1. Clearly define your goals
Clarity around your goals is the fundamental first step to being retirement ready. You need to know what your income needs will be and how they might change over time. If you want to do anything additional, such as donate to your church or charity, provide an early inheritance to children or grandchildren, or pursuing other interests, documenting your goals will provide a clear path ahead.
And it should go without saying that it’s essential for you and your spouse to be on the same page regarding all of it.
2. Get rid of debt
Unexpected circumstances are guaranteed to arise throughout retirement, and carrying debt could hamper your ability to adjust your cash flow accordingly. While many consider an interest rate of 5% to be relatively low, I usually advise clients to rid themselves of anything exceeding this before considering calling it quits, if possible. Certainly don’t be taking on any additional debt as you’re preparing for retirement.
3. Know what you are paying for
Consider the following: A 1.00% fee on a $1,000,000 portfolio will be worth about $700,000 less in 20 years than it would be if it wasn’t charged a fee, assuming a 7% growth rate on the investments. Meanwhile, 95% of “professional” investors underperform their benchmarks over a 20-year period, meaning that many retirees are paying substantial fees in exchange for a subpar product!
Obviously, professionals deserve to be paid for the services and expertise provided to their clients. However, it’s crucial that you are clear on what you are paying for and what you are receiving in return. This awareness doesn’t just foster transparency but empowers you to make informed decisions that could profoundly impact your financial wellness in retirement.
4. Maintain a positive outlook by tuning out the noise
A positive demeanor will prevent you from panicking and making rash decisions during uncertain times. On the other hand, nothing will suck the joy out of your life like cynicism, the greatest perpetrator of which is the media – financial and non-financial alike.
I’m not asking you to be unrealistic or to act like something that is bad is good. But I am asking that you remain thankful for what you possess. Gratitude is a daily exercise. Begin and conclude each day by acknowledging your fortunes and appreciating the position you are in compared to others. Regardless of market conditions, politics, or global events, preserving your sense of gratitude is essential to a peaceful retirement.
Stop watching, or at least limit your intake of, the “news” and be intentional about spending time with your spouse, family, or friends. Take up a new hobby, get involved with the community – anything that prevents you from getting caught up in worrying about something that lies outside of your control.
5. Set realistic expectations
If the market is bad, you should expect to lose money. If the market is good, then you should expect to make money. You shouldn’t expect to “beat the market”, but you also shouldn’t put up with chronic underperformance of benchmarks.
If you’re working with a financial advisor, don’t expect them to “get out” before the market falls or “get back in” before it begins to rise again. This is not what financial advisors do. They help you prepare for challenges which inevitably lie ahead and construct a plan to address them.
You’ve likely witnessed numerous crises throughout your life. It’s only rational to accept that more lie ahead.
6. Prepare for the unexpected
Sound planning always begins with protection. Insurance, although often overlooked, is essential. Some might need to carry a small amount of life insurance into retirement and others might need to purchase independent long term care insurance policies.
By far the most overlooked insurance policy is umbrella liability insurance, which supplements the liability insurance provided by your homeowner’s and auto policies and provides additional coverage as well. The last thing that you need is to get sued after a car accident and have a good chunk of your nest egg up for grabs by the victim!
7. Develop a distribution plan
A well-thought-out distribution strategy is paramount. You should have no more than 5 years of portfolio distributions invested in cash and bonds. This is your “short term bucket”. The rest of your portfolio should be invested in a mix of low-cost stock index funds. This is your “long term bucket”.
When (not if!) the market falls, you need to be prepared to adjust your distributions to take stress off your portfolio, allowing it to recover. Conversely, when the market is doing well, you have a clear understanding of how much you can sustainably draw.
8. Develop a tax plan
Effective tax planning can significantly enhance your financial security in retirement. Aim to minimize your lifetime tax burden through strategies such as Roth conversions, qualified charitable distributions or investing in qualified opportunity zones or other commercial multifamily real estate projects. If you can, try to stay within the 12% tax bracket (soon to be the 15%) so that all long-term capital gains and qualified dividends remain tax-free!
And remember, your tax strategy in retirement begins with your tax strategy while you are saving! The earlier you are intentional about adopting a tax-efficient approach to saving, the more control you’ll have over your taxable income in retirement, ultimately reducing your lifetime tax bill.
9. Avoid complicated and expensive products
Annuities and permanent life insurance are two products which get marketed to retirees like there’s no tomorrow. Rarely are they needed. The full costs associated with purchasing such products are seldom disclosed upfront, and the high commissions earned from selling them present a conflict of interest that is rarely considered. Keep it simple by sticking with low-cost investments managed by a professional.
10. Plan your estate
Establish and regularly review beneficiaries on all accounts that permit them, ensuring they reflect your current wishes. Have your will reviewed at least every five years. If you have a living trust, make certain it’s funded and up to date. And implement a medical power of attorney to ensure that medical decisions can be made according to your preferences if you become incapable of making them yourself.
These things don’t take long, but far too many people push them off and leave their family to pick up the pieces after they’re gone. An updated, well-structured estate plan will spare your loved ones from unexpected complications, allowing them to honor your legacy without added stress.
11. Leverage competent professionals
Even if you can “do things on your own”, do you really want to? You’d have to spend the years leading up to retirement earning what essentially amounts to a college education in financial planning, social insurance, taxes, estate planning, investment management, etc. Then you must take time to keep up with legislative changes every year, some of which can be sweeping in nature.
The expertise and guidance of skilled professionals can be invaluable, especially as you approach retirement. Engaging with a competent, knowledgeable, and proactive Certified Financial Planner (CFP), estate planning attorney, and Certified Public Accountant (CPA) can significantly enhance the implementation of the steps discussed above.
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