10 Pre-Retirement To-Do's

By Betty BookerRetirement approaching? Do you feel as if you're about to jump off a cliff?Trepidation is a normal feeling when you're exchanging a familiar career for an unknown way of life.The way to lessen anxiety isn't leaping without looking, however.Know what you're getting into."Retirees face a new reality," says Tama McAleese, author of "Get Rich Slow" (Career Press, 2004), now in its fourth edition.Longevity, escalating health-care costs, wobbly pension and retiree health insurance security, tax changes that stress the middle class and careers shortened sooner than expected mean ordinary people have to change their expectations and to plan differently, the Cleveland certified financial planner says."Most people don't have a clue," she continued in a phone interview last week."They underestimate what they'll need. They think they can walk off with $250,000 in their 401(k) and think that will last."That's why "comprehensive financial planning gives you confidence you are making the right financial moves before you make them," says Janet B. Benedetti, a certified financial planner at Ameriprise Financial.Planning "allows you to test your choices to make sure they are good moves," she says.
If you don't have a financial planner, ask colleagues, friends and family for recommendations about planners who know about the retirement transition process. Retiring is filled with administrative pitfalls, says Kevin Deckert, a certified financial planner and president of Deckert Leahy Inc., a fee-based wealth management firm.Done properly, retirees can save thousands on taxes and make their money last as long as they do, he says.Here are some steps to take and why: Check Social Security. If retirement is imminent, such as the end of the year, talk to Social Security now to get the closest estimate of what you'll get, Deckert says.You need to understand Social Security options, including delaying retirement until age 66, the date of full Social Security benefits if you were born in 1942 or thereafter.Women -- whose longer life spans create higher health and living expenses -- should pay particular attention because they "have circumstances that make sound financial planning critical for them," Benedetti says.  Stop spending. Live far beneath your means, McAleese says, long before retirement and especially as retirement nears."Use it up, wear it out, make it do or do without," is her frugality mantra.Certified financial planner Keith Muth, managing partner at Virginia Asset Management, says that often, in the five years that precede retirement, "there's a lot of disposable income, and it turns into spending that creates debt that could wreck a retirement plan."

To make your money last, don't overspend in the first five years after retirement, Muth says.


  • Don't push to pay off the mortgage, McAleese says.

    Instead, she advises, invest the savings you would have used for that payoff in sound, diversified mutual funds outside 401(k) and IRAs. Capital gains on nonretirement plan assets are taxed at 15 percent while income from tax-deferred retirement funds are taxed in retirement as ordinary income at a higher rate.

    Also, reassess if it makes better economic sense to sell your house, invest the profits and rent smaller quarters, she says.

    • Do thorough tax planning, Deckert says.
    Save written literature on company retiree benefits in your permanent files, Deckert says.

    Also, if you have company stock in a 401(k) or profit-sharing plan, askthe company for the actual tax basis on the company stock since the daythe company contributed it to your 401(k). This is better data for taxplanning than the average cost basis.

    You usually have to ask the plan administrator, not humanresources, for this information, which the company is required by lawto maintain, he says.

    Don't sell your company stock before moving it to a "rolloverIRA" that you create to receive your 401(k). Instead, roll it "in kind"into the IRA and then use the cost-basis information to sell it, if youwant to, at the best tax advantage to you.

  • Note that there's no law requiring companies to continue retirement health insurance coverage, even to their current retirees.Also, many corporations are freezing or discontinuing their defined-benefit pensions, Deckert continues.These traditional pension plans are being converted intocash-balance plans, in which retirees are given a sum that the companydetermines their pension is worth, or the pension plans are being soldto an insurance company, which may or may not be sound enough to payout the pensions.Bottom line: Get a reputable financial planner and tax adviserto analyze your options and advise you on the best options for you.Pre-Retirement To-Do'sCertified financial planner KeithMuth, managing partner at Virginia Asset Management, developed thisto-do list to get retirement income from your nest egg: Consolidation. Put 401(k), 403(b) and IRA accounts in oneIRA per person at a brokerage or large mutual fund family. Registernon-IRA accounts as individual, joint or living trust.  Income. Amount expected from Social Security andpension (compare lifetime pension income with a lump-sum rollover intoan IRA). Evaluate single-life or joint-and-survivor pension income,with life insurance for the survivor. Any part-time employment? 
    Needs. Figure living expenses, such as food,clothing, shelter, medical care, utilities. Discretionary expenses,such as travel and entertainment. Health costs and insurance andinflation. Cost of future retirement housing.  Taxes. Determine local, real estate and state andfederal income taxes. Income tax is due on Social Security, pension andIRA withdrawals (which must start by age 70 1/2). Social Security hasearnings limits before age 65.  Investment income. Add living expenses and taxes,then subtract pension and Social Security income. Limit withdrawals to4 percent to 5 percent of portfolio balance to prevent outlivingsavings. First consider automatic withdrawals from non-IRA investmentsto checking account.  Asset allocation. Determine what percentagesshould be in cash and diversified bonds and stock. Consider your risktolerance, how many years you will make investment account withdrawalsand amount needed.  Choices. Use mutual funds or stocks, bonds or investment managers to help choose investments to cover inflation during retirement.  Balance. Don't leave too much money exposed to thestock market. If there's an extended stretch of poor market returns,you could end up in trouble. Start positioning your portfolio forwithdrawals. Typically recommended are 50 percent to 60 percent instocks, and 40 percent to 50 percent in long-term bonds. 
    Cash. Put one to three years of needed withdrawalsin a money-market account or in short-term bonds. Have three months ofneeded expenses in a money-market checking account.  Plans. Eliminate debt, project retirement needs,get a copy of the company retirement plan and retirement forms, reviewstock options, open a "rollover IRA" account to receive your 401(k),evaluate health insurance and do tax planning, establish direct depositand tax withholding for retirement income.Source: Richmond Times-Dispatch. Powered by Yellowbrix.
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