13 must-dos for your preretirement checklist

Here, according to experts, are some of the steps that should be on your checklist.

1. What’s your expected starting date for retirement?

In her book, Dana Schilling, author of “Financial Planning for Senior Clients,” recommends setting a “goal date for retirement” five years before retirement.  

Others, however, suggest setting a goal date for retirement way before the five-year mark. “Waiting until five years before retirement to decide when you’re going to retire may be inappropriate depending on the targeted age,” said Keith Whitcomb, a financial adviser.

For example, he said, waiting until you are 65 to decide you will retire at age 70 means you will miss out on the annual opportunity to restructure qualified assets (penalty-free at age 59½ or earlier under certain circumstances) before required minimum distributions (RMDs) begin.

Besides setting a goal date for retirement, it’s important to estimate your planning period, the length of your retirement income needs. “Individually, no one can know their longevity, but they can look for some help from within their immediate family tree,” said Jason Branning, a wealth manager with Branning Wealth Management.

Consider too using the Society of Actuaries’ longevity calculator. That tool, said Branning, “can offer some insight into an appropriate planning horizon, which may affect the retirement date decision.”

Read: Ramit Sethi’s 5 lessons on how to get rich—from his new Netflix series

2. Estimate retirement income and expenses

Estimating how much you’ll spend in retirement isn’t an easy task. You could, for instance, ballpark that your expenses will be 80% of your preretirement income but that percentage could vary wildly depending on many different factors. Or you could sit down with a spreadsheet and column by column, row by row calculate what your expenses will be over an appropriate planning horizon, say, to age 95.

As for estimating income, you need to determine how much you’ll collect from Social Security and when, whether you’ll have pension income, whether and for long you might have earned income, and then how much money you’ll be able to generate from your personal assets, including your taxable and tax-deferred and tax-free accounts as well as your home.

This exercise will also require you to not only review your Social Security earnings history and correct any errors, but decide when to claim Security as well as estimate how much you’ll be collecting from Social Security once you do claim. To do this, you’ll need to sign up, if you haven’t already, for a mySocialSecurity account.

As part of this exercise, Allain recommends studying, if you plan to use this distribution method, what your after-tax safe withdrawal rate from your retirement accounts should be relative to your spending needs so there are no surprises. 

Read: Working Longer Works Better Than Saving More Money for Retirement.

This exercise might also require you to investigate options for a phased retirement. For many, working longer can make all the difference between achieving the retirement you desire or not.

Both Schilling and Branning, co-author of Modern Retirement Theory: Reaching Client Goals in Every Market, recommend using an online worksheet like those offered by Vanguard, Retirement expenses worksheet and Retirement income worksheet.

For this exercise, Branning said retirees should always begin with expenses first, and the Vanguard calculator does that along with categorizing according to the Bureau of Labor Statistics retirement spending survey. This can offer some insight as to how a retiree’s expenses compare with the survey results, which are broken down by income tranches, he said. 

Part of this exercise will, of course, require that you estimate what your healthcare expenses will be in retirement, what Medicare covers, and whether you’ll want to purchase a Medigap policy or not. 

Read: How to pay for healthcare costs in retirement.

“If you are pre-65, know how you will be covered with health insurance, and approximately what this will cost, so it can be factored into your retirement budget,” said Moe Allan, a financial adviser with Baird Retirement Management. “Minimize healthcare risk by being knowledgeable.”

3. Plan for long-term care costs

In her book, Schilling recommends that you consider buying long-term-care insurance or a hybrid life/long-term care insurance policy (especially one with strong home care coverage). “Someone who waits might encounter a higher premium, or be found uninsurable,” she wrote.

Preretirees may also consider an asset-based annuity with a health-activated rider because they do not require evidence of insurability, said Branning. “The benefits are based on the individual’s longevity, but by adding the cost of the health-activated rider, the individual can receive an increase in their income for up to five years,” he said.

These riders and benefits, he noted, are product-specific but individuals should look for commission-free options offered through fee-only advisers.

It’s not just about buying long-term-care insurance. “People need a long-term care plan: where would they want care, who would be taking care of them,” said LeTian Dong, a certified financial planner. “The long-term-care insurance is only the funding piece of that plan—and it’s important to coordinate that plan between spouses and definitely communicate that plan to kids or whoever that may be the one carrying out that plan.”

