You’ve decided you’re about ready to retire. But you’re not sure about what you should consider before finally taking the leap. That’s totally understandable because it’s a big decision and shouldn’t be taken lightly. I can guess that you’re a planner, though, because after all, you’re reading this. And you’re doing the right thing by considering all of the variables. Today, we’re rounding out our series about what you should think about before retiring. We’ve already covered cash flow and taxes, healthcare and insurance, and long-term planning. Today’s post summarizes what you should consider before retiring from an asset and debt perspective.
Do your retirement assets include stock options, grants, or restricted stock units?
If you have any form of employer stock that has rules or restrictions, find out how retirement affects your eligibility. Also find out how it will affect your tax liability. Then, consider how the after-tax proceeds will impact your cash flow.
Will your investment objectives to risk tolerance change?
Many folks believe that once you retire, you need to get more conservative in your retirement investment accounts. Often times, this is true. Usually, the move to a more conservative investment portfolio is one that happens gradually over time, as opposed to the day you retire. So sometimes, retirement day (or month, or year) isn’t necessarily the “trigger” for making a change to your portfolio.
With that said, some investors don’t ever make changes to their investments upon retirement. A good example (don’t mistake this as advice, because there are several variables at play here) is when someone has a sizable pension. Perhaps your pension income is enough to cover all of your retirement expenses, but you also have an IRA on the side that you don’t plan to touch. Would you need to get more conservative in that portfolio because you retired? Maybe not! Maybe you prefer to be aggressive in that portfolio and then plan to give it to the next generation or to charity upon death. Conversely, you might feel that if you don’t need that money to grow much, why take the risk of an aggressive portfolio? Both are legitimate views, and ultimately you should discuss the appropriate level of risk and reward with your own financial advisor.
If your retirement assets include business ownership, do you need an exit strategy or a succession plan?
This is a decision that should be on your mind well in advance of your retirement year. It’s a factor you need to think through. For many business owners, their business is their largest asset. So it’s important to be mindful of the different ways you can exit and how that impacts your retirement. It’s a big decision, so lean on the expertise of a financial planner, tax professional, and attorney.
If you have annuities or illiquid retirement assets, do they need to be reviewed to understand options?
Annuities are usually very complex, and you might have several different options of what to do with that annuity. Do you want a monthly income stream? Or do you want to let it stay in that account and (hopefully) grow? Would you want to get out of that annuity completely? Talk to the insurance company to understand your options, and consult with your financial planner, too. It’s best to make those decisions within the context of a broader financial plan instead of thinking about the annuity in a vacuum.
Do you have a loan on any employer retirement plans?
If so, you may need to plan for how to pay it back and be mindful before rolling the balance to another plan.
Do you have a deferred compensation plan?
If so, coordination strategies may exist among other sources of retirement income to optimize cash flow and manage income taxation. This is something that can make a big impact on how much you pay Uncle Sam.
For example, if you will be receiving deferred compensation for the first five years of retirement, it may not make sense to minimize distributions taken from a Traditional IRA for those five years. If you need more cash flow to pay for life on top of your deferred compensation, perhaps you should use money from assets like a Roth IRA or nonretirement account. Once your deferred compensation payments cease, you might switch to taking more from your Traditional IRA.
In this oversimplified example, the idea is to smooth out taxable income. You don’t want to push yourself into higher than necessary tax brackets. Consult with a financial planner and tax advisor for strategies that are more specific to your situation.
Do you have multiple accounts with similar tax treatment (e.g., multiple 401(k)s or IRAs)?
If so, consider consolidating accounts to reduce complications. There are certainly other factors at play, like the cost of different accounts, along with the services provided by the different financial institutions. With that said, consolidation and simplification of retirement assets tend to be priorities for a lot of retirees who we work with. They want to spend time focusing on hobbies and relationships instead of trying to deal with administrative hassle and challenges that come from having several like accounts.
Will you change your residence?
If so, this may impact tax liability, cash flow planning, and your Medicare Advantage plan if you move out of the network.
That wraps up our series on financial considerations upon retirement! We genuinely hope that you’ve learned something from these articles. We’ve said it before, but retirement is such a big decision for many people, so there’s a lot to sift through. The last thing we want is for you to retire, only to have to return to work five years later because you ran into unforeseen circumstances that could have been avoided with proper planning. We want your retirement assets to last! To that end, we encourage you to think through all of the issues that we’ve mentioned. If you’re ready to enlist the help of professionals who have helped other retirees like you, we’d encourage you to reach out to us if you’re not already working with us. We’d love for you to experience a happy and confident retirement!