59 and retiring soon: How to prepare for retirement in 8 steps

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC Head of Financial Planning

As Head of Financial Planning, Jason is a strategic partner who is responsible for developing the strategy, managing the planner teams, and coordinating personal financial planning activities across Citizens Wealth Management to help clients navigate and grow in changing circumstances.

When you're about to go from being career-focused to starting new adventures, it's a significant life change. In retirement, you may finally be free to pursue lifelong dreams, such as traveling, taking up new hobbies, volunteering, spending time with your family and many other things.

However, figuring out how to prepare for retirement can be a daunting long-term task. You need to make sure that your finances are in order so you can live the life you've been dreaming of without having to compromise on anything. This requires a careful evaluation of your sources of retirement income to make sure they will cover your living expenses and health care costs for the long term.

As you near retirement, you can ensure you are ready to begin your new life by gathering information on your future needs. Here are some steps you can follow to help you get there.

Have you thought about what you want to do with your time after you retire? Many people are so focused on making sure they are financially prepared that they neglect the other components of a successful retirement — like being physically active and emotionally ready for what retirement brings.

Transitioning into retirement can be hard, which is why having a plan for how you'll spend your time and stay connected to family, friends and your community is critical. Your first step in preparing for retirement is to create a vision of what your new life will look like.

Here are some questions to consider as you develop your retirement vision:

• What hobbies and passions do I want to pursue?
• How much do I want to travel?
• Where do I see myself living?
• Will I continue working in some capacity?
• Will my standard of living remain the same or will I downsize?

Once you have a clear picture of what you'll do with your time, you should assess your finances to make sure it's feasible. More specifically, you'll need to estimate how much that lifestyle might cost and how much money you'll need to pay for it.

This can get tricky because there are so many moving targets, but a good starting point is looking at your current expenses and subtracting things that will go away, like commuting costs, and adding expenses that will be new, like travel. In particular, you may want to consider whether you should stay in your current home or if you should downsize. While you do this, you have to make assumptions about how long you'll live, how much you'll spend and how inflation might affect basic goods and services and health care.

Speaking of health care, if you do retire when you're 60, you need to have a specific plan for how you'll pay for health care expenses from the time you retire until you qualify for Medicare at age 65. You'll have access to the Consolidated Omnibus Budget Reconciliation Act (COBRA) for 18 months after you leave your job, and the state-offered health care exchanges are options that could help you bridge the gap until you're eligible for Medicare.

Because you will have to budget for co-payments, deductibles, and other expenses that are not covered by Medicare, a Medicare supplemental insurance plan can help. As you near retirement, it's a good idea to start researching plans to find the one that best suits your needs and budget.

Overall, just try to get a ballpark estimate of what your annual health care expenses will be. There's no need to get too hung up on the exact numbers because this is something you'll be reassessing throughout retirement as things change.

Saving for retirement is one of the most important things you can do to ensure you can realize your retirement vision. One of the best ways to grow your savings is to make regular contributions either to a 401(k) or IRA. The money you contribute grows over time through investments in stocks, bonds and other securities, and through the compounding of interest.

A 401(k) is a retirement savings account sponsored by an employer. One of the best features of these accounts is that many employers offer matching contributions. They contribute a dollar to your account for each dollar that you contribute up to a certain amount. It's essentially free money that you can use to help you reach your retirement goals. 401(k) plans are tax-deferred, which means you don't have to pay any taxes on the money in your account until you start making withdrawals.

Unlike a 401(k) that is sponsored by an employer, a traditional IRA is a retirement account that you set up yourself. Traditional IRAs are also tax-deferred. There is another type of IRA called a Roth IRA, where you make contributions with money that has already been taxed and you don't pay taxes on the money you withdraw. The type of IRA that is best for you depends on the tax bracket you expect to be in when you retire, among other factors.

IRA and 401(k) retirement accounts both have annual contribution limits, which may change from one year to the next. If you are at least 50 years old, you can make additional "catch-up" contributions up to a certain amount on top of the regular contribution limit. This gives you an important opportunity to boost your savings in the years leading up to retirement.

