I was recently asked by an industry writer for "not so common" recommendations for retirement planning. I typed in "retirement planning recommendations" on google and found the 10 commandments, 7 rules and 5 steps of retirement planning as well as a million other sites telling us the basics. Why do people need to hear the basics time and time again? Because retirement planning is equally a mental and behavioral shift as it is a financial shift. We host two presentations specifically geared towards retirement planning. The first is big picture planning for those that are just starting to think about retirement. The second is for those that have a tentative date in mind and dives into the weeds of retirement planning. These are open to everyone, not just potential clients, because Baby Boomers need to get their act together, if they hope to not outlive their money.
The three tips I will share go a little off the beaten path and dig a little deeper into some of my common recommendations for folks gearing up towards retirement.
1. It takes three years prior to retirement to practice and understand your budget. The word budget, in the context of personal finance, makes us think of our first job or low income households. The reality is that you couldn't run a business without a budget and you shouldn't go into retirement without one either. You don't need to micromanage continually through retirement, but you do need to make sure you understand how much money you really need in retirement and that means understanding your budget. Also, it's probably not much less, if at all, then what you are spending now. So here is a practical guide to confirming what you believe is your retirement budget. Three years prior to retirement, try to live off your estimated budget. The second year (because the first year is never a reality), adjust and try again. The third year should be spent fine tuning your lifestyle budget, while getting emotionally and mentally prepared without worrying about finances in the future.
2. Don't take on any new debt such as car loans or equity lines in the last three years before retirement. There is a tendency to want to make a car purchase, fix up the house or tackle a project when you still have the income. These are also your final savings years. If you can't afford these normal life expenses in retirement, which you should certainly plan for, then you shouldn't retire. The car you buy right before retirement won't be your last car purchase, and I promise that any homeowner will have maintenance, repairs and upgrades throughout retirement. Instead of taking on new debt in those last three years, consider plowing that money into savings and then getting the car after you retire.
3. Don't underestimate the need to have after-tax liquidity. Cash and investments that aren't in your retirement accounts are critical for maintaining control of your taxes throughout retirement. If you have saved diligently in your 401(k) but don't have a brokerage account, consider saving or shifting savings the last three years before retirement. If you need a lump sum in retirement for an insurance deductible, dental work, or down payment on a car, it's nice to have a different bucket to distribute. Taking the same net amount from the IRA means taking out more for taxes, and you will be depleting your nest egg faster. Often these days, folks come in to put together a retirement plan and have almost all of their investments in 401(k)s and IRAs. If it won't drastically affect your tax situation, you should consider building up after-tax assets at least three years prior to retirement. A great place to do this is within a 401(k) if your company offers a Roth option.
Our mission is to guide folks on life's financial path and retirement is one of the biggest transitions. Plan proactively and you may find that the path to retirement can be easily traversed.