Nearing retirement

Retire by design, not default

Plan, Plan, Plan

For many people, the new "age of retirement" is about 66. Some plan to leave the workforce earlier and others realize that they will stay a bit longer, but people generally calculate "early" or "late" from a milestone of about age 66. Unfortunately, this type of thinking encourages too many people to view retirement as a one–size–fits–all event — and that couldn't be further from the truth. Retirement is a highly personalized lifestyle change that requires careful attention and good decision-making skills. It's likely that you'll be living on assets that you've accumulated during a lifetime of work, and those assets cannot be easily replaced if you make costly mistakes, so it pays to plan.

Designing your retirement

If you're about five years away from retirement, it may be time to do some specific thinking about what your life in retirement will look like and how you will use your personal savings and other potential income sources to fund it. After years of working, you'll have more free time, but you may also be at a very different financial place. Instead of focusing on accumulating assets, you'll be focused on using those assets wisely, with the goal that they will last throughout your retirement. Every decision you make about your retirement lifestyle will affect your retirement assets, so each must be weighed against the other.

Your retirement goal may include leaving the workforce before age 66. If so, you may need an investment portfolio or other assets that can finance your monthly expenses. Your eligibility for Social Security benefits may also play a role. If you were born in 1960 or later, your full Social Security benefits are not available to you until age 67. You can claim benefits earlier but only at a permanently reduced level. If you leave the workforce at 55, you'll be retired for 12 years before you can collect full Social Security benefits.

Likewise, you won't be eligible for Medicare for several years, so you may need to plan to pay full medical insurance premiums, as well.

Then there are lifestyle choices. How will you use your time? If you plan to work part-time or start a small business, you may need to rely less on your accumulated investment portfolio. If you plan to travel or indulge in an expensive hobby, you may need to rely heavily on your nest egg.

Even where you live must be part of your decision process. A Manhattan high rise, Broadway shows and five-star dining will likely require heavy monthly withdrawals. On the other hand, a modest home in a small town, gardening every afternoon and barbecuing on the deck will cost much less. Which fits your style?

Planning around question marks

You must also consider factors over which you have no particular control. How long will you live? No, it won't be forever, but it could be 30 or 40 years after you retire. Do you have favorable genetics? Do you exercise and eat right? If you are married, you'll need to plan together and anticipate life expectancy for both partners. Statistical analysis can provide ballpark numbers, but even these statistics are averages and don't apply to everyone.

Beyond lifestyle factors, there are day-to-day investment considerations. If you have a pension plan, you'll need to calculate the monthly benefits it will provide. If you have a 401(k), you'll probably base many decisions on how much cash flow you can generate from those investments without running out of money. Do you know what rate of return you should use to estimate the annual income your portfolio might generate?

If your anticipated budget and your anticipated annual income are mismatched, you need to know that before you leave your job. Armed with this knowledge, you'll be able to make a more informed decision about the timing of your retirement. You may decide to delay retirement a few years to provide more time to put money away and let the assets you do have continue to grow. You could also decide to go ahead and retire, but work part time.

After accumulating assets over a lifetime of hard work, you will spend those assets during your retirement in a uniquely personal way. Designing your retirement in advance can help you feel more in control of your future.

How to estimate your retirement income needs

How much of your current salary will you need after you retire?

This is a good question to start with. But a better question might be: how much income will you need each year to meet your obligations and still maintain the standard of living you desire during your retirement. Like most people, you probably want to be reasonably free to spend with confidence in retirement without the risk of running out of money. So, how do you begin to figure out what kind of income you'll need to live comfortably in retirement?

Start by looking at your current expenses

Take a look at what you spend today in various categories and estimate how these amounts will change when you're in retirement. Which expenses will remain fixed? Which expenses will change? Your housing costs, in particular, may change — whether you've paid off the mortgage, relocated to a less expensive locale or otherwise downsized your living arrangements, what you're paying now may not be the same as what you pay in retirement. You'll also no longer see the tax benefits of saving for retirement, and other costs, like healthcare, may rise.

It's also important to think about your desired spending goals, either ongoing annual amounts for essential expenses or one–time events. Take into account travel, hobbies, charitable giving and other expenses related to the specific desires you have for the lifestyle you want to live in retirement. Be sure to think about the impact of taxes and inflation as well. Establishing a comprehensive spending budget is central to creating a good retirement lifestyle plan.

See also: Tax strategies to maximize your retirement income

Figure out how much income you could get from outside sources

Start adding up income distributions you expect from sources such as Social Security, your 401(k), personal IRAs, pension plans (if any) and the like. Social Security plays a key role in the retirement plans of many. To get an idea of your potential Social Security benefit, visit the Administration's estimator tool at You may also have savings or other sources of potential income you've built up throughout the years, and it's important to review everything to get a clear picture of your financial situation.

Estimate how much income you'll need from your investments

Once you know how much you need and how much you're expecting from your existing retirement income sources, you can generally estimate the balance you need from your investments. This comparison between your expenses and income should reveal whether your spending budget is on track and what your "funded status" is. Your advisor will factor in your "funded status" when making recommendations and creating an investment portfolio designed to give you the cash flow you need in retirement.

If your goal is to purposefully draw-down your assets and leave little monetary legacy, conventional wisdom generally starts with a 4% draw-down rule, but individual circumstances will vary. That is why it's important to work with a financial professional to tailor a plan to your specific withdrawal and legacy needs.

Consult a professional

Since your retirement income needs are different than your neighbor's, be sure to give your financial professional a complete picture of your goals, your assets, and your expected spending needs. And review your situation at least annually or whenever something unexpected occurs.

The information contained herein is being provided to you for educational purposes only and is not intended to constitute investment, tax or legal advice nor a recommendation or solicitation to invest in any investment product. The general information contained in this publication should not be acted upon without obtaining specific investment, legal and/or tax advice from a licensed professional.