Retirement can be an abrupt change when you go from working full time to a life of leisure. Some people miss the steady paycheck and opportunities to socialize that their job provided and need to make significant adjustments to live off their savings. Here’s how to make the transition into retirement go smoothly.
Know where your income will come from. The amount you have saved in your retirement accounts during your working years needs to be turned into a stream of income you can use to pay your bills. You may have Social Security and pension income coming in every month, but you will need to find another way to pay for expenses that exceed those income streams. “Make sure that you won’t spend more than 3 to 4 percent of your retirement account balance every year,” says Otis Aust, a certified financial planner for Aust Financial Advisory in Atlanta. A gradual withdrawal strategy will help ensure that your savings will last the rest of your life.
Decide when you will sign up for Social Security. You don’t have to sign up for Social Security immediately upon leaving your job. Your monthly payments increase for each month you delay signing up between ages 62 and 70. “If longevity runs in your family, then you should try hard to delay receiving it because for every year you wait you get an increase in your benefit,” says Mark Avallone, a certified financial planner and president of Potomac Wealth Advisors in Rockville, Maryland. “If you are relatively unhealthy or you have a heart condition or are overweight or a heavy smoker, then you might want to claim Social Security as soon as possible.”
Avoid gaps in health insurance. When the coverage through your former job ends, you need to have new health insurance coverage lined up that will start the next day. You can begin Medicare coverage as early as the first of the month you turn age 65, if you sign up during the three-month period leading up to your 65th birthday. If you retire before age 65, you will need to find another form of health insurance, perhaps including retiree health insurance, COBRA coverage through your former employer or a health plan purchased through your state’s health insurance exchange. “If you’re not going to have a lot of income, you can get the Obamacare subsidy,” Aust says. “You need to be investigating your health insurance options a year before you retire at healthcare.gov.”
Carefully consider whether to roll over your 401(k). Many people roll their 401(k) over to an IRA when they retire, often in an effort to get more investment options and lower fees. But rolling over a 401(k) isn’t the best move for everyone. While penalty-free IRA withdrawals typically aren’t allowed until age 59 ½, people who leave their jobs at age 55 or later can begin taking 401(k) withdrawals up to four years earlier without incurring the early withdrawal penalty. “If someone is 56 or 57, I would say keep it in the 401(k) until you get beyond 59 ½,” Aust says.
Stress test your retirement finances. You will sleep better at night if you consider a few worst-case scenarios and how you will cope with each one. For example, if there’s a significant drop in the stock market, calculate how that will change how much you are able to spend each month. “You should be broadly diversified, and you should understand how that asset allocation you selected performed in 2008 and 2000,” Avallone says. “Assess if you can live with that level of risk in your portfolio.”
Develop a plan for how you will spend your time. You don’t want to finally escape an unpleasant work situation, only to become bored with retirement a few weeks later. It’s important to have at least a few ideas about what you will do during the time you used to spend at your job. “Some people are more than content to sit on the porch and read and drink lemonade, but can you read for the full eight hours?” says Elizabeth Buffardi, a certified financial planner for Crescendo Financial Planners in Oak Brook, Illinois. “Practice doing the things that you think you might want to do in retirement.”
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How to Ease Your Transition Into Retirement originally appeared on usnews.com