The next step is relatively easy. You need to take inventory of all the financial resources you have that can provide income in retirement. If you need to sell any assets, timing the sale may help you minimize your tax obligation. For example, if you retire early, you won't have your employment income anymore, which may put you in a lower tax bracket.

Some assets to consider include:

• Stocks, bonds, CDs and savings accounts. Any savings that are not part of a 401(k) or IRA can be used as needed for your living expenses. You could also liquidate your assets and purchase an annuity to have a guaranteed income for life.
• Real estate. Many people purchase single-family homes, duplexes, small apartment buildings and other properties to rent during retirement. You can choose to maximize your revenue by managing your properties yourself or use a property management company to free your time for other things.
• Business interests. If you are a business owner, selling your business could provide you with a significant influx of cash. If you have a business partner, your partner could also continue to run the business for an additional cut of the profit while you earn a passive income from your ownership stake.

Evaluating your assets will help you get an estimate of how much income you will have when you retire. This will help you prepare a realistic post-retirement budget. It will also help you determine whether you need to make some lifestyle adjustments. If your expected income is lower than anticipated, you may have to downsize your home or continue working in retirement on a part-time basis to meet your financial needs.

How much you can expect to receive monthly from Social Security will vary based on your retirement age, your lifetime earnings history and other factors. Social Security is a crucial revenue source for most retirees. Estimating your Social Security benefits is helpful when planning for retirement to make sure you are on track to meet your future income goals.

You can obtain an estimate of your Social Security benefits by using the SSI calculator on the Social Security Administration's website. You just enter your birthday, age, the age you expect to retire and earnings information to perform a quick calculation.

It's important to keep in mind that your monthly Social Security benefits will vary based on when you choose to retire. You can start collecting benefits when you turn 62; although, they will be less than if you had waited a few more years. The age you will need to be to collect full Social Security benefits (also called full retirement age, or FRA) is between 65 and 67. it depends on the year you were born.

Many people prefer to stay busy in retirement instead of engaging in leisure activities — and there's nothing wrong with that. Retirement is your time to do things that you've always wanted to do. If you have sufficient retirement income, working for money may no longer be your primary focus. You could do something that's personally rewarding instead, like tutoring students, making and selling arts and crafts or working as a tour guide at a historical site.

If you decide to have a second-act career, it could be either a part-time or full-time job. It could also be a business venture that you've dreamed about for years. The extra income can be used to supplement your Social Security and 401(k) or IRA income. It can also give you a sense of purpose and help you stay socially engaged.

If you are considering a retirement job, it's important to make sure your new work is something you will enjoy and that the work hours align with your schedule. For example, if you are an early-morning person, working a late-evening shift could disrupt your sleep, which could affect your health or cause you to dislike your job.

Now that you know what you need and you've taken inventory of your resources, compare the two to see whether you have enough to last throughout retirement. You can use a retirement planning calculator to help you crunch the numbers.

Many free retirement planning calculators are offered online by 401(k) administrators and brokerage firms. Some use statistical analysis to calculate the monthly income you'll need. At a minimum, you'll want a probability of success score above 70% to ensure your target retirement date is financially feasible.

If you're below the 70% probability threshold, you should consider making some changes to your retirement plan to improve the chances that you will make it through retirement without depleting all your assets. You could consider things like delaying your retirement date, securing a part-time job, saving more, spending less and living a healthy lifestyle to minimize health care costs. These can all make a meaningful impact on achieving your goal.

As you evaluate your assets, be sure to consider how much of your retirement account you plan on withdrawing each year. As a general rule of thumb, the safe withdrawal rate to ensure you don't run out of money during your retirement years is 4% annually.

After completing the eight-step process to prepare for retirement, you could be well-positioned for a smooth transition into your post-career life. If you have any additional questions about any step of the financial planning for retirement process, consider consulting with a financial advisor. A financial advisor can also make recommendations to help you stay on track to reach your retirement goals.

Looking for more advice on how to prepare for your retirement? Request a call today to find out how a Citizens Wealth Advisor can help you reach your financial goals.

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