For most of your working life, it wasn’t exactly a pressing concern. You might have pondered it for a few minutes as you skimmed your company’s benefits handout, checking to see if your new glasses were covered or if you’ll be reimbursed for your gym membership. Retirement was more like a vague, distant concept rather than something that would actually happen one day.
Then, suddenly, you hit your late 50s or early 60s and you realize, almost without being aware of it, that you’ve begun paying closer attention to those commercials about annuities, reverse mortgages and Medicare Part B, and you’re no longer reflexively tossing those AARP mailings straight into the trash.
Now, retirement looms with terrifying urgency. Do you have enough savings? Is your money invested too aggressively — or not aggressively enough? Do you need long-term-care insurance? Do you have a will? What even is a reverse mortgage?
This abrupt awakening/panic attack often hits five years or so before retirement — and that can be a good thing, financial advisers agree. Because those years can be critical. You can make moves now that will substantially improve your life in retirement.
“We call the five years right before and right after retirement ‘the fragile decade,’ because your investment returns then are disproportionately important,” says Alex Murguia, managing principal of McLean Asset Management, a Virginia investment firm.
That doesn’t mean you have to make every retirement decision right this second. Many of these choices can wait, at least for a while. Spread the work out over a few years “and do it at a comfortable pace,” suggests René Bruer, a fee-only financial planner in Tallahassee, Florida.
“If you give yourself just six months,” he says, “there’s going to be some long nights and weekends and hair-pulling to get it all done.”
So what are the key things to concentrate on each year? Here, based on interviews with financial advisers, economists and retirees, is our suggested “five-year countdown to retirement.”
Five Years to Go
Your first step is, admittedly, a daunting one. But the rest of your retirement planning depends on it. Before anything else, you need to see where you stand financially. How much have you saved, and will that money, plus Social Security and any other pension income, generate enough cash to cover your expenses in retirement?
You may already have a bad feeling about what these numbers will tell you. Don’t sweat it, advisers suggest. This is the moment to confront the truth, knowing that there’s still time to change your investments to generate bigger returns, cut back your current spending to find more money for savings or (worst case) rethink your retirement expectations.
A qualified investment adviser who specializes in retirement planning can help you sort all this out. But do-it-yourselfers have some options, too. Laurence Kotlikoff, a Boston University economics professor, has created an online service called MaxiFi Planner, which compares your assets against your fixed expenses to calculate how much you can safely spend annually for the rest of your life. The program, which costs $99 for the first year and $79 for renewals, takes about 45 minutes to complete.
Let’s say you are a single 60-year-old earning $140,000 a year. You have $1.5 million in your 401(k) and will contribute 6 percent of your salary to it, or $8,400, a year, along with a 3 percent match from your employer until your planned retirement at 65. You will get roughly $500 a month from the pension plan that your company phased out several years ago but that you are still eligible to collect from, and can receive $3,150 a month from Social Security if you wait until you are 67 before you start taking it. (MaxiFi will help you calculate your Social Security income.) Also, you own a $500,000 home in New York state that costs you $25,000 a year in property tax, insurance and maintenance, and you plan to stay there.
The MaxiFi program estimates that your fixed annual spending on housing, taxes and insurance should range from $52,000 to $61,000 from ages 65 to 100, and that you’ll have enough left over for “discretionary spending” — money you can freely spend on food, travel, clothes and entertainment — of around $64,000 a year.
Unsatisfied with that amount? It’s easy to run an almost endless series of what-if scenarios to see how they would affect your retirement income and spending. For example: If at 65 you downsized into a $250,000 home that cost you $12,500 a year, it would make a huge difference over time. The money available for your annual discretionary spending would climb by $23,000, to $87,000, according to MaxiFi Planner.
This is a good time to take a look at your overall asset allocation — that is, how you’ve spread your savings among stocks, bonds and cash. Most investment company and brokerage websites have sections where you can review your allocation, including investments held at other firms (though you may have to enter this data yourself). Unless you’re depending on big investment gains over the next five years to make retirement doable, a balanced allocation of 50 percent stocks and 50 percent bonds is reasonable for someone expecting to live another 30 years or more.
