a new period, you may need to leave all traces of your previous lifestyle behind. But, when making a significant move, such as selling your home and relocating to a new region of the nation, you may want to adopt a more gradual approach. For example, renting for your first winter may help you assess whether you are ready to leave your former area behind. Trying on the new lifestyle before committing might lessen the likelihood that you will later regret your decision.
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Develop an appropriate asset allocation strategy for your investments
A generation ago, retirees would put most of their assets in conservative securities such as bonds, believing that these investments would provide them with the necessary income and capital. But, with earlier retirement ages and longer life expectancies, today's retirees frequently require the primary growth potential that stocks have historically delivered.
As you prepare for retirement, consult your financial counselor or investment expert about how you will distribute your investment assets. MFS® believes that investors of all ages benefit most from a disciplined diversification® approach based on three essential principles:
Divide your investment portfolio across the vital asset types—equities, bonds, and cash—taking into account the time you have until retiring.
Diversify across classes to acquire exposure to different investment types, such as value and growth, and market sectors, such as government and corporate bonds.
Rebalance your assets regularly to preserve your desired allocation.
Remember that no investment plan, including asset allocation, can ensure a profit or safeguard against loss. Furthermore, all investments involve risks, including the possibility of losing the initial investment.
Select which accounts you will withdraw from first
If you are under 73, taking money from your taxable accounts may make the most sense. For example, pulling money out of a stock fund you have invested in on your own will allow you to continue postponing taxes on any IRA returns. But you should check with your financial counselor or investing expert to see if this general guideline applies. You may figure out an initial plan of withdrawals from your various accounts that is appropriate for your condition with the assistance of your financial expert or tax counselor.
Balance your income needs with your estate planning goals
Your ambitions for leaving a financial legacy for your children may influence your retirement planning selections. For example, money left in an IRA may have more tax implications for your children than money left in taxable accounts. Again, the traditional wisdom of initially accessing taxable accounts may not apply since you may withdraw funds from your tax-advantaged IRA before touching your taxable accounts to reduce the tax burden on your children.
Enjoy the ride
The task of retirement preparation never stops. Each year, you should check in with your financial adviser or investment expert to ensure that your financial plan works as intended and to make any necessary modifications to keep you on track. Yet, the decisions you make in the final months before retiring will have a significant influence. If you get things right, you could be one of those retirees who can honestly say that retirement is all they ever wanted and more.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.
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