Pre-Retirement Years:

People love checklists! I may be biased as we use them for almost every task at the firm and I do the same personally.

There is something to be said about looking at a clean list of steps to complete a certain, often rather complex, task.

As a famous quote states: How do you eat an elephant? One bite at a time.

In all seriousness, planning for your eventual retirement, or financial freedom, is a complex task.

But it doesn’t have to be overwhelming if you tackle it step by step and work with the right timeline.

To help you plan for this new chapter, my team and I decided to put together “The Ultimate Retirement Checklist.”

Even though we try to keep it comprehensive, there are still many items that will apply specifically to your situation. So keep that in mind.

Over the next few months, we will feature each “chapter” of the checklist in this newsletter.

And today’s feature will be all about the Pre-Retirement phase which is generally in your mid-50s.

Let’s dive in!

Stress-Test Your Plan 

A plan that works when the market is up 10% every year isn't a secure plan.

Specifically for those who are thinking about retirement, considering longevity risk and sequence of returns risk is crucial.

How does your plan fare when the market is down by 30%? It happens more frequently than you think.

What does it mean for your retirement income if you live longer than you planned for?

And how will your plan handle the stress of long-term care expenses, unexpected or otherwise?

These are the “stress test” types of scenarios that you should consider for a truly comprehensive plan.

Define Your Income Target

The old rule of “70% of pre-retirement income” as a target doesn’t quite address the nuance of everyday life.

Your spending won't be a straight line, as people tend to spend more in the beginning of their retirement (and also in later stages of their life).

Instead, consider defining for yourself three levels of income.

The minimum income would be what you would need to maintain your existing lifestyle.

Your comfortable number would be what you would need to accomplish your bucket list goals, such as travel.

And your aspirational number would include charitable giving and supporting your family.

I understand that your priorities may be different, but I hope you understand the concept!

Inventory Every Corner of Your Wealth

For a variety of reasons, you may enter your 50s with a plethora of accounts.

A few former 401(k)s, maybe a handful of IRAs from different custodians, and sprinkle in a couple of mutual fund accounts.

It gets messy quickly!

That’s not that big of a deal for a while, but once you’re in retirement, you will appreciate having this tidied up to ease the administrative needs.

To get started, you could write down all of your accounts and begin mapping out your rollovers.

This is actually one of the first things we handle for our new clients.

Pro tip: Keep in mind that funds can be purchased directly at major custodians. In most cases, you don’t need to keep your funds at more than one custodian.

Reassess Risk 

This step is of particular importance.

Do you really need the same level of growth and risk in your 50s as you needed in your 30s?

The answer actually depends on your goals and preferences.

If you undersaved earlier in your life, perhaps you need to maintain a growth-oriented investment mix to catch up.

On the other hand, if you have enough, perhaps it simply doesn’t make sense to maintain such a risky portfolio any longer.

Let me be very clear.

We very rarely, if ever, suggest that our clients make any dramatic adjustments to their investments all at once (e.g., “sell most of your stocks and buy bonds, or vice versa”).

A gradual shift toward a mix that prioritizes capital preservation with reasonable growth is usually a better approach.

The sooner you think about it, the more time you will have to make the adjustments gradually and tax efficiently.

Build the Pre-Medicare Healthcare Bridge

If you plan to retire before 65, health insurance will likely be one of your biggest expenses.

As many of you know, the ACA Marketplace premiums have been rising rather significantly.

You need to be proactive with planning for your income and expenses so that you qualify for the lowest possible premium. There are other options too.

If you’ve been accumulating funds in your Health Savings Account (HSA), it can be a big help at this stage.

Gradually Build Your Reserves

One of the biggest dangers to new retirees is being forced to sell stocks during a market downturn to support your lifestyle.

This is where your short-term reserves come into play. 

In our Fortress Financial Plan approach, we include fixed income investments and dividend stocks to help in this area as well. 

However you go about it, the main goal here is to avoid panicking and “selling low.”

Evaluate Concentrated Positions

We have clients who accumulated large positions in their company stock or simply a handful of other companies.

Perhaps this is one of the reasons why you’ve been able to accumulate your wealth, but diversifying can be a smart move at this stage in your life.

To keep it tax-efficient, consider reducing any single stock position to less than 10% of your total portfolio.

There are, of course, many other nuances here, but I would rather not go into technical details for now.

Model Future Tax Brackets

The years between your retirement and age 73 (when Required Minimum Distributions or RMDs begin) are often your lowest-tax years.

I usually refer to them as “artificially low” income years.

Map out your anticipated "low-tax windows" where you can consider Roth conversions and other adjustments and stay in the 12% to 24% federal tax brackets.

This is important because if you do nothing at this stage and enjoy your low tax years, it’s entirely possible that you will pay much more in the future.

So be proactive!

In Summary

There is a lot to consider here. I know!

The good news? You still have time at this stage in your life and career.

Tackling these items gradually will make retirement planning feel much more manageable.

Want a copy of the full checklist to keep handy? 

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