Financial Issues as Retirement Draws Near

March 06, 2018

As we wait for the floodwaters to recede and for spring to arrive, some of us start to think about our favorite outdoor activities.  Spring is often the time that people around here start to think about retiring, often to spend more time on those favorite activities.  We spend many years planning and saving for retirement, but priorities change when retirement looms on the horizon.

Hopefully when you get within a year or so of retirement, you will have acquired almost all the assets you will need in retirement.  At this point, you might consider turning your attention to reducing or eliminating any outstanding debt.  Obviously, it makes sense to reduce high-interest credit card debt.  High balances translate into high monthly payments.  Meeting those obligations will put more stress on your nest egg.  Even if you must put off retiring for a few months, it often makes sense to retire with as little debt as possible.

If you still have a mortgage, you may wish to weigh the benefits of paying that off as well.  Depending on the interest rate you are paying on the mortgage and what you are earning on your nest egg, it may make sense to use some of those assets to pay off the house.  Of course, there are tax consequences to taking distributions from retirement plans and your mortgage interest may be tax deductible, so consulting your tax advisor is a good idea as you consider your options. 

If you are covered by a defined benefit retirement plan, commonly known as a pension, you should get an estimate of the benefits you are entitled to, as well as your options for taking those benefits.  Typically, retirees have a choice of taking the benefit as a lump sum or in the form of monthly payments for life.  If you choose to take the lump sum, you may be able to roll it over to an IRA and preserve the tax deferral.  If you take monthly payments, you may be able to choose to take them over your lifetime only, or with a benefit of some percentage payable to your spouse over his or her lifetime should you die first.

If you have a 401(k) you’ll generally have three options. First, you can take a payment directly to you.  If you do this, the entire distribution may be taxable.  Second, you may be able to leave it in the plan.  Third, you can roll it over to an IRA.  Rolling the distribution over to an IRA should preserve your tax deferral. You could also roll it into a plan at your new employer, if it’s available to you and rollovers are permitted.

Before you actually retire, you may want to construct a withdrawal plan.  The withdrawal plan is a strategy for determining which account you will withdraw from first. It often makes sense to use after-tax money first.  Once you turn 70 ½, you’ll be required to take distributions from your retirement accounts.  If you are selling assets in a taxable account, such as shares of stock or real estate, you will want to know your cost basis before you sell, so that you can estimate how much of the proceeds may be taxable as capital gains.  Your withdrawal schedule may change over time.  For example, if you retire before you can take your social security benefit, you might withdraw a larger amount until you can begin social security. 

Retirement is a huge change in anyone’s life.  After spending 20 or 30 or 40 years with the same routine, it’s only natural to experience some angst when the routine is permanently changed.  We usually advise clients to resist the temptation to make big changes immediately upon retiring.  If one of your retirement goals is to spend the winter months in a warmer climate, maybe rent a place for the first winter.  This way you will have time to acclimate to the area, and decide if that’s where you really want to be.  If it is, you can take your time and make sure you find just the right place before you buy. 

As you get closer to retirement, your focus will change, but with a little planning, you can be ready.

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 The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Securities and Advisory services offered through LPL Financial, a registered investment advisor.  Member FINRA/SIPC.