Dong recommends working with a long-term-care planning specialist to get things right from the start.

Read: Retirement isn’t what it used to be: 6 things to know about growing older in America

4. Manage and mitigate retirement risks

The Society of Actuaries has identified more than a dozen risks you’ll face in retirement. The preretirement years are a good time to learn more about longevity (the risk of outliving your assets), inflation, market, and sequence of return risk, which refers to the potential danger that a retiree or investor may face when they experience negative returns on their investment portfolio or retirement savings in the early years of their retirement or investment journey. 

Read: Managing Post-Retirement Risks: A Guide to Retirement Planning.

While you’re at it, Allain recommends aggressively adding to your emergency reserves if you’re able to. “Large war chests are one of your best defenses against spending shocks,” he said.

Among other things, these reserves can be used to manage household shocks such as becoming a caregiver; a major home or car repair; premature involuntary retirement, and a major health event. 

“These are more common than you might think,” said Allain. “Are you ready for these?”

J.P. Morgan Asset Management recommends in its most recent Guide to Retirement that retirees have three to six months of living expenses in emergency reserves but other advisers recommend one to three years in reserves.

5. Did you calculate how much you need to accumulate?

Often, you’ll need to accumulate a certain amount of money in order to fund your desired standard of living. If you’ve run the numbers and you’re behind, consider not just maxing out your contributions to health savings accounts, IRAs and 401(k) but also taking advantage of the catch-up provisions.

In 2023, individuals who are age 50 or older can make catch-up contributions of up to:

• $6,500 in their 401(k) and 403(b) accounts in addition to the regular contribution limit of $20,000, for a total contribution limit of $26,500.
• $1,000 in their Traditional and Roth IRAs in addition to the regular contribution limit of $6,000, for a total contribution limit of $7,000.
• $3,000 in their SIMPLE IRA in addition to the regular contribution limit of $14,000, for a total contribution limit of $17,000.

In 2023, individuals who are age 55 or older can make catch-up contributions of up to $1,000 in their health savings account in addition to the regular contribution limit of $3,650 for individuals and $7,300 for families. According to Allain, maximizing contributions to your HSA is important because “healthcare costs are not going to go away.”

Read Projected Savings Medicare Beneficiaries Need for Health Expenses Remained High in 2022.

6. Adjust your portfolio

In her book, Schilling recommends that you adjust the balance in your portfolio between income investments and equities, based on your needs and priorities. “This might be a time to reduce risk and adopt a higher percentage of bonds and bond funds,” she wrote.

However, Branning said research on what’s called the rising equity glide path does not agree with the advice to adjust your allocation of assets over time to become more conservative.  

Read: The Benefits Of A Rising Equity Glidepath In Retirement.

However, he noted, that risk tolerance must be balanced with choices that improve outcomes, such as delaying Social Security by spending some of your portfolio to hedge longevity risk and keeping 50-60% of your portfolio in stocks as an inflation hedge for years 10-plus of retirement.

For her part, Dong said preretirees feel much more comfortable having the first few years of retirement spending in cash and cash equivalents so market downturns don’t upset the retirement timeline.

Scammers are getting more creative and preretirees should learn how to better protect their assets/resources when their mental capacity is diminishing, Dong pointed out. Plus, preretirees should learn how to structure their portfolio/assets so that it’s easy to manage and maintain.

 7. Retire with or without a mortgage?

Time was when you would retire without having a mortgage, a home equity line of credit, or Parent PLUS loans. But now, it’s less common for retirees to pay off their mortgages. Though it’s dated, a 2018 survey, “Retirement and Mortgages,” by national mortgage banker American Financing, found 44% of Americans between the ages of 60 and 70 have a mortgage when they retire, and as many as 17% of those surveyed say they may never pay it off. 

Now that interest rates are low, paying off the home mortgage could take a lower priority, Schilling wrote in her book. “Some experts advise not to pay off the mortgage until after ‘maxing out’ contributions to employer plans and/or IRAs,” she said.

