September 06, 2019

Countdown to Retirement

When you get to within five-to-ten years of when you expect to retire, the planning usually gets more serious. So far, you’ve probably thought about how much money to save every year, but now you need to think about lots of other issues that will guide you to a better estimate of how much you need to accumulate.

What Are You Retiring To?

What is it that you want to do? Have time to read? Work out regularly? Spend more time with kids, family, friends? Take up a new hobby? Volunteer your time for something you care about? Take a class? Try working at something new? Perhaps with fewer hours or a shorter commute.

Whatever the possibilities, you should probably talk to your spouse (if you’re married) to see how that fits in with their future plans. It’s quite common for the spouse to have some anxiety about a change in the daily home routine. No doubt compromise will need to be part of everyone’s agenda.

  • Make a list of what excites you about the future and how you’d like to spend your time.
  • Think about how much those possibilities will cost.
  • Talk to your spouse, friends, other people you trust to get their thoughts.

Living Arrangements

Your choice of where to live is a major factor to consider when contemplating retirement. Are you happy staying where you are? Do you want a warmer (or colder) climate? Do you want to be able to travel for extended periods? It’s all about lifestyle.

If you are happy living where you’ve always lived, you probably won’t have many surprises. But if you’re thinking about a second home in another part of the country or perhaps moving permanently somewhere else, you need to do some homework. Try spending a longer vacation where you think you want to go. How will you make new friends, find medical care or get involved with your community?

  • If you plan to stay where you live now, quantify the costs for living there. Is your mortgage paid off? Do you have association fees? Can you afford to pay property taxes once retired? Should you consider downsizing within the same area?
  • If you are considering a new location in retirement, make the time to visit for several weeks or months. The experience will help you consider issues you may not have thought about before. What are the costs like? Higher? Lower? How easily can you integrate yourself in this new community?
  • If you are thinking about relocating, how will the current housing market affect your decision? Do you need to allow more time to sell your home before you start looking for a new place?
  • If you’d like to travel for an extended period of time on a regular basis, try to quantify those costs. Will you have “double” expenses for that time? For example, will you be paying rent in the new location and mortgage payments on your current home? Two sets of utility bills? Will you need to ship a car back and forth? These costs can add up fast, so it pays to think about it ahead of time.
  • Will your health care cover you anywhere you choose to live? What types of changes would need to be made to other types of insurance coverage based on a change of residency?
  • If you already have more than one home, do you anticipate selling any properties once retired? How does the rest of the family feel about that?


Speaking of family feelings, you’ll need to give some thought to how the kids will react to major changes in the household. Many retirees’ children are grown and launched in their own lives. But you’d be surprised how many of those kids still think of the house they grew up in as “home.” Retirement can be a time to follow your dreams and try new things, but be prepared for a variety of reactions from those closest to you.

Not everyone’s kids are completely launched at retirement. That may be a reason to stay in your current home for a while. As the kids get older, they may be able to continue with their lives while you travel for longer periods. Or perhaps you can time your adventures so that they can join you, although they may be reluctant to leave their own lives – even for a relatively short period of time.

  • What considerations are there for retirement that would affect your children?
  • How will you incorporate the needs of your kids once you’ve retired?

The Family Bank

Unfortunately, one of the fairly common issues we see either approaching retirement, or in retirement, is friends and family needing more help than may have been expected. Of course, most of us have written a check to help someone in need. But sometimes the problems just aren’t resolving and the tug-of-war between heart and checkbook can cause major anxiety.

Having counseled clients for over twenty years, here are some of the situations that can potentially derail retirement:

  • A child or family member that needs some type of substance abuse support. While everyone desperately wants the treatment to work, it’s not unusual to see the patient needing multiple series of treatments that often are not covered by insurance. That can have a significant, and unexpected, impact on retirement savings.
  • Lending a child or friend money for some good cause. Again, in moderation, this can be rewarding for the lender and repaid by the borrower in the best circumstances. However, think hard about heading down this path. I’ve seen many situations where unfortunately the lender is unwittingly enabling the borrower who has great difficulty in paying the money back. The lender can forgive the annual exclusion amount (currently $15,000 a year), what happens the next time there is an unexpected financial crisis?
  • “Gray divorce” is on the rise. An unexpected marital split will probably impact both parties ability to retire as planned.
  • Parents need long-term care and they don’t have insurance to cover these costs. Nursing home costs can run $100,000 a year in some areas. And these costs have been increasing faster than the usual rate of inflation.
  • Boomerang kids may live at home longer than expected. I’ve seen many parents delight in the additional time spent together, but over time the financial impact may take a toll on when the parents can retire.

There are no easy answers here. Having a trusted advisor to talk through these difficult and sensitive issues may help. Ultimately it needs to be the client’s decision and we as advisors need to support that and look for creative ways to help. When life throws a curve ball, a detailed cash flow analysis can play a part in trying on solutions before you have to commit to them. A sounding board to talk through emotions as well as finances can help.

