Financial Planning, Retirement

A Few Things To Consider As You Approach Retirement

1/10/17 8:00 AM

iStock-518185878.jpgIn the United States, the traditional age of retirement has long been considered 65 since this was for many years Social Security’s full-benefit retirement age. However, a traditional retirement may be becoming a thing of the past because many recent retirees have not felt like waiting to receive their full benefits from the government, according to research from the Transamerica Center for Retirement Studies. Indeed, a 61 percent majority of surveyed retirees said that they were fully-retired before the age of 65. The median retirement age among these respondents was actually 62 but many individuals continued to work on a part-time basis for a few years.

Younger Americans, though, seem to doubt that they will be able to retire so early because a newer Transamerica survey found that only 35 percent of Millennials and 18 percent of Generation X respondents anticipate that they can stop working before age 65. In fact, roughly a third of respondents from both age groups expect that they will not be able to retire until sometime after their 65th birthday, and about one in ten currently have no plans to ever retire. Some individuals may postpone retirement because they are fortunate enough to enjoy the work that they do, while others will delay their exit from the labor force in order to shore up their savings.

Regardless of the age at which you ultimately decide to retire, there are a few things that should be completed in the years leading up to this major life event. First and foremost is a comprehensive review of your old-age financial plan. This involves making sure that your savings are on track to provide you with your desired level of income in retirement, and whether or not any changes need to be made. For example, if the retirement plan you developed involves living on an income that is lower than what you are currently enjoying, you may want to spend some time while you are still working to actually live on that reduced income and see if the lowered standard of living is really right for you. If it is not, then you will likely need to increase your saving rate and possibly even delay retirement.

Another issue to consider ahead of time is where exactly you want to spend your retirement. Indeed, when you withdraw money from a traditional 401(k) plan, you are subject to both federal and state income taxes. This means that individuals who spend their working careers in high-income-tax states but then retire in a low-income-tax state may have the ability to reduce or outright avoid any state income tax liabilities. On the other hand, a Roth 401(k) subjects your retirement dollars to both federal and state income taxes today in return for “tax-free” income during retirement. Since state-level income tax rates can vary significantly, the effect on a person's retirement can be huge. Individuals must therefore consider not just their expected federal tax bracket in old age but also the tax rates in the place they intend to retire.

Another location-related issue to consider is the weather. For instance, you might have always enjoyed the summers in the Northeast but could you continue handle the brutal winters as you get older? For many Americans the answer to that question is “No,” which in part explains why population growth continues to outperform in Florida and Texas, states with favorable climates and tax environments. It is also smart to investigate ahead of time the availability of quality medical care in the area you wish to retire, as well as property taxes and other local cost of living considerations. However, if you do not plan on moving in retirement and own the home in which you will be living, then it could be a good idea to make any expensive repairs or upgrades now while you still have a steady paycheck rather than having to worry about such potential outlays in old age with a limited income.

As for a non-financial issue to consider, it is often recommended to take a long vacation prior to retirement in order to see if you would truly be happier without a job. Many people say they want to travel or spend time on hobbies in retirement but such activities can often become boring over time, which is why a long vacation can help determine if one would really be better off no longer having something specific to do every day. Further, if all you really need is just a little more free time, try to set up a flexible work arrangement with your employer, such as telecommuting or switching from full-time to part-time work. These small changes at the very least could allow you to spend a few more years in the workforce and in turn generate additional income that would greatly improve your financial standing prior to fully retiring.

There are of course many other things that should be considered ahead of retirement, e.g. expense forecasting, estate planning, investment diversification, long-term care needs, etc. This is why working with a professional advisor is the best way for most Americans to make sure that every old-age variable is accounted for in their financial plan so that it can provide them with the retirement lifestyle they deserve after decades of hard work.



Sources: U.S. SSA, Transamerica Center for Retirement Studies, U.S. Department of Commerce, Wells Fargo Securities

Post author: Charles Couch