Four Years to Go
It’s easy to get caught up in what happens right after you quit working, but take some time now to consider the later years in your retirement.
Think you might live in a retirement community one day? Though most people don’t move into them until their 70s, it’s smart to begin researching communities now. You’ll find there’s a wide variety of amenities and price ranges, and the most popular ones have waiting lists that you can join with a refundable deposit.
Kathryn Olive of Durham, N.C., and her husband, Bruce, both 63, are drawn to continuing-care retirement communities, or CCRCs. These communities allow you to start out living in a town house or apartment and then move into assisted-living or hospice care as you need it. The Olives have already gotten on one waiting list (it’s currently 10 years long for the larger cottage-style home they have in mind) and may join two or three more.
“One thing people tell us is ‘Don’t come too early — wait until you’re 73 or 75 — but also don’t come too late, because you won’t make the friendships and enjoy all the benefits of living here,’” Kathryn Olive says. “I want to be sure there’s a place for us when we’re ready.”
When thinking about these later years, many are rightly concerned about long-term care. This is when a senior needs full-time help to do even the most basic activities, such as dressing, bathing and eating. The national median cost for long-term care last year ranged from $48,000 to $97,000, according to the Genworth 2017 Cost of Care Survey. Many people, even in CCRCs, are drawn to insurance that will cover the expense. Though some CCRCs will let you transition into long-term care without an increase in your monthly fee, others charge more as your needs increase.
Before you make room in your budget for a long-term-care policy, it’s worth considering whether you truly need it. Working with a financial planner or crunching the numbers yourself, you may find you have enough assets to pay for those expenses without insurance. Rick Waechter, a fee-only financial planner in Chapel Hill, North Carolina, figures long-term-care insurance makes sense for about a third to a half of his clients ages 55 and up.
“It’s popular for people with net worths of $500,000 to $2 million,” he says. “That would be the sweet spot. Once you get meaningfully above $2 million, you probably don’t need it.”
Know, too, that the insurance itself is pricey. To cover $500,000 of expenses over five years, the insurer Genworth would charge a 60-year-old couple living in New York $3,800 a year per person, and insurers reserve the right to bump up your premiums in the future.
Waechter suggests looking at policies that would cover only part of your expenses. A policy paying for $100,000 in long-term care over three years, for example, would cost around $1,100 per person annually for the same couple. The fact is, there’s a limited chance you’ll ever need long-term care, and if you do, “there’s a less than 10 percent chance you’ll need it for more than three years,” Waechter says.
One other important item to handle while you’re thinking of your mortality: your will. If you don’t have one yet, by all means get it done this year. It makes things much easier for your heirs when you die. Depending on the complexity of your estate and where you live, it should cost $1,000 to $4,000 to prepare. If you already have a will but haven’t looked at it in a few years, this is a good time to reach out to your lawyer and revisit it.
Three Years to Go
Put aside some time this year to contemplate what retirement will actually mean for you. Sure, you want to travel a bit, but what about your day-to-day existence? What will you do with yourself?
“People often fail to consider how they will feel once they’re removed from the workforce,” says Andrew Russell, a fee-only financial planner in San Diego, Calif. “While work can be stressful, it can also be rewarding to feel important and a sense of accomplishment.”
Russell suggests taking classes, joining a social group or exploring hobbies you enjoy while still working. “This can help keep you engaged in activity even once you’re retired,” he says.
Larry Stein, a Chicago planner, tries to get his soon-to-retire clients to focus on what’s most important to them. “What if you had three years to live?” he asks. “What would be your top three or five priorities?”
If they balk, he puts a finer point on it: “’Let’s say a doctor said you had three hours to live. What would be your regrets? What do you wish you’d done with your time on earth?’ That sometimes gets people a little more charged up.”
Take a good look at your house this year, too. Whether you’re thinking about selling it to downsize or determined to stay in it forever, it may need some updating. Better to pay for it now while you’re drawing a salary.