Saving and Spending

A study in the Journal for Financial Planning by Wade Pfau, Ph.D. posits that it’s the savings rate that we should be focusing on rather than the withdrawal rate. His research shows that it may be more effective to think about what you want to spend in retirement and then save accordingly. The longer you have to save, the less you need to sock away each year. But on average, the savings rate needed in this study was approximately 16% to 17%. That’s higher than the traditional 10% of net income. But for many people, it’s probably realistic. Of course many factors affect that rate including time to save, asset mix, inflation, taxes and so forth.

Once you get within five years of retirement, it makes sense to do a detailed projection of income sources and expenses in retirement to see if you are on track. This is probably one of the most important times to seek professional advice to make sure you’ve really considered all relevant factors.

  • Are you saving enough for retirement? It may be more now that the economy is growing so slowly.
  • Have you thought about how much you’ll spend in retirement? Have you considered inflation over time on those costs?
  • Do you know the percent of assets you’ll spend each year in retirement – your withdrawal rate? Is it sustainable over your lifetime? One of many people’s biggest fears is running out of money during retirement.
  • Consider your life expectancy. People are living longer now and many of you may need to plan to live into your 90s.

Sources of Income

Historically, there have been three primary sources of income in retirement: Social Security, your company retirement plans and personal savings. Not everyone will have all three.

Social Security will most likely change for many people who are not already retired. It is already “means tested” in that people in higher income brackets pay more tax on their benefits than those in lower brackets. You can apply as early as age 62, although at that age you will lose 20% of your full benefits. If you are married, there can be significant advantages to doing some analysis of “claiming strategies” (when to take your benefits). This stream of income can play an important role in retirement and it pays to learn more about your options. In some cases, it may make sense for one spouse to defer their own benefits until age 70 while taking spousal benefits at an earlier age.

Company retirement plans are a major source of income for many retirees. Some companies still offer pension plans. In these types of plans, the employer puts away money based on an actuarial formula for its employees. At retirement, you can choose a pension benefit for just your life or for a combined life expectancy with your spouse. More often, companies offer 401(k) or 403(b) plans where the employees have to save and choose their own investments. At retirement, you can rollover those assets to an IRA or leave them in the company plan.

If you like the idea of a pension – receiving a regular income – then you may want to consider an immediate annuity for a portion of your retirement income. Choose an insurance company with reasonable expenses and a strong financial track record.

Recent retirement studies show that it may be advantageous to use an immediate annuity to cover your fixed costs. The annuity is guaranteed to pay out for your life expectancy (or a joint life expectancy if that’s what you choose). So assuming the company that sells you the annuity is solvent, you won’t run out of money – at least for a basic level of expenses. You can then draw are right now, you may want to wait a bit before committing to an annuity. Once you purchase an immediate fixed annuity, you typically lock in an interest rate for life.

  • Think about when you want to start taking Social Security benefits assuming you think you’ll be eligible.
  • Understand what company benefits you are entitled to: retirement plans including pension plans, 401(k) or similar plans, non-qualified plans (typically for higher level executives), stock options, restricted stock, company health insurance and other benefits.
  • If you want to lock in a stream of income in retirement, consider an immediate fixed annuity from a company with reasonable costs and a strong financial base.

Health Savings Accounts

One frequently overlooked source of income in retirement is the Health Savings Account (HSA). An HSA is a tax-exempt trust that is set up with a qualified HSA trustee. You can contribute to an HSA if you have a high-deductible health insurance policy. (If you are enrolled in Medicare, you cannot make contributions.) The money in the HSA grows tax-free until you need it in retirement. As long as the money is used for qualified health expenses, you won’t have to pay income tax on the withdrawals.

When you make a contribution to an HSA, you get a deduction on your tax return. If you contribute through an employer plan, you put away dollars that will never be taxed. Self-employed individuals can also contribute after-tax dollars to HSA plans. You do not need to have earned income to contribute.

There are annual limitations on how much can be contributed. For 2019, a single person can contribute $3,500. If you are over age 55, you can make an additional catch-up contribution of $1,000. If you have family high-deductible coverage, you can contribute up to $7,000. Contributions can be made up until the tax filing deadline. You report contributions to the IRS on Form 8889 that is filed with your return.

If you die with an HSA, your spouse can use it for their qualified medical expenses. If your beneficiary is someone other than your spouse, the money becomes taxable to your heirs.

Investing in Retirement

As people approach retirement, many start to worry about potentially the largest amount of money they’ve ever had. While they may have been comfortable investing for fun in the past, retirement investing may be on another level. This is frequently a time we see new clients approach us as advisors, seeking council for so many decisions around tax and investing at the point of retirement.

This money has to last potentially twenty or thirty years. It’s important to run projections that test your mix of stocks and bonds to see if it will meet your retirement objectives. It’s also important to review cash flows you are anticipating along the way.

