Some 4 million baby boomers are expected to retire in the
next year. If you're one of them, you need to make sure you're on solid ground
before exiting the workforce. Otherwise, you could find yourself without a job
and without enough monthly income to cover your expenses. Retiring has the
potential to affect everything from your social life to your insurance
coverage, so pre-retirees should take some time to evaluate both
their current situation and future goals before clocking out for the final
time. Here's what financial experts say you should do (and not do) during the
year before you retire.
Do: Review Your
Expected Budget and Cash Flow
The first thing pre-retirees should do is estimate what
their expenses will be in retirement. Pre-retirees often make the mistake of
focusing solely on the bottom line of their 401(k) or IRA statement.
But what may be more important than the total balance is the monthly cash flow
you can expect to pull from those accounts. Add up all your monthly expenses –
with travel plus major and future expenses included – and having a financial
advisor run "Monte Carlo simulations" to determine how long you can
sustain that budget before your money runs out.
Larry Rosenthal, president of Rosenthal Wealth Management
Group in Manassas, Virginia, says poor management of private retirement
accounts can be a costly mistake. While those with Roth IRAs can make tax-free
withdrawals, money from a traditional IRA is taxable and withdrawals before age
59½ often trigger a 10 percent early withdrawal penalty. Beyond having to
pay taxes on money they don't plan to use immediately, retirees could find that
unneeded withdrawals bump them into a higher tax bracket.
Don't: Forget About
Health Insurance and Life Insurance
Reviewing insurance policies is another must-do for
pre-retirees. Medicare doesn't start until age 65, which means early retirees
could find themselves without coverage and without access to their employer's
health plan. As for life insurance, it's not so much a question of finding new
coverage as it is seeing whether you can reduce your monthly expenses. Ask what
happens with your whole life insurance [policy] if you stop payments. Depending
on the policy, some companies may allow premiums be taken from the cash value,
which can free up much-needed money in a retiree's monthly budget.
Do: Refinance Now
Rather Than Later
If you think refinancing your home mortgage is a
wise financial move, you should pursue it while you are still are earning
income. Refinancing becomes harder after retirement. Creditors may be hesitant
to provide loans to those who don't have any earned income and are living on
retirement funds. Along the same lines, consider whether you want to make any
major purchases in the near future, such as a car or RV. In most cases it'll be
easier to buy these items now rather than obtain financing after you've left
the workforce.
Don't: File for
Social Security Too Early
One of the biggest decisions you need to make as you approach
retirement is when to take Social Security. While you can sign up for
Social Security any time after age 62, your monthly benefits will increase for
each month you wait up until age 70. Smart use of funds from your retirement
accounts can be one way to comfortably postpone the start of Social Security
benefits. Consult with a financial professional to determine the right amount
to withdraw, noting an annual withdrawal of no more than 5 percent of the fund
balance is usually ideal.
Do: Find a Social
Outlet in Advance
Before you leave the workforce, decide whether you need to
find a new social outlet. If the workplace is your main source of
friendship, you may have a rocky transition to retirement, where long
hours at home can lead to boredom or marital tension. To find your happy place,
consider whether you might want to travel, pick up a new hobby, work part time
or volunteer for a favorite charity after you finally say goodbye to the daily
grind.
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