Nearing Retirement

If you are hoping to retire in two to five years, what should you be doing now to make it happen?  As in all things financial, you must have a plan.  In retirement, especially in the later years, there is little you can do to increase income.  Additionally, there are significant expenses over which you’ll have little control (medical costs).  An assessment now will help toward understanding if you will be financially prepared for retirement.

1. Review your net worth. Your net worth is your total assets (cash, bank accounts, investment accounts, retirement accounts, real estate) minus your total liabilities (credit card debt, mortgage debt, other money owed). Your net worth will be used to supplement retirement income you receive from other sources (pensions, social security).
2. Estimate your annual expenses for retirement.  Consider life style changes.  Perhaps you’ll travel more or engage in hobbies in early retirement.  Medical expenses might be higher in later retirement.  Will you move to a lower tax state? Some states have no income tax or exempt a significant amount of retirement income from taxation. Will you downsize from your current home, planning on using some of the equity for retirement? How often will you need a new car? Retirement planning tools are available on the web sites of many financial companies and AARP’s web site.
3. Develop a retirement income plan.  Identify the source of your income (pensions, social security, retirement account withdrawals), estimate the amount you’ll receive and when you will start receiving it.  Make sure to review the available options, particularly as they relate to a surviving spouse.  On the death of one spouse, will the surviving spouse be able to maintain her lifestyle on the remaining income?  Plan how you will draw from other assets to supplement pension/social security. 
4. Know your options for Social Security.   Most people take social security at age 62, which means their benefit is reduced by 25% assuming 66 is their normal retirement age. Waiting until 66 means you’ll receive your full benefit.  And for each month you wait beyond your full retirement age, you’ll receive a higher benefit (up to 8% per year) maxing out at 70.  The Social Security web site has tools to estimate your benefit based on your work history. 
5. Review your insurance coverage.  You may not need life insurance any longer if your assets will cover the costs of your funeral.  Medical insurance could get more expensive.  Will you have an employer provided plan? When you are on Medicare will you carry a supplement?  Does you medical plan include prescription drugs?  Medical insurance and your share of medical costs must be included in your retirement expenses.
6. Understand the requirements for filing for Medicare.  If you miss filing dates your premiums could be higher.
7. Does your plan work?  The primary advantage of planning when you are working is that you can do things now to affect the plan.  Work diligently to lower your debt, especially credit card debt.  Save as aggressively as possible to increase your retirement assets.  Cut expenses to increase saving. Investigate keeping your job longer or transitioning to part time so you continue to have a stream of income.

Whatever your dreams for retirement, planning ahead will increase the possibility that they will come true. 

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.