An Eight Point Checklist To Determine If You Are Financially Retirement Ready

retirement readiness

Are you ready to retire? Before you rent the RV, take bridge lessons, and become helicopter grandparents, complete this checklist:

1. Expenses

Estimate your annual expenses. They will change after you retire but probably not substantially. Spending on commuting, dry cleaning, and take-out lunches may decrease, but movies, travel, and health care may increase. Not only should you have a good sense of your living expenses, you should also track them each month to ensure you’re spending at the level you want.

2. Income

Estimate your annual income. Include distributions from your retirement accounts, Social Security, investment income, and any pension you may have earned. Given the various tax treatments, standardize on after-tax income. You should develop an understanding of how your investment income will change over time as you begin to draw down the principal.

3. Social Security

Determine your optimal Social Security benefit claiming strategy. It usually makes the most financial sense to hold off claiming your benefit until you are nearing age 70, especially for the higher earner of a married couple.

4. Retirement accounts

Roll over any remaining 401K accounts into an IRA. You want to minimize the number of your retirement accounts both to make your financial life simpler and your required minimum distributions (RMDs) easier to manage. When you enter retirement, you should ideally have just one pre-tax IRA and one Roth IRA, with all of your previous 401Ks rolled into these.

5. Investment strategy

Determine the optimal asset allocation strategy for your investment portfolio. This should be based on a combination of your age, income, financial goals, and risk tolerances. You’ll want to make adjustments over time as you age and your goals shift. Also, minimize your investment expenses as seemingly small fees can turn out to be very costly over time.

6. Taxes

If you are moving into a lower marginal tax bracket, consider tax strategies to save money. Depending on your circumstances, you may want to pre-pay property and state taxes and charitable contributions while you are still in a higher tax bracket and convert to a Roth IRA when you are in a lower tax bracket. If you have part-time income, you are probably still eligible to make Roth IRA contributions and they will, almost certainly, be a good idea for you.

7. Health insurance

When you lose employer-sponsored health insurance, you’ll need an alternative. A spouse’s plan, COBRA, or a state exchange may be options, or if you are 65, you are likely eligible for Medicare. Plan for any additional costs and verify if your health care network is covered.

8. Annuities

Consider purchasing a simple lifetime annuity with a portion of your savings, either inside of your pre-tax IRA (known as a “QLAC” — qualified lifetime annuity contract) or using your regular savings. Don’t think of it as an investment as an annuity is longevity insurance — an insurance company guarantees you a monthly payment for your lifetime, regardless of how long you live.

After you’ve completed this checklist, you should be able to answer these questions:

  • When can you afford to stop working and how would your financial stability change if you worked fewer years?
  • How much can you spend each year and how sensitive is your financial stability to a significant unexpected expense or investment loss?
  • What asset allocation is best for your retirement savings and what assumption is appropriate about your future investment returns?
  • What is the most sensible distribution strategy for your retirement accounts?
  • Should you consider an annuity?
  • Should you consider long-term care insurance?

Are you retirement-ready? Learn more about my Retirement-Readiness service.

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