Five Things You Must Do to Retire With Confidence

A retired couple smile as they look at a map in the back of their camper van.

(Image credit: Getty Images)

published August 3, 2024

It’s coming — the year in which you thought you might begin your retirement. Have you done anything to prepare for it?

Retiring involves taking steps to ensure that your transition to life without paychecks goes as you’d hoped without any unpleasant surprises. What are the issues that you should be thinking about?

1. Take inventory of your finances.

Before you gather all your financial statements, look at the other side of your personal balance sheet. How much are you spending each month? Do you expect to spend the same in your retirement years, or will certain expenses decrease or even disappear? For example:

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Will you finally pay off your mortgage or other loans?
Are you thinking about selling your home and downsizing with part of the proceeds?
Are you contemplating a move to a different part of the country where taxes and expenses are lower?

Once you get a handle on projected retirement living expenses, gather all those statements from your bank and financial advisory firm. Remember your 401(k) or any IRAs you may own.

Determine your asset allocation — in other words, what percentage of your overall assets is invested in stocks, fixed income and other asset classes? Does your allocation appear to be overly aggressive for this stage of your life? Remember — retirement marks a transition in not only your lifestyle but your investments as well. In the past, you focused on returns and potential growth. In the future, you may be more concerned with preserving what you’ve accumulated and converting your assets to income to replace the paycheck you were used to receiving.
Consider tax diversification, as well as asset allocation. How much of your assets are housed in tax-deferred accounts, such as 401(k)s and IRAs, vs. taxable accounts? Tax-deferred accounts may seem preferable, but again, you are entering a different phase of your life. Withdrawals from tax-deferred accounts are taxable as ordinary income. Withdrawals from taxable accounts may be taxed at a more favorable capital gains rate. Tax-free accounts, such as Roth IRAs, offer the ability to invest with after-tax dollars but pay no income or capital gains tax on withdrawals you make in retirement. Other sources of tax-free income include whole life insurance or other insurance policies that offer cash value, municipal bonds and even 529 college savings plans and health savings accounts. Seek professional guidance before making any decisions.

Certainly, you will have other sources of income once you retire, but Social Security benefits are not to be minimized. By understanding how these benefits are calculated and how much you can expect to receive, you can begin to determine:

Whether your other sources of income will be adequate to support the retirement lifestyle you envision for yourself.
Whether you can afford to retire on schedule or whether you might have to work a bit longer than anticipated.
Whether you should try to accumulate additional assets that can be used to generate income once you stop working.

When should you begin taking Social Security benefits? You can apply for benefits as early as age 62, but you stand to receive considerably more by waiting until you reach what the Social Security Administration calls your full retirement age.

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If you were born in:	Your full retirement age is:
1943-1954	66
1955-1959	66 and 2 months to 66 and 10 months
1960 and later	67

By waiting, you can receive 25% to 30% more each month than you would have by taking benefits at age 62. Furthermore, you will be able to work, if you wish, without reducing your benefits. Should you wait even longer to receive benefits?

Clearly, it depends on how much you need the income. For each year that you defer benefits after your full retirement age, your benefit amount increases by about 8% (until age 70). With today's longer life expectancies, higher payments can prove especially advantageous in your efforts to meet day-to-day expenses.

To understand how much you can expect to receive at different ages, visit www.ssa.gov and open an account. It should be one of your first steps in creating a viable retirement income strategy.

3. If you're covered by a defined benefit pension plan, understand your options.

Defined benefit plans have become increasingly rare, but if you’re lucky enough to work for an employer who offers one, understand that you have choices to make:

You can receive fixed monthly payments for as long as you live.
You can opt for reduced monthly payments that will continue to be made to your surviving spouse for as long as they live.
In some cases, you may be able to receive a lump sum instead of monthly payments.

The choice you make will depend on your overall financial situation. Again, only make irrevocable decisions after talking with your financial adviser.

4. Plan for the unexpected.

You may or may not have the need for life insurance that you did when your family was younger, but unforeseen events, if not planned for, can wreak havoc on your retirement plans. Long-term care expenses, for example, can deplete the inheritance you hoped to leave your loved ones. That’s why so many retirees have made the purchase of long-term care insurance an integral component of their retirement plans. Many policies not only offer meaningful protection but also the flexibility to leave your loved ones a death benefit in the event you don’t require all your coverage for long-term care expenses.

Another risk that should be carefully managed is good old-fashioned market risk. Up until now, the value of your portfolio has gone up and down with market fluctuations, but your gains and losses have been on paper. Once you retire, they become anything but. A drop in the value of your assets can translate to lower income for retirement expenses. To mitigate not only this risk, but the risk that you might actually outlive your assets, many people allocate a portion of their assets to annuities.

An annuity is a contract between you and an insurance company in which you receive future income in return for current assets. Your assets are allowed to grow on a tax-deferred basis until they are withdrawn at retirement. You may then receive income in several ways, including guaranteed payments that will last for as long as you live.

Annuities are complex, and there are a few different annuities from which to choose. Your financial professional will be able to help you decide whether annuities have a place in your retirement plan and, if so, which annuities make the most sense for you.

5. Calculate your retirement readiness.

Armed with all this information, you can work with your financial professional to develop an analysis of your finances that will help you determine the probability of achieving your retirement goals. Understanding now whether there is a gap or surplus between your resources and aspirations can help you quantify any challenges you face and take tangible steps to meet them.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Stefan Greenberg is a Managing Partner who has been with Lenox Advisors since 2005. Stefan is responsible for working with both corporate and high-net-worth individual clients of the firm. He specializes in comprehensive financial planning, wealth management, estate planning and insurance services for individual clients. Additionally, he helps businesses attract, reward and retain top-level employees through the use of tax-efficient techniques.