Early Retirement Years:

We kicked off this Ultimate Retirement Checklist series last month, where we discussed your Pre-Retirement needs.

This month, we're moving on to the crucial years between ages 60 and 65.

I will call this the Early Retirement phase, but you can also think of it as a Transition stage of your retirement journey.

The primary focus during this phase is to bridge the income gap and manage your taxes before the so-called "traditional" retirement age, which for many is usually between 65 and 70.

Finalize Your Income MaP

You need to know exactly how you will be covering your expenses in retirement.

Not just the total amount, but specifically where the funds would be coming from.

Start by combining your portfolio assets with other income sources.

This includes pensions, portfolio income or part-time work.

I fund that seeing everything in one place really helps you spot gaps.

As an example, if you need $10,000/month net of taxes, perhaps $7,000/month would come out of your investment account, $2,000/month from your IRA and the remaining $1,000/month is covered by your part-time income.

The key step here is mapping it out and planning ahead for these income sources to avoid surprises.

Confirm Your Spending Rate

This step is picking up on the work you did in the Pre-Retirement Phase of our checklist.

In that step, I wanted you to consider different ranges of retirement expenses.

Now in this step, it's time to narrow in on that initial work you've done.

The goal here is to confirm a sustainable spending rate for a comfortable retirement.

And to be clear, this is rarely ever a static number as your lifestyle and discretionary expenses will likely change in the future.

It is often reassessed every year, if not twice a year, once you're in retirement.

A perfect example here is travel expenses.

Many young retirees want to travel more and you need to account for it ahead of time.

As an example, if you are comfortable with a $10,000/month lifestyle and plan to spend $20,000/year on travel in the first ten years of your retirement, this needs to be part of your plan.

As a side note, many planners consider 4% a "safe withdrawal" rate.

This means you could withdraw 4% of your portfolio value each year to live off of without depleting it.

I find this rule of thumb beneficial for discussion purposes, but not so much as part of the actual retirement plan.

In practice, if you structure your plan correctly, there is nothing wrong with spending more in the beginning of your retirement to really enjoy your "go-go" years!

Build the Income Bridge

To start with an example of what this means, you might want to stop working but prefer to wait to claim Social Security because it maximizes your income in retirement.

This requires an income bridge strategy because you will need more from your assets in the beginning of your retirement.

You might use a dedicated cash “bucket” or a brokerage account.

Alternatively, perhaps you would live off the income and dividends that your portfolio generates (this is frequently my recommended approach).

Regardless of the strategy you choose, it is important to consider other factors such as health insurance premiums, which are income-based if you access plans on the marketplace.

Social Security Planning

Social Security planning is not a one-size-fits-all choice.

I can tell you from experience that we frequently recommend very different Social Security claiming strategies for clients who are in a seemingly similar financial situation.

In general, single individuals usually focus on their own cash needs and life expectancy.

But married couples have more complex options.

To be specific, if you're married, you really need to coordinate when you and your spouse will be collecting the benefits.

Simply waiting until age 70 to receive the maximum possible benefits is not always the best choice!

You should consider other factors such as your longevity, work income, risk tolerance and potential portfolio growth.

(I have so much to say about Social Security planning, but I would rather not do it here as this is meant to be a checklist, not a guide.)

Simplify Your Finances with Rollovers

This step is simple but also incredibly valuable.

The fewer accounts you have, the less paperwork and fewer headaches you will have in the future.

You really don't need to have your accounts across multiple investment institutions and former employers.

For most people, 3 to 5 accounts of different types is all you really need.

Design a Tax-Efficient Withdrawal Strategy

This is one of the key ideas for a well-prepared retirement plan.

Just to give you some basic structure, if you pull from your taxable accounts first, this allows your tax-deferred accounts to keep growing.

Distributions from your retirement accounts count towards your ordinary income taxes (i.e. fully taxable in most cases).

But you also need to keep in mind that if you take no distributions from your retirement accounts, you will likely be responsible for sizable required minimum distributions (RMDs) once you turn 73.

So taking some distributions from retirement accounts prior to your RMD age can potentially be helpful.

There is, of course, a lot more that can be said about designing a tax-efficient withdrawal strategy, so please make sure you have one!

Secure Your LegacY

Life changes quickly as we all know well.

As you work on the transition to the next chapter, this is a great time to update your estate planning documents.

Make sure your will and/or trust documents still reflect your current wishes.

Check the beneficiary designations on every single account.

Ensure your powers of attorney are up to date.

What I frequently find when we work with new clients is that they haven't updated their estate planning documents since their children were born.

If you have estate planning documents that are 30 or 40 years old, be mindful of potential consequences!

In Summary

Your early retirement or transition years represent a major turning point in your life.

Moving from the saving phase to the distribution phase is a significant financial shift.

It is also an emotional adjustment that many people underestimate (I have written multiple newsletters on this important topic).

Our team created The Ultimate Retirement Checklist to help guide you through these logistics.

The goal is to create a clear path for you to make these important decisions.

You worked hard for this and now it's time to enjoy you well deserved retirement!