  • How much do you expect to spend annually? Should you keep several months (or even years) in highly liquid investments?
  • Can you separate mandatory expenses from discretionary? How do expenses like cars, weddings, health costs, grandchildren fit in?
  • How much money should be invested for the long-term? How much risk are you comfortable taking? Do you need to have more of your portfolio invested in stocks for long-term growth? Or could you have a more conservative investment policy that may help you sleep better at night?
  • Will your investment strategy change as you age?
  • Are you confident in your own abilities to manage your money in retirement or should you seek a professional? Many times investors start off managing their own affairs but find that as they age they value having a trusted professional there as a sounding board.
  • Have you considered how to protect your portfolio against inflation?


Insurance needs can change at retirement. Most people want life insurance when their children are young and their mortgages are high. With the ability to pass over $22 million to children estate tax free from a married couple, there may be less need for life insurance to protect against estate tax.

You won’t need long-term disability insurance in retirement. That’s to protect your income while you’re working. You will still need homeowners’, auto and umbrella coverage.

Fidelity estimates that a couple at age 65 will need $285,000 for medical costs alone throughout retirement. This assumes both people sign up for Medicare and don’t have additional company retirement benefits. This does not include any need for long-term care expenses, over-the-counter medications or dental costs. If you retired before age 65 or needed long-term care, expenses could be much higher.

Long-term care insurance covers home health care and nursing home costs. Typically people evaluate their need for this coverage between age 50 and 60. Costs are more reasonable during that period and go up with age. Costs can also go up for entire classes of insureds over time. The shorter the period of benefits, the lower the increases. Depending on your level of assets, you may not need long-term care insurance.

  • Evaluate your need for life insurance at retirement.
  • Review your personal property coverage: home, auto, umbrella.
  • Understand what your company will provide for retiree health insurance, if anything.
  • Although you typically will have COBRA health insurance coverage when you leave your company, make sure you understand how long it will last.
  • Apply for Medicare about three months before you turn age 65.
  • Educate yourself about long-term care insurance to see if you should apply for a policy.


While you were working, your employer withheld taxes for you. At retirement, you’re responsible. Many people pay estimated quarterly tax payments for income tax – both state and federal. You may find that you owe much less tax right after you retire – and before you have to start taking required minimum distributions from retirement accounts. That could be because you are drawing on assets that have already been taxed.

If you are working for a corporation, you may have a few more tax issues to consider:

1. You can take withdrawals from a company retirement plan once you are age 55 and separated from service without penalty. So if you need to draw on this money, don’t roll it over to an IRA where you have to be age 59½ to withdraw money without penalty. The penalty for early withdrawal is 10% on top of your regular tax owed.

2. If you have company stock in a retirement plan, you may be able to use a little known tax rule referred to as “net unrealized appreciation (NUA).” To use this special rule, you do not roll over the company stock to an IRA. You take it out of the plan and pay ordinary income tax on the cost basis. Many times this cost basis is low because the shares were purchased by the company long ago (your company can provide you with the cost basis). When you eventually sell the stock, you’ll pay capital gains tax on the net unrealized appreciation (fair market value on the date of withdrawal from the plan minus the cost basis) instead of ordinary income tax on an IRA withdrawal. If you hold the stock at least one year, any additional appreciation is also taxed at capital gains rates. If you use NUA, your heirs will not be able to step up the cost basis at your death. There are pros and cons to using this technique and I strongly advise you to consult a professional before doing this.

Watch out for tax penalties in retirement. At age 70½, you have to take required minimum distributions (RMDs) from retirement accounts. If you miscalculate on the amount to withdraw, you may have to pay a 50% penalty on what you should have withdrawn but didn’t. The rules can be complicated especially when you first start, so you may want to seek professional help at that time.

  • Think about if and when you’ll need to file quarterly estimated income tax payments.
  • Consider the tax impact of withdrawals from your assets. You may want to start taking withdrawals from assets that have already been taxed first and wait to start withdrawing from tax-deferred assets.
  • Make sure you understand when you are required to start taking withdrawals from retirement accounts.
  • You can always take more than the minimum distribution.

Estate Planning

You need to have a will. And perhaps a trust, too, depending on your circumstances. These documents detail what you want to happen with your assets, guardianship for your children and who will make important decisions when you’re gone. Procrastination is common. Most of the time, people just can’t figure out who they want to name as executors, trustees or guardians. Try to identify your best choice now and understand you can always change it later if necessary.

If you are worried that your heirs won’t manage money wisely, you can add language to create a “spendthrift” trust. The trust controls how the money can be spent. If you want to leave money to someone, but not their relatives, you can have the trustee purchase an annuity that ends after one life. There are lots of solutions to estate problems you may be worried about.

In some cases, a significant level of wealth needs to be protected for heirs. Creating a family trust can be one way to pass assets to the next generation. Creating charitable trusts that all family members can participate in can create values that you want to pass along. Don’t forget to plan for pets’ care once you are gone.

Powers of attorney for health care and property are also important to make sure your wishes are honored if you are not competent to manage your own affairs. And don’t forget to write down where to find important information so your family or friends know where to find everything.

  • If you don’t have estate documents, get them drafted by an estate attorney.
  • If you do have estate documents, review them every five-to-ten years.
  • Make sure you have powers of attorney for property and health care.
  • Write down where your important papers are and who to contact in case of an emergency.

This commentary originally appeared on

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