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Retiring in 12 months or less? What to do

Retiring in 12 months or less? What to do

May 26, 2021

This is it — the home stretch, the last hurrah, the final few months before you retire. Congratulations! You’ve earned the right to relax.

Just be sure your pending retirement doesn’t distract you from the important financial moves that must be made before your paychecks come to a halt.

From stress testing your budget, to planning for healthcare, to determining which Social Security claiming strategy might optimize your monthly benefit, the to-do list is long for those who expect to retire in the next 12 months.

“This is the time when you really have to make sure you’ve got a boat that floats,” said Steven Sass, an economist with the Center for Retirement Research at Boston College, in an interview. “You might decide that you need to work longer, or use your house as a source of savings.”

Review your retirement assets and expenses

Your first step as you ready your financial plan for life after paychecks is to get a grip on your budget — a firm grip.

“You need to develop a truly comprehensive budget to be sure you understand what fixed expenses you are going to face in retirement, what your assets are, and how inflation may impact that budget,” said Josiah Grauso in an interview, a financial professional with ASC Financial Group in Bartonsville, Pennsylvania.

Compiling such data should take a minimum of six months to give spending patterns time to emerge and to ensure any bills that get paid quarterly get factored into the budget. “This will give you a chance to see trends, like how much you spend on dinners and vacations per year,” said Grauso.

As you budget for the long haul, consider, too, which bills may disappear over the next five years, including perhaps your car loan or monthly mortgage. But also project for healthcare expenses, which tend to increase as you age.

Indeed, many retirees underestimate the cost of future medical expenses. The latest figures from Fidelity Benefits Consulting estimate that a 65-year old retiring today with traditional Medicare insurance coverage will need an average of $295,000 (in today’s dollars) to cover medical expenses throughout retirement, not including any costs associated with assisted living or long-term care.1

Analyze your income stream

Once you’ve calculated your future expenses, determine how much money you will have coming in from guaranteed sources of income, such as Social Security and any pensions, annuities, or trusts.

Find out, too, whether those income streams include cost of living increases, said Grauso. If not, your future purchasing power may be far less than you bargained for.

The difference between your expenses and guaranteed income is the amount of money you will need to generate from your personal savings, IRAs, 401(k)s, and other investments to make ends meet.

A 4 percent withdrawal rate, adjusted annually for inflation, is often advised, as it may allow you to leave your principal untouched and minimize the likelihood you will deplete your savings, but rules of thumb don’t always apply. The ideal withdrawal rate for you will depend on your living expenses, the amount you have saved, and your portfolio’s annual rate of return.

If you can’t generate enough from your personal savings and investments to cover your bills, you face some tough decisions. You can potentially downsize to reduce your living expenses, assume more risk to chase higher investment returns, or simply work a few years longer to supplement your savings.

Remember, if you are age 50 or older by the end of the calendar year, you can potentially supercharge your savings by making additional catch-up contributions to your 401(k), 457 or 403(b) retirement plan.

Depending on circumstances, some of these calculations get complicated. Some people opt to consult a financial professional to help determine an appropriate savings rate and withdrawal rate.

Stress test your retirement budget

Before you bid farewell to the boss, it is also important to give your budget a test drive.

Try living off your projected income for a period of several months to make sure it meets your needs, suggested Justin Halverson, a financial professional with Great Waters Financial in Minneapolis, Minnesota.

Don’t forget that in the first decade of retirement, you are likely to spend more money than you did during your working years as free time allows for more travel, dining out, and spoiling the grandkids.

“For the first 10 years of retirement, you may enjoy your newfound freedom while you still have your health, so you’ve got to build in a buffer for extra spending money,” said Halverson in an interview.

Your entertainment expenses may drop during the last decade of retirement, but your healthcare costs will likely rise.

Pay down your debt

If your budget looks tight, you may be in the position to lower your expenses by paying down some of your debt, such as your car loan or high interest credit card bills, before you retire. Indeed, minimizing debt is an important strategy when you move to a fixed income.

Don’t fret if you still have a mortgage. Unlike their parents’ generation, many retirees today still carry a mortgage. Some even “upsize” to nicer digs. Just be sure your income stream can support your future payments.

That said, it may make sense to refinance your mortgage loan to lower your monthly expenses, if you can still secure a lower rate than you currently pay. Those who intend to renovate or relocate in the near-term may also wish to close on their new loan before they stop receiving a paycheck, as borrowing money in retirement can be more challenging, said Halverson. “It’s certainly easier to refinance a loan to a lower rate while you are still collecting wages,” he said.

