The Value of Planning as Retirement Approaches

Not long ago, “retirement” for many people meant living on a combination of Social Security and a fixed pension. Today, retired people are living longer and better, and they also are making more personal choices. Most retired people want to “live it up” in their golden years, not watch life pass them by. That puts even more of a burden on the pre-retirement planning process.

Retirement Is Not Predictable

In today’s world, many people slip into retirement gradually in a transition period that occurs over months or years. In some cases, this period begins at an unexpected time, such as when an employer announces layoffs. Few people can predict with certainty which day will be their last on the job, while many people want to keep working (at least part-time) well into the retirement transition.

In the absence of predictable retirement dates, many people put off the serious planning that should take place before retirement. Instead of anticipating changes in their lifestyles or financial circumstances, they wait until too late and then react. This can lead to poor decisions made under pressure, and an unproductive start to their golden years. As a rule of thumb, it’s a good idea to start serious retirement planning at least one year before the transition period begins. This allows adequate time to obtain professional help, understand the many choices available, and make important decisions.

Key Issues and Decisions

What issues and decisions should you evaluate in this pre-retirement planning process? The following are often important:

• Investment asset allocation – Retirement is a good time to assess how much risk you want to take with your investments. Once you stop working full-time, it may be harder to replace assets lost if markets turn down. Also, you may have less time available to recover from a loss. An asset allocation process guided by a qualified financial professional can help to develop an overall investment framework that aims at a specific level of risk, with adequate diversification among asset classes.
  
• Income from investments – Many retiring people expect that investment income will replace part of their paychecks. Since few stocks pay dividends above about
  3-4%, that can mean repositioning assets from the stock market into bonds or cash. Fixed annuities provide guaranteed monthly income payments that can help to fill budget gaps when paychecks stop. In some cases, retired people find that income can be obtained for special needs by borrowing against the accumulated cash values of their life insurance policies. A pre-retirement review can identify the level of income needed and the best sources of investment income.
• Social Security benefits – The decision of when to begin Social Security retirement benefits is important, and usually can’t be changed once made. Whether you apply for benefits as a worker or spouse, you currently can begin receiving benefits as early as age 62. However, permanent benefit reductions are imposed for each month that benefits are received prior to your Normal Retirement Age. As retirement nears, it’s a good idea to check the free Social Security Statement, which contains your earnings history and an estimate of benefits.

• Health benefits – This can be a major issue for people who retire prior to age 65, when Medicare and Medigap coverage may begin. Many employers do not offer to extend group health coverage beyond the period required by law. Even then many retiring workers must dig into their pockets to pay premiums. At age 65, coverage under Medicare Part A (hospital) is automatic for most people, and most retired people also elect to pay the modest premium required for Medicare Part B, which covers doctor bills and miscellaneous medical charges. It’s also important to evaluate private Medigap policies, which cover Medicare co-payments and deductibles.

• Retirement distributions – When workers retire, they can be offered the full balance of “vested” money in their company retirement plans. But before you accept a check for so much money, it is wise to have a clear idea of tax implications and investment choices available. One choice is to receive this money and roll it over to an IRA within 60 days. But even if you meet the rollover deadline, 20% of plan money goes to the federal government in withholding taxes. In many cases, it is better to have the plan directly transfer money into an IRA. Since you don’t handle the transfer, there is no federal tax withholding and 100% of your nest egg can grow tax-deferred.
  
• Estate planning – It’s best to start planning for your estate as early as possible. In recent years, there have been many changes (and proposed changes) in estate tax laws. That makes this a good time to review any existing estate plans, and also to take care of details such as writing a will or creating trusts. Park Avenue Securities (PAS) and The Guardian Life Insurance Company and the representative do not provide legal or tax advice or services.
  

If you reach a point at which you feel pressured to make major decisions without adequate planning, you’ve waited too long. So, obtain the information and guidance you need to calmly consider all your choices. Competent financial professionals will offer illustrations that can help you chart a course through retirement, while projecting the levels of income and assets you need to maintain your lifestyle. In pre-retirement planning, you will make some of the most important financial decisions of your lifetime. Don’t make them in haste or alone.