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~How to Retire with Confidence~

 

It's generally a good idea to start planning for retirement no less than five years before you retire.  Please keep in mind that the steps below are not financial advice, but financial education.  You should consult your financial advisor and CPA before making any decisions regarding financial decisions.

 

 

1.  Step 1 - Review your debts:  Consider paying off high-interest debts like credit card debts and any other high-interest loans prior to retirement.  Debts with high interest rates will sap your ability to retire.

 

2.  Add up your income sources:  Decide which Maine State Retirement option you will choose (there are 9 of them......) and decide when to claim Social Security benefits (either based on your earnings record or on your spouse/ex-spouse's earnings record).  Add in any other "fixed" income sources.

 

3.  Determine your expenses:  What are your goals for retirement?  Figure out how much you will spend in retirement based on these goals.  Research suggests that retirees spend about 75% of their pre-retirement income (see:  https://www.troweprice.com/personal-investing/resources/insights/how-to-determine-amount-of-income-you-will-need-at-retirement.html).  Consider creating "sinking funds" for "irregular" future expenses and contribute to them monthly (e.g. for the new car that you'll eventually need).

 

4.  Mind the gap:  Calculate the gap between your "fixed" income sources and your anticipated expenses.  This amount will need to come from your portfolio.  If there is no gap, then you have lots of options regarding how aggressively you can invest your portfolio in retirement.

 

5.  Assess portfolio size:  Work with your financial advisor to determine if your portfolio is large enough to support the desired annual withdrawals in retirement.  Structure your portfolio appropriately to maximize the likelihood that it can meet your spending needs/goals and minimize the chances of running out of money in retirement.  If your portfolio is too small to support the desired withdrawals then you'll need to cut spending, work another year(s), or work part-time in retirement.

 

6.  Diversify:  Work with your advisor to determine if your portfolio is properly diversified in stocks, bonds, and alternative assets.  From 2000 to 2009, the S&P 500 (mostly big tech companies) was down 10%, while many other categories of stocks did just fine.  Overinvestment in the S&P 500 ruined more than a few retirements between 2000 to 2009.

 

7.  Assess inflation risk:  Work with your advisor to ensure that your portfolio is not too conservatively invested.  A portfolio with too small of a stock allocation is at risk of being eroded by inflation.  Over a 30-year retirement, a  portfolio would lose about 25% of its purchasing power if the rate of inflation were only 1% more than the growth of the portfolio.  That will, for one, potentially harm your ability to pay for long-term care needs at the end of your life.

 

8.  Strategize on taxes:  Because there are different types of accounts (taxable, post-tax/Roth, pre-tax/Traditional), determine if your investments are allocated in the most advantageous account.  This will help you minimize your tax bill over the course of retirement and thus help grow your investments more effectively.

 

9.  Assess Roth conversions:  Work with your advisor and accountant to determine if it is advantageous to convert Traditional retirement accounts into Roth accounts.  Many people don't realize that every dollar that they will take out of a Traditional 401k/403b/IRA is taxed as regular income and that at a certain age, the IRS will require you to take "required minimum distributions" from these accounts.  This can potentially push you into a higher tax bracket in retirement.  Converting Traditional accounts into Roth accounts could potentially save you hundreds of thousands of dollars over the course of retirement.  Keep in mind, that with a Traditional 403b or IRA, one will pay income taxes on every single dollar that is withdrawn from the account, whereas Roth withdrawals are tax free.  Whether it is a good idea for you to convert part or all of your Tradtional IRA/403b to a Roth IRA depends on your personal circumstances.  The goal is to minimize lifetime tax payments and an important part of this is minding how withdrawals from a Traditional 403b/IRA will affect what tax bracket you are in.

 

The sooner you can start addressing these issues, the more confident you will feel in your plan for retirement.