If you think about it, you
went to school for probably nearly a quarter of your life to prepare you for
your career--a big investment of time and money. But beyond just making sure we do not run out
of money, it does not seem that we spend the same proportionate amount of time
getting ready for the retirement phase of life.
With that in mind, I thought I would dedicate this week’s blog entry
toward creating a checklist of items to prepare for transitioning to
retirement. Here are a few thoughts on
getting ready to enter pre-retirement transition years:
Debt: The 3 “No’s” of
Preparing
- Borrowing from Retirement Accounts—Accessing funds in an IRA comes with the sting of a 10% excise penalty tax, but many company plans allow you to borrow from them and “pay yourself back” over a specified time period. Sometimes these loans come with record-keeping fees, and you could be missing out on potential appreciation on investment markets.
- Racking up Credit Card Debt—The interest paid to credit card companies is lost leverage in critical pre-retirement years. Savings rate is quite important as you near pre-retirement years, and carrying balances on credit cards not only serves as impediment to saving, but also drains more money through interest costs.
- Accessing Equity in your Home—Home ownership is a critical key issue for the pre-retiree because your home will either serve as your retirement residence, or as a large piece of re-investable savings if you choose to sell and access built-in equity. For those people carrying large loans into pre-retirement & early retirement, this key cash-flow item could force the need for more income sooner, or the need to downsize earlier.
Health:
- Not only is it no fun being in poor health in retirement, but it can also be costly. While much of this may be out of our control due to genetics, having a healthy diet and engaging in reasonable exercise can boost general health.
Saving (Tax-Advantaged):
- Pre-Tax Savings Plans—For most of us, the pre-tax retirement savings plan(401k, IRA, etc.) will provide the best tax advantage; reducing taxable income now. This is the primary place to engage in savings until you hit your limit. Pre-retirees should aim to put as much in this bucket as their budget can bear because once earned income stops, so does their ability to use these plans.
- Roth IRA Saving—After you have max-funded your pre-tax savings and funded an emergency fund, funding a Roth IRA would allow those assets to compound tax free. Some people may not be able to save in a Roth due to their income tax situation.
- Tax-Sensitive Savings—Saving in taxable accounts can be different to tax-deferred funds because of the requirement to pay capital gains and income tax “as you go”. Being tax-sensitive with individual securities sometimes makes sense, as does funding cash value life insurance or annuities. These choices are highly dependent on the goals set forth for these savings account
Planning (not just
financially):
- Just as having a vague idea about “what you wanted to do with your life” was a decent idea as you entered the working world, having some thoughts on what you want your retirement years to look like is also a good idea. Whether it’s travel, taking up golf, or volunteering, this will give you some idea of lifestyle, which in turn gives you some idea of income needs. Also, giving this some serious planning will help you to time your exit from the everyday workforce with what is right for you.
As I have written before, I
believe that the retirement transition years are the most important in setting
yourself up for the rest of your life. It
is important to be ready to start getting ready to transition.
