Count Down to Retirement

As your retirement date approaches, there are a number of items to consider. Forethought will reduce stress, save money, and increase your retirement security. Some items will require family discussion. Facing these decisions one at a time will help - as will the services of a financial advisor when appropriate.

Five Years (or more) to Go
You may be sitting on a portfolio that is top-heavy with growth stocks. With retirement dead ahead, it is time to change course slightly but not time to abandon the equity ship. The mistake that some people make is to tie everything up in fixed-income investments. If leaving the job at age 55 or 60, one could spend the next 20 or 30 years in retirement, so there is still a need to invest for the long haul.

Some people in their mid-fifties who are heavily invested in equities should begin shifting out of aggressive-growth stocks and funds, with the aim of putting together a retirement portfolio. It should be divided among the following four asset categories: growth stocks or funds (with a tilt toward blue chips rather than small companies); growth and income (or balanced) funds; bonds, possibly tax-exempt if warranted; and certificates of deposit with staggered maturities.

It is best to ease out of riskier holdings gradually. Suppose that a 55 year old has a total of $200,000 in retirement assets that he/she controls, such as IRAs and 401(k) tax-deferred retirement plans for employees, and of that, $50,000 to $100,000 is in aggressive-growth mutual funds. Over the next five years, while maintaining the tax-deferred status of the money, $10,000 a year, or about $850 a month, can be shifted into assets that are less volatile. However, some retirement plans do not permit monthly shifts, so contact the plan trustee for the guidelines.

Four Years to Go
With an investment plan in place, it is necessary to turn one’s attention to where money is spent. “The key is to try before you buy,” says Helen Dennis, a lecturer at the University of Southern California’s Gerontology Center. Use vacation time to travel around with an eye toward where you might like to live or spend time in retirement.

Get a feel for the area during vacations and take time to make the decision about moving. Often people are sorry that they sold the main house now that they have the time to enjoy it. For specific information on places to retire, take a look at Retirement Places Rated, by David Savageau (Prentice-Hall), 50 Fabulous Places to Retire in America, by Lee and Saralee Rosenberg (Career Press), and The 99 Best Residential & Recreational Communities in America, by Lester J. Giese and others (John Wiley & Sons). For a state-by-state comparison of income and sales taxes and other advice on relocating, get a copy of Finding the Right Place for Your Retirement.

Three Years to Go
Some pre-retirees use a spreadsheet or budgeting software program to help them create a retirement budget based on different assumptions. Start with current expenses and then anticipate how those costs will change once retirement comes.

In general, expect some costs, such as travel, entertainment, and health insurance, to increase, while other expenses, including clothing, taxes and perhaps housing, decrease. Keep in mind that active retirees are likely to spend more in the first five or so years of retirement than they will later.

When figuring your retirement budget, do not forget about saving. Continue to accumulate wealth during the first seven or eight years of retirement before starting to dip into the principal.

Chances are, most will worry less about outliving their resources than about health insurance costs, inflation, and Social Security – wild cards that could throw a wrench into careful planning.

Request a copy of your Social Security earnings statement and benefit estimate by calling 1-800-772-1213, and ask for Form 7004. After you fill out and mail back the form, it takes four to six weeks to receive the statement and estimate. If both spouses have been employed, submit two forms.

If the savings fall short of projected expenses, you may have to take on more investment risk in the search of higher returns, or you may have to plan on spending less after retirement or even postpone retirement.

Consider whether to drop your life insurance or take paid-up values. If you have a whole-life policy and no longer need it to provide income in the event of death, cash it in or draw down the cash value gradually before starting to tap IRAs. However, evaluate life insurance needs in combination with the defined benefit pension options that reduce benefits to provide for survivors.

Make sure there is adequate umbrella liability insurance. Are there grandchildren driving your car and do you want that liability to be over-exposed?

Two Years to Go
Retirement is not exclusively a financial decision. Now is the time to devote some thought to how the one or two of you are going to spend all those leisure hours, or even whether there will be time spent in leisure. Plan to continue networking with business associates after retirement, just in case there is boredom with fishing and canoeing. Is there a little consulting in the future?

The trend toward working part-time in retirement is not just a way of filling up the day. Many retirees need the income or want to build future financial security. An increasing number of companies are keeping retirees on retainer for part-time work or special projects, so even if the retirement isn’t totally voluntary, it pays to leave on good terms in case there is a need to get future assignments.

Retirees often underestimate how difficult it is to become a consultant or run another small business. If considering taking the plunge, get those feet wet by enrolling in one of the pre-business workshops held at local Small Business Administration offices.

To volunteer business expertise, contact the Service Corps of Retired Executives (SCORE) at 1-800-634-0245. The Points of Light Foundation (1-800-879-5400) can also refer people to a volunteer clearinghouse in their area.

One Year to Go
Lump sum or annuity? It can be a tough decision. The most common type of annuity, the joint-and-survivor option, pays a monthly check to the retired employee for life. After the employee’s death, the spouse receives a portion of the original benefit for life. An annuity frees the account holder of the responsibility of managing the money, but his or her decision to annuitize is irrevocable. It is possible to lock in a fixed rate of return, but interest rates are at a 30-year low.

If you opt for the lump sum, arrange to have the employer roll it directly into an IRA to avoid having 20% of it withheld for taxes if the money passes through your hands. Consider allocating the funds among investments with different levels of risk.

If the owner is among the small number of people who need all the money right away to launch a business or make a major purchase and was born before 1936, it’s best to pay the taxes due immediately using ten-year forward averaging to ease the bite.

Set the optimal retirement date. By waiting until the end of the year or the employment anniversary month, an owner could add a full year of service for the purpose of calculating his/her pension. Plans vary, so contact the retirement plan administrator. Also contact former employers to check eligibility for any other pensions.

Consolidate rollover IRAs with regular IRAs to cut down on paperwork and reduce fees. However, keep non-deductible IRA accounts totally separate.

Six Months to Go
Medical insurance is a top priority. Find out whether the company provides benefits for retirees or whether a monthly premium can be paid to stay on in the group policy. Law allows a person to remain in his/her employer’s medical plan for 18 moths after retirement, but the full cost of coverage plus a small administrative fee will have to be paid.

Next, try to convert to an individual policy with the employer’s carrier. However, such conversion policies usually offer bare bones coverage at exorbitant prices. If both spouses are healthy, shop for individual coverage independently. Premiums for a couple in their early sixties are likely to run $400 to $700 a month.

Once age 65, Medicare will be available, but Medigap coverage is also needed. Following one’s 65th birthday, there is a six-month open enrollment period during which any Medigap policy can be chosen, and the person can be accepted by the insurer, regardless of his/her health.

If not in good health now, you may be better off postponing retirement until at least age 63 ½ , when the 18-month extension of your employer’s group insurance can be relied on until eligible for Medicare.

Final Checklist
Apply for Social Security benefits about three months before you want them to begin. If you will be moving to another state, have an attorney there review your will to make sure it will still be valid in that state. Draft a durable power of attorney, naming someone to handle your financial affairs if you become incapacitated. Also, make a living will, expressing your wishes about what kind of medical treatment you would want.

Source: Guide to Social Security 2000