Retirement planning is often thought of as a savings goal: accumulate enough assets, reach a certain age, and retire.
In reality, the years leading up to retirement involve much more than determining whether you have accumulated enough. They can be an important period for evaluating how your financial resources, income sources, taxes, investments, and spending needs may work together once employment income ends.
For individuals approaching retirement, the focus may begin to shift from building wealth to preparing to use it.
Revisit Your Retirement Goals
One of the first steps in preparing for retirement is determining what you are actually planning for.
Retirement can look very different from one person to another. Some individuals may plan to travel extensively, while others may expect their expenses to remain relatively consistent. Some may want to work part-time, relocate, or support family members.
Consider questions such as:
- When do you expect to retire?
- What type of lifestyle do you want to maintain?
- Where do you plan to live?
- Which expenses are likely to increase or decrease?
- Do you expect to work in some capacity after leaving your primary career?
- Are there significant purchases or financial goals you want to accomplish during retirement?
A realistic picture of your anticipated lifestyle can help provide context for the amount of income and assets you may need.
Understand Where Retirement Income Will Come From
Retirement income may come from several sources, and understanding how those sources fit together can be an important part of the planning process.
Depending on an individual's circumstances, sources may include:
- Social Security
- Employer-sponsored retirement plans
- Traditional and Roth IRAs
- Pension benefits
- Taxable investment accounts
- Annuities
- Cash and other savings
- Part-time or consulting income
Rather than simply asking, “How much have I saved?” it can be useful to consider how those assets may be used to generate income over time.
The timing of withdrawals can also matter. Different accounts may have different tax characteristics and distribution rules, which can affect how much income is available after taxes.
Consider the Tax Implications
Taxes do not necessarily end when a paycheck does.
Traditional retirement accounts are generally subject to income taxation when distributions are taken, while qualified withdrawals from Roth accounts are generally tax-free. Taxable investment accounts may generate interest, dividends, and capital gains.
The combination of these different account types can create planning opportunities—and tax considerations—in the years surrounding retirement.
For some individuals, the years before retirement may also be an appropriate time to evaluate strategies such as the timing of retirement account withdrawals or whether a Roth conversion could make sense based on their individual circumstances.
Tax laws and individual situations vary, so tax planning should be considered carefully and, when appropriate, coordinated with qualified tax professionals.
Review Your Investment Strategy
As retirement approaches, investment considerations may change.
Someone who is several decades away from retirement may have more time to recover from periods of market volatility. Someone approaching retirement may have a shorter time horizon for assets that will be needed in the near future.
This does not necessarily mean that an investor should eliminate investment risk as retirement approaches. Instead, it may be useful to evaluate whether the portfolio remains consistent with:
- The investor's time horizon
- Expected retirement income needs
- Risk tolerance
- Liquidity needs
- Overall financial goals
It can also be important to consider how much of a portfolio may be needed in the early years of retirement and how market volatility could affect withdrawals during that period.
Evaluate Health Care and Other Major Expenses
Health care can be an important consideration when estimating retirement expenses.
Individuals approaching retirement should understand how their health insurance coverage may change when employment ends and how Medicare or other coverage may fit into their plans.
Other expenses may also deserve attention, including:
- Housing costs
- Property taxes
- Insurance
- Travel
- Transportation
- Long-term care considerations
- Support for family members
- Home renovations or other major purchases
Some expenses may decrease in retirement, while others may increase. Building a realistic estimate can help create a more complete picture of future cash-flow needs.
Review Social Security Timing
For many retirees, Social Security may represent an important source of retirement income.
The age at which benefits are claimed can affect the amount of monthly income received. As a result, the decision about when to begin benefits should be considered within the context of the individual's broader financial situation.
Factors such as other sources of income, health, longevity expectations, marital status, and retirement goals can all play a role.
There is not necessarily one claiming strategy that is appropriate for everyone.
Think About the Transition—Not Just the Destination
Retirement planning is sometimes focused almost entirely on the moment someone stops working.
But the transition into retirement can involve several financial decisions at once.
An individual may be moving from a regular paycheck to a combination of investment withdrawals and other income sources. They may need to decide which accounts to draw from, how much income to take, and how to manage expenses while preserving assets for future years.
This is one reason the years immediately before retirement can be an important time to test the plan.
A retirement income projection can help answer questions such as:
How much income might I need each year?
Where will that income come from?
How might taxes affect my available income?
How much liquidity should I maintain?
How might my plan respond to a period of market volatility?
The answers may change over time, which is why retirement planning is generally an ongoing process rather than a one-time calculation.
Review Your Estate and Beneficiary Plans
Retirement planning also provides an opportunity to review how assets are intended to be transferred.
Beneficiary designations on retirement accounts, insurance policies, and other accounts should be reviewed periodically, particularly after major life events such as marriage, divorce, the birth of a child, or the death of a beneficiary.
Estate documents should also be reviewed to determine whether they continue to reflect your wishes and current circumstances.
These considerations are not limited to individuals with substantial estates. Having current documents and beneficiary designations can help ensure that assets are directed according to your intentions.
The Goal Is Confidence, Not Perfection
There is no single formula for preparing for retirement.
The years before retirement are an opportunity to bring different parts of a financial plan together: investments, taxes, income, insurance, spending, and estate considerations.
The objective is not necessarily to predict every expense or market outcome. Instead, it is to develop a strategy that is flexible enough to account for uncertainty while remaining aligned with your goals.
For those approaching retirement, a useful place to start may be with a few fundamental questions:
When do I want to retire?
What do I want retirement to look like?
Where will my income come from?
How will taxes affect my retirement income?
How is my investment strategy positioned for the years ahead?
Are my estate and beneficiary documents current?
Addressing these questions before retirement can help identify areas that may require additional attention and provide an opportunity to make informed decisions before the transition begins.
Retirement is more than a date on the calendar.The years leading up to it can be an important part of building a financial strategy designed to support the life you want to live after work.