Transitioning into Retirement: The Steps You Need to Take

You've been working your whole life. You've been (hopefully) saving up for that time when you're no longer trudging through your daily routine of early mornings, work, kids, errands, etc., and can finally bask in the glow of all those years of hard work. But how will this transition actually play out? How do you even begin? As exciting as it is to reach this point in life, it's understandable if it's slightly intimidating. No matter what your retirement dream looks like, it's important to take the necessary steps to ensure you can live comfortably.

Here are some areas to focus on before, during, and after you've made the leap into your new lifestyle: 

5 Years Before Retirement

First, you need to determine if you're on track to retire when you want to. Depending on your savings, you may retire early, on-time or later than you initially thought when you first started saving. A number of other factors go into this as well: inflation, the rising cost of health care, longer lifespans, etc. While you still have the time, evaluate the whole picture and determine what retirement age is right for you. 

In earlier years, your investments for retirement were most likely focused on growth, which makes sense and probably has a lot to do with the fact that you're able to retire in the first place. About 5 years out from your target date for retiring though, it's a sound idea to start shifting your investments away from being more focused on stocks, and towards a more conservative asset allocation focused on fixed income investments. Be careful not to make all of your investments conservative though, as you'll still want the opportunity for growth. Think of your investments as being "buckets" for different goals: conservative for immediate, short-term goals; moderate for mid-term goals (3-5 years away); more aggressive for goals that are still a little farther off for once you're in retirement (5+ years). This type of strategy should help you continue to stay financially secure. 

If you haven't quite saved enough and you're nearing retirement, hope is not lost. Do you know about "catch-up contributions"? If you're 50 or older and can swing it, you can exceed the regular $18,000 annual limit for 2015 on 401(k) plan contributions, and defer an additional $6,000 to your savings. If you're already maxing out and can save even more in these years, make it happen with a separate IRA or another type of investment account. 

What about any debt you may have? While paying down credit card debt is always an important step to take, it gets even more important nearing retirement. In a few years, you'll enter a period where you will be on a fixed income and paying off credit cards might be harder. There's also always the chance that your original plan won't work out and you'll need to retire earlier than anticipated. Having consumer debt won't do anything to help you in that situation. Save yourself the stress and prioritize paying off debt. 

Now is also the time where you should begin thinking about what you want your retirement to look like. Do you want your standard of living to stay the same, or will you be downsizing? Is relocation in your future, or do you want to stay in the same area? Are there any new hobbies you want to take up that may be an extra cost? Think about what will actually make you happy in retirement, not what you think is supposed to, and go from there.

When You Retire

Even though you may have been hyping up the day you'll finally stop working, the act of actually retiring may not be as joyous as anticipated for everyone. With any major life event, there is a significant period of adjustment. Retiring may even seem more like a burden to you if you really enjoyed your work and aren't sure what you'll do with all of this newfound free time. It's important to consider what "retirement" really means to you. According to a Merrill Lynch study, nearly 3 out of 5 retirees enters into a new field of work after retirement, and according to the Bureau of Labor Statistics, 67.5% of Americans aged 55-64 will remain in the workforce by 2022. While some of these numbers are reflective of previous generations not saving enough, that's not always the case. If, to you, retirement means playing golf, buying a beach house and luxuriating in having a completely flexible schedule, that's great, but it doesn't have to look that way.

One of the most important aspects of living in retirement is figuring out your monthly spending. While we're always huge advocates of budgeting, now more than ever is the time to know how much you really need to get by and not drain your savings. The temptation to overspend and indulge now that you've finally reached this goal can be strong, but it's important to remember that you're not earning as much, if any, income, so you're living on a fixed amount. It's important to have a picture of what you really spend on your needs, versus what you spend on your wants. Our budgeting tool can help you get started on creating a plan. 

In conjunction with budgeting, figuring out your "income" in retirement in order to maintain your standard of living is vitally important to ensure you don't deplete your savings. Ask yourself some important questions: What does your new "annual salary" need to be? How can you safely withdraw money from your retirement accounts? To really break it down, here's a simple formula to use when figuring out how much you'll need annually in retirement: 

While there's a lot more that goes into determining your retirement income, this is a good starting point. As for your Safe Withdrawal Rate (SWR), most research suggests that an initial withdrawal rate of 3.5% to 5% over a 30-year period is "safe." You may have heard of "The 4% rule": using this as your withdrawal rate for your initial retirement portfolio, and adjusting that dollar amount for inflation every year thereafter, you should have a paycheck to cover your expenses for the next 30 years. Of course, while this strategy doesn't work for everyone and it has come under criticism in recent years, it still holds value as a starting point in figuring out your retirement income strategy.    

A few other things to consider at this point: Estate Planning, Medicare and health insurance, and Social Security. While maybe not the most fun aspects of retiring, writing up a will, designating beneficiaries, and determining health-related directives like who will hold power-of-attorney, are vital steps to take in this phase of life. As healthcare costs are on the rise, it's important to at least try and estimate how much this will cost in retirement based on your personal situation. Once you are 65, you'll be eligible for Medicare, but is that enough? Retiree health coverage from employers is increasingly becoming a thing of the past, and even with Medicare, out-of-pocket healthcare costs are skyrocketing: the Center for Retirement Research cites a couple retiring in 2040 will need $491,000 over the course of their retirement for medical costs. Depending on your retirement age, you may or may not need to claim Social Security benefits. There are several factors that go into the best strategy for using Social Security: your income, retirement age, marital status, and so on and so forth. Make sure that you're on track to get the most out of this benefit because it really can be a valuable addition to your retirement income. After all, it is the only source of income you can't outlive with an adjustment for inflation. 

A Few Years In

Hopefully by this stage in the game you've taken the necessary steps previously outlined to make sure you're comfortable in your new life. If you have the means, hiring a financial advisor to assist you can be a great asset, but even just taking into consideration the areas discussed here is a great first step towards living a happy retirement. 

Retirement doesn't look the same for everyone. You may still have to work later in life and unexpected costs can always come up, but having a plan in place is instrumental in making sure you live out a dignified retirement. A life of leisure may sound great, but studies prove that planning out what you'll do in retirement, whether that's a new hobby, volunteering, or a new career, leads to greater fulfillment.  

No matter what your retirement looks like, you'll have some important choices to make along the way to ensure you fully enjoy your life -- all of it. 

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