What Does Pre Retirement Planning Entail?
Pre-retirement planning is an important step you should take to ensure a smooth transition from your working years to retirement.
It can include any number of steps depending on individual needs, but every pre-retirement plan should address five key areas: finances and budgeting; health care; tax management; investment management; and estate planning.
Finances and Budgeting
Is your savings plan on track? Do you have enough cash or other assets to meet your retirement goals? Is your debt in order? You need to put together a comprehensive list of all present income sources, including employment income, pensions, 401(k) plans, social security benefits, and investment income.
Another key step is to estimate how much the expenses will be when you retire. One way to estimate living costs in retirement is to use the 80 percent rule. The idea is that once you are retired, you will spend about 80 percent of what you spent now. It's a bit arbitrary, but it's a useful rule for planning purposes.
A financial advisor can help you develop a realistic budget based on your projected activities and expenses during retirement as well as how much income you'll need to sustain them.
Health Care
Health care costs in retirement will vary depending on family history and available resources, but it's a good idea to estimate these costs and build them into your budget. Some options for health insurance coverage during retirement include:
- Medicare: Generally available at age 65, Medicare can be used to cover the bulk of medical expenses, but does not cover long-term care or prescription drugs. Many people supplement Medicare with other types of insurance policies or programs such as Medicare Part C (also known as Medicare Advantage) or Medigap insurance.
- Employer-based coverage: Many employers offer retiree medical benefits so check your company's benefits package for details on coverage and eligibility requirements.
Tax Management
Taxes are one of the most significant expenses in retirement – especially if you have a pension or annuity income, which is subject to ordinary income tax rates. Make sure you understand how much income you will receive in retirement, and how much of it will be taxable. If you have certain deductions or credits that could disappear in retirement, consider maximizing them while they are still available. However, if you're unfamiliar with these strategies or haven't considered how you can use them effectively, it's time to talk to a financial planner or tax professional.
Investment Management
Your investment portfolio should reflect the amount of risk that is appropriate for your age, financial goals, and risk tolerance. That may mean the need for more aggressive investments if you're behind in retirement savings or more conservative investments if you're approaching retirement age. A good financial advisor can help you create a strategy that meets your needs.
Estate Planning
Estate planning is an essential component of financial security, regardless of what stage you're at in life. You'll want to make sure that your assets are properly organized so that they will be distributed according to your wishes, and managed on behalf of your dependents if anything should happen to you.
Pre-retirement is a good opportunity to address this issue since you'll have more time available to get everything arranged before leaving the workforce.