You might also look at refinancing your mortgage or even opening a home equity line of credit, which will be easier to do while you’re still earning income. Your goal should ultimately be to reduce debt, not take on more of it, but a line of credit could come in handy in an emergency.
Two Years to Go
Some potentially big tax-saving opportunities await you early in retirement, and this is when you lay the groundwork for them. It’s possible your taxable income will drop by a lot in the calendar year after you stop working. If you don’t start taking Social Security payments and withdrawals from your tax-deferred individual retirement account until later years, you may find yourself in the 22 percent or even the 12 percent federal tax bracket for a while. Your federal long-term capital gains tax rate could drop to zero for this stretch.
You can take advantage of this by converting some of the money in your tax-deferred IRA into a Roth IRA during this window. It’s complex, and you should discuss it with a tax professional. You’ll owe tax on the money as it comes out of the IRA, but you’ll be in a lower tax bracket then. Once it converts to a Roth, you won’t owe any federal tax when you take it out later. And unlike a traditional IRA, which requires minimum annual withdrawals starting at 70½, the Roth IRA allows you to take the money out anytime, tax free, as long as you’ve held the Roth IRA for five years or more.
Before this year is out, you should rerun all the numbers on your financial plan, whether through an adviser or online. What does your expected retirement income look like now?
“One thing I insist on when a client is two years from retirement is that they ‘practice being retired,’” says James Moore, a fee-only adviser with Campbell Financial Partners in Fort Myers, Fla. “By that I mean living off the annual cash flow you anticipate during retirement, before you retire.”
Shirley Curtis of Cincinnati, Ohio, is one client of Moore’s who has been “practicing” this year. She figured out how much she and her husband, David Tobergte, would be getting from Social Security and their pensions, and they have been trying to live off that sum.
“It is a good experience, but it’s scary at the same time,” Curtis, 61, says. “While I thought I had two years to retirement, now maybe I’ll work another six months. I want a little bigger cushion” of savings.
The Final Year
Curtis’ reaction is fairly typical, advisers say. But there are other options besides remaining in the labor force, and this is a good time to explore them. Start by looking at ways to reduce spending.
One way to make ends meet, if you’re planning to stay in your current home, is a reverse mortgage. This is a deal in which you hand over the equity in your home to a lender and get regular monthly payments in return.
But approach this option skeptically. Reverse mortgages are a “fourth- or fifth-tier line of defense,” says Jennipher Lommen, a fee-only financial planner in Santa Cruz, Calif.
If you are concerned about running out of money in retirement, “they can be a good resource,” she says. “But you’ll need to continue to maintain the home and pay the property tax, and you have to understand what will happen if you leave the home. The bank may get it, not your heirs.”
Assuming you haven’t done so already, this is also a good time to figure out your health insurance needs. Medicare kicks in at 65, and you can learn about its different coverage levels (and what they cost) at medicare.gov. Retiring sooner than 65? Some employers offer their retirees health insurance to cover them until Medicare starts, but most people are on their own. You can look into COBRA, or Consolidated Omnibus Budget Reconciliation Act, a program that allows you to continue your employer coverage for 18 months after you leave, or buy a policy on an Affordable Care Act exchange. An insurance broker can also help sort this out for you.
Now, take another look at your investment portfolio. If your savings appear on target to deliver the income you need in retirement, many advisers recommend pulling back on your stock holdings and adding cash and other short-term investments as your final day at work nears. Lommen encourages her clients to allocate a year’s expenses or more to cash, certificates of deposit or short-term bonds, if possible.
It’s not that you suddenly must become an ultraconservative investor. You still need your portfolio to grow over the next couple of decades or more, and that means exposure to stocks. But should the market take a big hit right as you retire, you don’t want to be selling stocks or long-term bonds at a loss to cover your expenses.
“Think about somebody who was due to retire in 2008 and was basing their assumptions from 2007,” says Bruer, the Tallahassee planner. “It would have been a very sour, negative surprise that could have upended everything they did.”