At long last you can see retirement on the horizon. With much anticipation you begin the countdown, there's just one year to go before you call it quits. As exciting as it seems, there is also much work to be done.
Here's a look at what should top your to-do list when retirement is 12 months away.
First stop, HR
“Now is the time to line up all your ducks in order,” says Jonathan Gassman, CPA with Gassman & Gassman. “It's time to run through the numbers one more time to make sure that it's the right time to pull the trigger.”
Meet with your human resources department to get the latest estimate of your retirement benefits. Ask them what all your options and choices are, and what you will need to provide to them as far as paperwork is concerned, says Gassman. “Understand what your choices are in terms of your company's pension plan. Can you take the money as a lump sum, or must it be paid as an annuity? You want to understand the survivor benefits and costs associated with the plan,” he adds.
If you participate in a company savings plan, thrift investment plan, or 401k, you want to understand the various withdrawal options and the tax ramifications of each method or approach. Be mindful too, if you are divorced, you need to take those implications into consideration. “Does your ex-spouse have any rights to a portion of your benefits? If so, what are they? You may need to provide a copy of the divorce decree to the company benefits department,” says Gassman. Determine what the federal and state tax ramifications are to the various payments you may receive from your company's benefits programs, such as its 401k.
If you have company health benefits, find out what your coverage may or may not be as a retiree. Are you eligible to continue coverage into retirement, and if so, at what cost? Check to see if you have any unused Flexible Spending Account monies. These terminate the day you retire so spend down the funds.
If you have not contacted the Social Security Administration, now is the time to run projections as to when to apply and collect, says Gassman.
You also want to think ahead about Medicare. “It's an amazing entitlement program, but it's complexity is mind-boggling. Don't wait until you need it to figure it out, especially if you might want supplemental coverage,” says Dave Edwards, president of Heron Financial Group.
Review, review, review
Review your wills. With all the changes in the estate laws, there could be drastically negative implications for a surviving spouse if wills are not current, says Edwards. Also look over anything where you have named a beneficiary, such as your life insurance policy or your 401k account. You want to be sure that the designations reflect your current wishes.
Not only should you be reviewing documents, but your asset allocation. Meet with your financial advisor. Where does your portfolio stand? You don't want to go ultra conservative just because you're retiring, as you could spend another 20 years in retirement, but make sure you are comfortable with the type of assets you own, and how volatile they may be. “Get a family index number. This is a percentage that represents the average annual return you need to earn on your investments to meet your retirement income goals. This will be your gauge in retirement so that you can maintain your lifestyle,” says Chad Olivier, a certified financial planner with the Olivier Group.
If you don't already have one, get a comprehensive financial plan done. You want an advisor to look at your insurance policies, any debt, and all investible assets. “The financial planner can do a projection of income and help you develop a plan on where to get all of your income,” says Olivier.
Assess your finances
Whether retirement is one year or 10 years away, identify your essential expenses, those that won't go away even though your paycheck does. Then estimate your guaranteed income such as Social Security and pension, says JP McDermott, a financial advisor with MassMutual. “There will be either a gap or a surplus. If there is a gap, I recommend considering annuities from investment accounts like your 401lk/IRA or stocks and mutual funds outside of retirement accounts.”
The goal, he says, is to take care of the essential expenses with guaranteed income, so no matter what the economy does, you won't lose your home or go hungry.
Take a detailed inventory of your expenses. Start anticipating your new life, including housing, vehicles, daily living, entertainment and travel. Put all this to paper and calculate how much income per year is needed as of today to pay for these living expenses. Then don't forget to add inflation into the mix, says Olivier.
Set a realistic budget. “You can draw 4% conservatively or 6% aggressively from liquid assets and never run out of money,” says Edwards. “A retiree's total retirement income will be that cash flow, plus social security, plus any pension benefits they have, plus any additional cash from from, a rental property or business, for example. One's monthly spend has to be the same or less than the total of those cash flows.”
Look at your debt. How much do you owe to whom? How much can you pay off before retirement? Come up with a plan to eliminate as much as you can over the next 12 months. The less financial baggage you have going into retirement, the better.
Build up your savings. Says Olivier, “Most of the time the day you retire will not be the day you start receiving retirement income checks. Beef up your savings, so that you can live off of your savings for at least a few months until you start receiving monthly income.”
A year may be 365 days, but the months will likely pass by faster than you think.. Don't wait until the last minute to take the steps necessary to start the next phase of your life. After all, you want to finally get to the land of little drama, especially when it comes to your finances.