Sequence of Steps to Retirement
Retirement planning is a concept, alien to many an individual. Retirement is not just about lazing in the armchair sipping the morning tea; it is something much more than that. For a comfortable life after retirement, a detailed planning is a prerequisite.
The process of retirement planning includes setting the right goals, making investments, sketching out a vision and working towards achieving them. To sum it up, it is all about making a financial provision for a secure future, before hitting the retirement age.
Retiring isn't a one-step process done because an eligible employee decides to stop working. Specific steps should be worked through to ensure maximum retirement income.
Effective retirement planning can and should require careful decisions being made well before - and long after - an individual actually stops working. And, though no two retirements are the same, all future retirees need to work through the same basic checklist in order to ensure their golden years are all they can be. Here’s that suggested sequence.
Save Enough to Retire - 10 Years Before Retirement
Make sure that saving, retirement accounts, social security, and other sources of retirement income are going to adequately meet the need. Retirement calculators, the Social Security Administration, and an employer’s pension plan administrators should be able to explain current and projected benefits.
Why so far in advance? Because time is the pre-retiree’s biggest ally on the savings (and capital appreciation) front, and waiting any longer may mean account balances are too small. On that note, investors currently above the age 50 need to know they can contribute an extra $1000 above and beyond the normal IRA contribution.
Pay Off Debts - 5 Years Before Retirement
By this point, workers should have all major outstanding debts (such as real estate, business loans, etc.) paid off… or at least in sight before retirement. Lingering debt and the interest payments accompanied by them are the biggest sap n retirement savings and retirement income.
Any defined-contribution benefit plans (IRAs, 401ks, SEP-IRAs, SIMPLE IRAs, etc.) should be reviewed by a qualified investment professional, as the shift from growth to income and safety investments should begin now.
Review Savings and Investments - 3 Years Before Retirement
Again, any holdings in IRAs or brokerage account – or even savings accounts – should be scrutinized for appropriateness. Safety and preservation is becoming paramount at this point.
Make a Retirement Budget - 1 Year Before Retirement
Estimate a retirement living budget (again). Though this step should have been taken at the ’10 Years Before’ mark as well as every year thereafter, it’s most important to do this again – being realistic – at this point. Why? Because the cold hard facts may necessitate the need to delay retirement for a couple more years.
Pre-retirees should also consult the Social Security Administration at this point to determine what their options are, and what the specific monthly income should be. The SSA can also explain the income resulting from several retirement scenarios.
And, yet another honest look at the risk involved in any self-directed IRAs or investment accounts should be revisited. From here, income and safety holdings should make up the majority of these accounts.
Notify Employer and SSA of Intent to Retire - 3 to 6 Months Before Retirement
Employers should be notified of the intent to retire; the processing of the paperwork could take that long. Workers should also notify the Social Security office if they have elected to begin taking retirement benefits at this point.
If workers are going to retire before they are eligible for Medicare benefits, health insurance should be comparison shopped.
Roll Over IRAs, Address Legal & Health Issues - At Retirement
Retirement accounts that are held at employer-sponsored retirement plans may be best ‘rolled over’ to an IRA account that offers better choices with better service. Workers should be careful to not take possession of these funds directly, as this would cause a tax liability. The brokerage firm or fund company accepting the rollover can provide the procedures to rollover an IRA without causing a tax liability.
IRA beneficiaries should be reviewed and updated as needed. A qualified attorney may provide the ideal guidance for each worker’s situation. The same attorney may also offer advice regarding wills and power-of-attorney considerations.
If workers retire before becoming eligible for Medicare benefits, health insurance coverage should also begin when employer benefits stop.
Review Investments for Appropriateness - Every 3 to 5 Years After Retirement
Since the stock and bond markets are always changing, so too is the risk profile of retirements accounts. Therefore, IRAs should be reviewed by an investment professional every few years, and adjusted as needed. Indeed, even if the risk profile of these holdings doesn’t change, the aging of their owners might change the risk level sought.