Plan for healthcare costs

If you plan to retire before you are eligible for Medicare, the federal government’s health insurance program for those age 65 and older (and some younger people with disabilities), you’ll need to factor in the cost of private health insurance for the gap years until you are Medicare eligible.

“Some employers allow retirees to continue on their plan at a much better rate (than you’d find on the private market), but for other companies that’s not an option,” said Halverson. “You need to be sure you have a bridge.”

Once you are Medicare eligible, you’ll need to decide whether it makes sense to purchase a supplemental policy to cover some of the costs traditional Medicare doesn’t pay for, including copays and deductibles.

Strategize Social Security benefits

Nearly half of Americans age 50 years or over failed a Social Security quiz in a nationwide MassMutual survey. That can be concerning, because not knowing Social Security essentials could result in fewer benefits.

For instance, the age at which you begin taking Social Security benefits can have profound implications on your future income stream.

Those who claim benefits at the earliest opportunity, for example, which is age 62 for current retirees, get a reduced benefit for life, which may make sense if you do not expect to reach the average life expectancy due to family history or poor health.

By waiting until your full retirement age, however, which ranges from age 66 to 67 depending on the year you were born, you can increase your monthly benefits to the full amount to which you are entitled, as determined by your earnings record.

You can maximize your monthly benefit further still by delaying Social Security until age 70 — at which point the benefit of postponing any longer disappears. If your full retirement age is 66, for example, you would receive 132 percent of your monthly benefit by waiting until age 70.2

“Some people take Social Security early because they worry about losing out if they pass away too soon, but it’s an insurance bet if you ask me, especially if you are married and your spouse will be dependent on that income stream,” said Halverson. “Don’t think about the break-even point. Think about longevity.”

Consider longevity insurance?

As you enter retirement, you may also potentially help insulate yourself from the threat of outliving your retirement savings by purchasing longevity insurance, or an annuity contract designed to pay guaranteed income for life once the policyholder reaches a certain age, said Sass.

“If you buy an annuity in your mid— to late—70s, that’s when these products can offer a lot of value because you’re pooling mortality risk,” he said. “If you live to 100, you get the resources of others you outlived, so it protects against longevity.”

To that end, it may also make sense to purchase a deferred annuity when you retire that delivers an income stream at some point in the future – whatever age you select, said Sass. “That creates a much simpler financial problem,” he said. “If you have an annuity that kicks in at age 85, now you only need to survive on your savings from now to then. An annuity allows you to hedge longevity risk.”

Here again, however, it may be best to consult a financial professional for guidance on whether an annuity, deferred or otherwise, is a fit for your goals.

Have an emergency fund

If you haven’t done so already, now is also the time to set up an emergency fund worth at least six months of living expenses in a liquid, interest-bearing account.

Why? A “cash stash” can help cover the bills when the market takes a tumble, minimizing the likelihood that you’ll have to liquidate a portion of your equity (stock) investments in a down market to generate income.

The other benefit of an emergency fund? A cash cushion may grant you the flexibility to keep a larger portion of your portfolio in growth-oriented investments, which could also help mitigate longevity risk.

“You need some money in a ‘growth bucket,’ which is designed to add additional income for a few more years into your 70s,” said Grauso, who recommends the ‘Rule of 100.’ “Take 100 and subtract your age. That’s the total amount of money I would recommend retirees have at risk in a growth position.”

Watch the Tax Man

When it comes to retirement, timing is everything. The last paycheck you collect is likely to be the biggest you’ve ever received. It may include unpaid vacation days, bonuses, and proceeds from stock options.

“Picking the right retirement date is important,” said Halverson. “If you work the entire year and get that last check in December, your entire salary could be subject to a higher tax bracket. It can pay big dividends to retire early into the new year so you’d be in a lower marginal tax bracket versus towards the end of the calendar year.”

It’s not all about money

Halverson is quick to note, however, that planning for a successful retirement doesn’t just involve numbers.

“You need to have a life plan for retirement,” he said. “Often times, our work environment is where we have the greatest social interaction and perhaps derive the greatest sense of purpose. When you take that out of the equation, you need to make sure you have a plan for not just how you will spend your money, but your time as well in retirement.”

While some retirees transition smoothly by joining community groups, taking classes at the local college, or getting more involved with their grandchildren, others find they have too much idle time on their hands — which can impact their mental and physical health. “Having a proper retirement plan involves the three Ps,” said Halverson. “You need ‘people’ to interact with, creative outlets to engage your ‘passions’, and a sense of ‘purpose’.”

Provided by Shelly Gigante, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual). 

©2021 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001