Written by: Tricia Rosen, CFP®, MBA, EA, Principal of Access Financial Planning, LLC

Checklist for Retirement Readiness

It can feel overwhelming to try to think of all the factors that go into setting yourself up for success in retirement. A checklist for retirement readiness can help keep important tasks from being overlooked. Also, using a checklist to determine if you’re on track to retire can make a seemingly enormous task seem more doable by breaking down the process into smaller, more manageable steps that you can tackle one step at a time. Here are the 9 critical steps to consider when getting ready to retire:


Checklist for Retirement Readiness Items:


1. Consider Your Retirement Date

One of the key steps as you develop your retirement plan is considering when you plan to retire. Of course, the financial payoff of working longer is obvious and has been well documented: Delayed portfolio withdrawals, additional retirement plan contributions and tax-deferred compounding, and a larger Social Security benefit can all contribute to a financial plan’s overall sustainability.

Qualitative Factors in Checklist for Retirement Readiness

It’s worthwhile to consider your expected retirement date from a number of additional angles, not just the quantitative, financial dimension. You’ll also want to consider quality-of life issues, health, and whether you can actually continue to do your job later in life. It’s helpful to have a plan for what you are retiring to once work stops, such as hobbies, family time, social connections or a side hustle, so you have a sense of purpose after the initial honeymoon period of having no set work schedule wears off.

Realistic Expectations

It’s also important to bring a healthy dose of humility to planning a retirement date. A study from Morningstar Investment Management has demonstrated that people often do a poor job of estimating when they expect to retire. People who thought they would hang it up early often ended up working longer than they estimated, whereas some who had anticipated delaying retirement didn’t do so. This study was conducted in 2018, so it doesn’t factor in the impact of the pandemic Health issues or layoffs often force people out of the workforce earlier than they might consider ideal, while others continue to work longer than they anticipated because they need or enjoy their jobs or value the social dimension. In other words, as valuable as it is to set a goal date for retirement, you may end up deviating from it for one reason or another.


2. Assess Your In-Retirement Income Needs for Checklist for Retirement Readiness


Estimate On-Going Living Expenses

The next step in the process is to take stock of your planned in-retirement spending. One common rule of thumb for that job is the 80% rule, which states that in retirement, you’ll need to replace about 80% of your working income. Taxes may go down and you don’t have to set aside income for savings as you did when you were working, which typically represents the bulk of that 20% reduction.

But affluent retirees tend to spend much less than 80% of their working incomes, on average, whereas retirees with lower working incomes tend to consume a higher percentage of their working incomes in retirement. That’s only logical, in that affluent households likely have heavier savings rates, whereas lower-income households consume a bigger share of what they make.

Common Spending Variables

Moreover, many retirees plan lifestyle changes in retirement that will affect their spending. Some retirees may be planning to downsize or move to a lower-cost part of the country to make retirement more affordable, for example, while other retirees may expect spending to increase because of heavy travel plans. Making lifestyle adjustments like these can be incredibly impactful from a financial standpoint. Long term care insurance has become increasing difficult to obtain and can be cost-prohibitive if someone does qualify. Privately funding long term care expenses can be a significant expense at the end of life, but it’s difficult to predict who will need it and how much should be set aside to fund it.

Because forecasting your anticipated income needs is such an important component of crafting your retirement plan, make sure you have an understanding of your income needs based on your known expenses. Then layer on anticipated changes. Your spending won’t necessarily be static from year to year and you may have higher-spending years, especially in the early and later parts of retirement, and lower-spending ones, too. 


3. Quantify and Maximize Pension and Social Security Benefits for Checklist for Retirement Readiness


Predictable Income Sources

The next step in the checklist for retirement readiness is to determine much of your retirement income needs will be supplied by sources which are more predictable. The most common examples are Social Security or pension income, but it could also be an insurance contract which pays out the benefit as an annuity.

Next, consider how your decisions can enlarge or shrink those benefits. Delaying claiming Social Security up until age 70, for example, will enlarge your eventual benefit and is often a good option for people who anticipate longer-than-average life expectancies. It’s one of the few lifetime annuities which adjusts for the cost of living available for most people and is an important part of a retiree’s income.

Choosing an option for a pension payout that doesn’t just cover you for your lifetime but also provides a benefit for your spouse if you predecease him/her will reduce the payout that you receive. The reduction in payout has to be weighed against the need to provide income for their spouse if the spouse outlives the person receiving the pension.

