Ready to retire? What you need to know to get set financially

What will your golden years look like? Retirement can be exciting, relaxing, a time of reduced stress. But making the transition to your next chapter can feel overwhelming. It is a major change, emotionally and financially.

It’s also very manageable: with some thought, planning and organization, you can turn uncertainty into confidence and feel a sense of control over your future. Our planning experts offer guidance on what you can do to make your retirement journey a smooth one.

Q: What steps are important to financially prepare for retirement?

Nicole: During working years, income comes in and money goes out, but many people don’t really keep track. To be prepared for retirement, you want to have a clear picture of your expenses and understand how your goals will impact your expenses in the future. Do you expect to travel, move to a new home, start new hobbies, entertain grandchildren, or do charitable giving? These goals will affect if you spend more or less once you retire.

We recommend organizing your finances so you can understand what assets you have, what your expenses are and what your future expenses are projected to be. Create or update your budget. This will help give you an idea of how much you might need in retirement and be the first step to evaluate how best to utilize your assets. We recommend taking inventory of where your accounts and other assets are held. You may have accounts in different places, like 401(k)s or 403(b) plans from old employers, or smaller savings accounts. Now is the time to consolidate and simplify to obtain a clear idea of your financial picture.

Other things you should consider include paying off debt and building up an emergency savings account. It’s important in retirement to have cash available in an emergency without having to sell investments or withdraw from a tax-deferred account. Additionally, as you evaluate all your assets, it is the perfect time to take a fresh look at your estate plan and think through your legacy goals.

Q: What often gets overlooked upon retirement?

Nicole:  A big one is being mindful of the timing to enroll in Social Security and Medicare. You’ll want to coordinate health insurance to ensure there is no lapse in insurance coverage. It’s important to understand when your employer-provided insurance ends and when Medicare and supplemental policies begin. If those dates do not line up, you'll want to purchase private insurance to cover the gap. It’s important to note that there is an eight-month Special Enrollment Period (SEP) for Medicare once you stop working after you pass age 65. If you miss that period, you can be subject to penalties.

With Social Security, identifying the optimal time to start collecting benefits is important. If you can postpone until age 70, you can maximize lifetime earnings. However, if you have health concerns or other financial concerns, postponing may not be in your best interest. Every situation is unique.

Q: How do you know if you are financially ready to retire?

John: We do financial projections all the time for clients to help them gain confidence in their finances. A projection is a cashflow analysis designed to answer the question: Do you have the money to retire and accomplish your goals? Projections are based on educated assumptions, including life expectancy, inflation, savings, assumed returns on certain asset classes, tax rates.

Goals are key. Most people are vague about their retirement goals. But goals help define future needs. Where will you live? Will you continue to work? How much will it cost to play golf four times a week? Will you do any gifting to heirs? Gifting to charities? A projection informs whether you can achieve what you want to achieve.

It’s important to note a financial projection cannot be made at one point in time and then applied unchanged after many years. It needs to be updated regularly as events and your circumstances – and your goals - change over time.

Q: What changes do you make if the projection says you’re off target?

John: We look at things we can and cannot control, dig deeper into the numbers, and make changes from there.

Things we cannot control include the financial market environment. Volatility is going to happen, but over time the peaks and valleys smooth out and history shows stock indexes, representing the equity markets, gradually trend upward. Watching a portfolio experience volatility in the first few years of retirement can be terrifying, and it raises the question whether early declines plus withdrawals could lead to a retirement spending shortfall. The bottom line is: Don't worry so much about the short term, keep an eye on your spending. If you have a down year in the market, make an adjustment to your spending.

Other uncontrollable things include tax legislation, how long you might live, and unforeseen expenses, such as major medical expenses or property damage.

Controllable things are where we adjust if your financial projections are not aligning with your goals. Spending is the big one. It’s common to anticipate spending the same amount in retirement as in pre-retirement. But if projections don’t support this level of spend, often a reduction in spend is achievable and can significantly improve results over time.

Q: Is there a tax-efficient strategy to spending in retirement?

Nicole: Yes, and this is where a sound plan can save you money in taxes. The rule of thumb is to first utilize assets from taxable accounts, including investment or brokerage accounts, since you have already paid taxes on these assets. Second, use assets from tax-deferred retirement accounts, such as an IRA. And last, draw from tax-free accounts, such as a Roth IRA, since these accounts not only grow tax-free, withdrawals also are tax-free.

This way you spend assets that are being taxed, while allowing tax-free assets to grow for as long as possible. If your IRA is large enough, that may be all the assets that you need, leaving assets in your Roth IRA. A Roth IRA is a great estate planning tool because your heirs can inherit those assets tax-free.

Q: Does the “4% rule” still apply when it comes to withdrawals?

John: The 4% rule says a retiree expecting to live 30 years in retirement can withdraw at that rate each year and not outlive his or her assets. It assumes a portfolio with a 50/50 mix of equities and fixed income. It’s nice to have a specific number to rely on, but it’s not safe to be inflexibly tied to a number, while assuming historic returns for stocks and bonds.

For those retiring early, a 4% annual distribution rate could be too high. Inflation is another consideration, especially for healthcare costs. Plus, spending habits tend to fluctuate each year. We believe it is better to remain flexible, well diversified and to make withdrawal adjustments as necessary. The idea isn't to guarantee a certain withdrawal percentage, nor to suggest that if you take more than 4% you’ll go bankrupt. The 4% rule is a good starting point, but it's not the end solution.

Q: Is it a good idea to defer taking distributions from an IRA?

Nicole:  In general, deferring withdrawals from an IRA until you need the money is a good idea. Under current rules, you have until age 73 before you must take required minimum distributions (RMDs), which are taxed as ordinary income when withdrawn from a traditional IRA or 401(k). If you were born in 1960 or after, RMDs begin at age 75. The longer you wait, the more time those assets will have to appreciate.

You should review your situation with a tax advisor. You don't want to defer if you will be in a higher tax bracket later. If you have a health issue and you're concerned about longevity, that could be a reason not to defer withdrawals.

Another thing to consider is gifting to a qualified charity directly from your IRA. If you are past 70 1/2, gifting from an IRA can be a great option to save on taxes. I have clients who were writing large checks for annual charitable distributions. Once they realized they could instead make charitable contributions directly from their IRA, it had a meaningful impact on their tax situation.

Q: How can people prepare for health care costs if they retire early?

John: There is a significant difference in how you address health insurance if you retire early, as opposed waiting until 65 when Medicare is available.

If you're retiring prior to 65, it's critical to think about your options and budget for increased premium expenses. Can you be added to your spouse’s or partner’s plan? If not, a comprehensive private family health insurance plan can be costly over a period of five to 10 years. The government’s health insurance marketplace offers plans with cost variable by your household income. Either way, it is going to be a higher expense than what you paid during your working life, particularly if you have dependents and a non-working spouse.

Prior to retirement, make sure to spend any flexible savings account (FSA) balance before your termination date. What you don't use, you lose. A health savings account (HSA) is not impacted by employment status, although you can no longer contribute to an HSA once you sign up for Medicare.

Once you turn 65, you must abide by the seven-month initial enrollment period (IEP) to apply for Medicare. If you miss your Initial Enrollment Period, you may have to wait to sign up and pay a monthly late enrollment penalty for as long as you have Part B medical coverage. The penalty goes up the longer you wait. Other penalties may apply to other types of Medicare coverage as well if you miss the IEP.  The IEP starts three months before you turn 65, includes the month you turn 65 and three months after the month you turn 65. It's important to note that you don't have to take social security to get full Medicare benefits, but you must contact social security to sign up for Medicare.