5 Tips for Investors Nearing Retirement

Sooner or later the retirement plan gets a kickoff time, but setting a date is just one of the final steps in changing from the accumulation phase to the distribution phase, when you start spending those hard-won assets.

The final 12 months are critical to assuring retirement goes as desired, and experts suggest a number of moves to make sure things work out. Details vary, of course, depending on whether the investor is activating the next phase of a sophisticated strategy, or is scrambling to catch up.

Either way, there’s some math to do — how much money do you have? What do you spend? And there’s some guesswork — how long will you live and how healthy will you be? What will the economy and financial markets do?

[See: 7 Ways to Retire Without Social Security.]

“It is a rare event to come across a prospective client within a year or two of retirement who has any idea of what is ahead of them,” says Pal Reudi, CEO of Ruedi Wealth Management in Champaign, Illinois.

“I feel most people are unprepared and have thought little beyond claiming Social Security,” says Steve Wright, of Cartwright Advisors in Columbus, Ohio. “They haven’t yet considered what their expenses will be, what they will do with any company retirement plan, medical insurance, etc.”

“People are living longer, and few take the steps to analyze the potential impact of that trend on their own financial situation,” says Ryan M. Smith, advisor with Paragon Financial Services in Richmond, Virginia. The other two most common mistakes are not understanding how the tax status will change and how Social Security benefits affect taxes and other financial matters, he says.

Among issues to consider as retirement comes closer:

Investments. Experts urge people near retirement to adjust their portfolios to provide more income, typically by adding assets like bonds and dividend-paying stocks. But don’t overdo it, they say, as growth-oriented holdings like stocks can help assure the nest egg keeps up with inflation and lasts as long as you do, even if that’s 30 or 40 years.

“People within a few years of retirement should make darn sure that they respect the sequence-of-returns risk and increase their bond holdings significantly, to 50 percent to 60 percent of their holdings,” Reudi says, referring to the risk that the market could plunge some years.

Experts say the portfolio should be set up so that volatile assets like stocks don’t have to be sold in a downturn to meet ordinary expenses.

“If your income will be dependent, in any material amount, on your investment portfolio, you need to have a plan B,” Smith says. “Plan B comes into play during a market downturn so you’re not peeling back principal when investments are down.”

Financial advisors say the fallback plan should include a combination of cutting expenses and boosting income, perhaps by going back to work.

[Read: 6 Ways to Fix a Retirement Savings Shortfall.]

“A safe rule of thumb is to start with a 4 percent withdrawal rate which can be adjusted upward over time for cost of living” increases, says William D. Lee, a portfolio manager at Ironwood Investment Counsel in Scottsdale, Arizona.

By taking 4 percent of the portfolio as income in year one, and increasing the sum at each year’s inflation rate, the investor should enjoy 30 years of steady income, according to this principle.

Debts and homes. Most experts say investors should try to be debt free by retirement — or at least free of major ones, like a large mortgage. Debt payments are fixed costs that cannot be trimmed as easily as travel and dining expenses if money gets tight.

Jordan Barkin, a Realtor with Harry Norman Realtors in Atlanta, says, “Retirees should consider paying off their mortgage or selling in this healthy market and downsizing to a smaller luxury space that requires less upkeep.”

Those who want to stay in the current home should look into a reverse mortgage, a loan available to homeowners 62 and over that does not require income to qualify and has no monthly payments. Instead, interest charges are added to the loan balance and paid off when the home is sold by the owner or heirs. The older you are the more you can borrow.

Expenses. Karen Lee, a planner with Karen Lee and Associates in Atlanta, says investors should tally their expenses in the final 12 months before retiring.

“I think in general people tend to under-estimate their budgets, forgetting to include things such as unexpected costs for dental care, home repairs, car repairs, etc., as well as how much they might spend on vacations and gifts and dining out when they have more time on their hands,” she says.

Taxes. Wright notes that some investors are wise to convert retirement funds to Roth accounts, which require a tax payment on the conversion but then allow tax-free withdrawals for life.

Factors like life expectancy, tax bracket and expected investment returns are key, and it may make sense to spread conversions over several years, so it’s not something to take up the night before you retire. It could make sense, for example, to delay the start of Social Security benefits to reduce tax on a conversion.

“Many people simply retire and make a claim without knowing options and how Social Security works from a tax standpoint, or even that you can increase your benefit for both you and your spouse,” Wright says.

[See: 8 Simple Rules for Investing in Retirement.]

Lifestyle. Obviously, finances in retirement need to match the investor’s desired lifestyle, so many experts suggest pre-retirees think carefully about what will matter most after they quit working.

Mike Lynch, vice president of Strategic Markets for Hartford Funds in Charlotte, North Carolina, says: “A checklist one, three, and five years out would include three simple questions to help them prepare: Who will change your lightbulbs? How will you get an ice cream cone? Who will you have lunch with?

“These three questions can help people start to think about and plan for where they are going to live, what they are going to do in retirement, and how they will get around.”

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