Reducing Impact on Your Portfolio

These decisions are mission-critical. The more of your income you’re able to replace with Social Security or a pension, the less you’ll have to rely on your own portfolio to pay the bills. Making smart pension decisions is unique for each person’s situation and a good time to get some professional help. To see how various Social Security filing strategies might affect your eventual benefits, the free tool Open Social Security can be helpful. Also, be sure to create your online Social Security account access to receive your Social Security benefits statement and to make communicating with the Social Security Administration more efficient. 


4. Evaluate the Appropriateness of Annuities for Checklist for Retirement Readiness


If Social Security or a pension will supply you with less income than you need for basic expenses such as housing, food, utilities, and insurance, for example, an annuity may be appropriate. Annuities can be another source of lifetime income, but they can also be devilishly complicated and, in some cases, quite costly. Before sinking a portion of your assets into an annuity, it’s important to thoroughly understand what you’re getting, whether you need such a product in the first place, and what type of annuity might be right for your needs.

A SPIA, or single premium immediate annuity, can be a good choice for someone who prefers the predictable income payments, expects to live for a long time, has enough assets that a portion of the assets could pay for the annuity without drawing down too much from their portfolio, and is purchasing the SPIA from a reputable company. A SPIA is typically more straight forward than other types of annuities, but it is still advisable to be well-informed before purchasing one.


5. Determine Whether Your Planned Spending Rate Is Sustainable


Once you’ve determined your in-retirement income needs and how much of them will be covered by certain sources such as Social Security (and possibly an annuity), your portfolio is going to have to supply the amount that’s left over. The annual dollar amount you plan to withdraw from your portfolio, divided by your portfolio’s current value, is your withdrawal rate.

What’s a reasonable withdrawal rate? People embarking on retirement planning often start with the 4% guideline, which revolves around withdrawing 4% of a portfolio’s value in Year 1 of retirement, then inflation-adjusting that dollar amount thereafter. That system was shown to have worked over a wide variety of 25- to 30-year periods over modern market history to prevent the retiree from out-living their portfolio. In any case, it’s wise to be a bit flexible with respect to withdrawal rates, especially reining in spending in weak market environments. It’s also important to remember that retirees’ consumption is rarely fixed from year to year. You may have years of higher outlays and years of lower ones. The 4% rule can be a good guideline but it may not reflect the actual expenses, both required and variable, over the course of a 30 year or longer retirement. 


6. Craft a Long-Term Portfolio Based on Your Anticipated Income Needs


Once you’ve determined your spending plan, the next step is to structure your portfolio to support it. Long gone are the days that retirees can subsist on the income from their cash, bonds or even dividend paying stocks. Today’s retirees also need the long-term growth potential from stocks.

Bucket Approach for Managing Cash Flow Needs

To help structure your portfolio, first use your cash flow needs to determine how much to hold in cash, bonds, and stocks. Using the bucket approach for cash management, near-term spending needs (approximately two years’ worth) is held in cash or cash equivalents, another six to eight years’ worth of cash flow needs in fixed income instruments and dividend-paying equities, and the remainder of the portfolio in globally diversified stocks. That provides a roughly 8 to 10-year buffer in case stocks decline and stay down for a long time. The key is using your own unique cash flow needs to inform your asset-allocation positioning. 

Low Cost and Appropriate Diversification

For everyone, whether they are in retirement or not, keeping portfolio costs as low as possible while still using well managed investments can have a meaningful impact on the return you receive. Cost is one of the few variables investors actually have some control over, so it makes sense to manage it as effectively as possible.

Appropriate diversification across all dimensions, for example company size, geographical location, industry sector, and stage of development, is important to manage portfolio risk. The three factors which go into portfolio risk are how much need there is for your assets to work harder, how much volatility you can absorb, and the investor’s emotional comfort with risk. Taken together, they will determine the appropriate portfolio risk level. Portfolio diversification allows an investor to participate in equities to allow portfolio growth, but with an appropriate amount of portfolio risk.


7. Pay Attention to Tax Management for Checklist for Retirement Readiness


Hidden Taxes and Surcharges

The impact of taxes on the sources of income while you are working can be complex, but it’s even more complex in retirement. There are various factors which impact taxes and surcharges in retirement which can be easily overlooked. AMT, IRMAA, NIIT, and the Social Security tax torpedo are taxes and surcharges you may never have heard of, but they can be significant additional expenses during retirement. Many of these obligations were initially intended for higher earners, but they now impact people with more moderate income because they aren’t adjusted for inflation. Click on the hyperlink here to learn more about the hidden taxes and surcharges and how to manage them.

Asset Location and Asset Allocation

Asset allocation is the mix of cash, fixed income instruments and equities which makes up a portfolio. A common asset allocation for someone at the beginning of retirement is 60/30/10, which is 60% equites, 30% fixed income, and 10% cash and cash equivalents. However, the asset allocation will vary depending on the person’s unique situation.

In contrast, asset location is which type of account holds the various securities. The account types are generally taxable, tax-deferred, or tax-free. Effectively managing asset location can significantly add to the longevity of the portfolio by being thoughtful about the tax implications of where each asset is held in the portfolio. For example, a high growth asset which doesn’t pay dividends would be best held in a taxable account where the growth would be taxed at generally lower capital gains tax rates instead of higher ordinary income rates which would be incurred at distribution if the asset was held in a traditional IRA account.

Roth Conversions

There is often a window of opportunity when someone retires and before required minimum distributions from their retirement accounts begins where they are in a much lower income tax bracket. This may be a good time to convert some of the assets held in tax-deferred accounts such as traditional IRA’s to Roth IRA’s. Future distributions from the Roth IRA are tax-free at the time of the distribution, and the distribution income doesn’t count toward the various other taxes and surcharges which occur during retirement. The amount of the Roth conversion is taxable at the time of the conversion, but managing how much is converted can keep the retiree below the threshold for a desired tax bracket.

Portfolio Withdrawal Sequencing

The general rule of thumb for which accounts to take withdrawals from in retirement is to first withdraw from taxable accounts, then tax-deferred accounts, and then finally from tax-free accounts such as Roth accounts. However, as in most things in financial planning, the most advantageous withdrawal sequence varies for each person’s unique circumstances. Required minimum distributions, social security taxation, hidden taxes and surcharges in retirement, asset location, and legacy needs have to be considered in developing the optimal withdrawal sequence.


8. Assess Insurance Coverage for Checklist for Retirement Readiness


Nearly all of the insurance coverage that made sense while you were working, for example auto and homeowners insurance, will still be necessary while you’re retired. But Medicare adds a new wrinkle to healthcare coverage for retirees, along with purchasing supplemental coverage to pick up what Medicare doesn’t cover. It’s also worthwhile to consider other types of coverage, notably long-term care insurance, well before you’re retired. The decision about how to cover long-term care outlays if they arise is a complicated one, made even murkier by the pandemic and a changing marketplace for long-term care. On the other hand, disability insurance in case you are unable to work will no longer be needed, and life insurance needs may be eliminated for retirees who are no longer responsible for the financial support of their dependent children. 


9. Attend to Your Estate, Portfolio Succession Plan for Checklist for Retirement Readiness


Documenting your wishes in case you should die or become incapacitated is valuable at every life stage, but it takes on increasing importance when we age. What do you want to happen to your financial assets? Who do you want to be able to make important financial and healthcare decisions on your behalf? What instructions do you want to give your spouse or other loved ones about your portfolio? Retirees and pre-retirees should ask, and answer, all of these questions when they’re of sound mind and body and update their estate plans and beneficiary designations periodically to reflect their current situations. This is a spot to get some competent legal help, ideally from an attorney who’s well versed in planning for situations like yours.

The onus will be on you for other aspects of estate and succession planning, for example, that your loved ones know how to manage your portfolio, your digital estate, and other matters. The good news is that you can prepare much of this documentation on your own, without paid legal help. 


Checklist for Retirement Readiness Summary

Gauging your financial affairs in advance of retirement is a job that lends itself well to a checklist. Of course, financial management before and in retirement is so complex that I’d recommend that you obtain professional help, or at least a second opinion on your plan, before you embark on it. But even if you ultimately end up employing a financial advisor to be your guide as you prepare to retire, using a checklist can help you comprehend the key variables that will make your retirement plan succeed or fail. It can help you course-correct before it’s too late.


Additional Information: 

As always, if you would like more information on how to prepare for retirement, or any other financial planning topic, please contact me. Find out more about Access Financial Planning, LLC here

Disclaimer: This article is provided for general information and illustrations purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult with a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Tricia Rosen, and all rights are reserved. Read the full disclaimer.