It’s probably a bad idea to withdraw money from an IRA or 401(k) account (to pay off a mortgage), Schilling wrote, even if there is no penalty on the withdrawal because the withdrawn amounts will probably be taxable income.

Rather than considering whether to retire with a mortgage or not, Branning suggests considering a home equity conversion mortgage (HECM). A HECM is the Federal Housing Administration’s reverse mortgage program which enables borrowers to withdraw some of the equity in their home.

“These can serve to reduce expenses by giving the homeowners the chance to live in their home without having to continue making principal and interest payments,” he said, noting that the borrower is still responsible for paying property taxes and property insurance on the home. “HECMs can also be a back source of tax-free income or liquidity as needed for spending shocks, or as a source for potentially paying for in-home long-term care.”

Assessing what to do with your mortgage, however, is something to be done on an ongoing basis, not just five to 10 years away from retirement, according to Whitcomb. “The process includes understanding details like interest rates, years to pay off, mortgage payment as a percentage of total household expenses, and the availability of assets to be used for the payoff.”

8. Where will you live?

If you have designs on moving, perhaps to a low-tax state, Schilling recommends using vacation trips to research possible places to retire. If you plan to age in place, Allain recommends making housing decisions such as remodeling in anticipation that physical and mental impairments associated with aging will impact your needs.

Choosing a retirement location, for many, will need to be more involved than simply checking things out when you are on a vacation. “While this may be fine for wealthy individuals who are looking for a golf community in a warm climate, for those with constrained resources, understanding the cost of living and taxes is more important than evaluating the amenities of potential retirement locales,” Whitcomb said.

9. Review the laws of retirement

The laws and rules regarding retirement accounts and the like can be overwhelming. But knowing them could make all the difference between having the retirement you desire and the one you don’t desire.

Allain recommends knowing, for instance, if you are in the 10% penalty zone with your 401(k) plan. The penalty assessed for taking money out of retirement accounts before age 59½ is typically 10% of the withdrawal amount in addition to any applicable taxes). “If you are 55, but not yet 59½, when you leave your employer, and your emergency reserves are fairly low, rolling over your 401(k) plan to an IRA may be a big mistake,” he said. “You would miss out on the ‘Rule of 55’ opportunity if you did that.”

The “rule of 55” is an IRS provision that allows some individuals who leave their jobs at age 55 or older to withdraw funds from their 401(k) accounts penalty-free. This rule applies to 401(k) plans, but not to IRAs or other types of retirement accounts.

10. Review your estate plan and create a plan for incapacity

It might be more fun to plan a vacation than to plan for incapacity and your estate, but it’s a vital part of your preretirement checklist. Allain recommends reviewing and updating, if necessary, your will, your powers of attorney for financial matters and for healthcare, your trusts, your HIPAA release, your healthcare proxy, as well as your living will, DNR orders, and MOLSTs.

Likewise, review and update the titling and beneficiary designations on your retirement, bank, and brokerage accounts and life insurance policies.

11. Prepare for the emotional shock of becoming a retiree

Allain recommends working on understanding the big paradigm shift in thinking that comes when moving from the accumulation (saving) phase of retirement to the distribution (spending) phase of retirement, “so that it is not so stressful when the regular paychecks stop coming in.”

12. Prepare for the nonfinancial aspects of retirement

Retirement isn’t just about the money, according to Allain. Your checklist should also include the following tasks: finding your passion and purpose; strengthening your social relationships; developing a plan to maintain an active and healthy lifestyle; understanding your relationship with work, and what happens when the work cord is cut, and everything changes.

“One of the biggest recent conversations/hot topics is around behavioral finance, and that plays an important part in retirement planning,” she said. “Most people’s purpose and drive in life is tied to their job,” Dong said. “I encourage preretirees to take time and really think through how they will spend their time and find a purpose in retirement.”

Travel, she noted, is a common answer. “However, upon asking more detailed questions, rarely do we hear people want to travel 100% of the time,” she said. “It’s usually less than 50% of the time. So again, how will you spend your time?”

Allain also recommends giving thought to the financial and nonfinancial legacy you want to leave behind. 

Read: Be sure not to die without having written a love letter to your heirs.

13. A checklist is no substitute for a plan and a planner

A checklist is a good starting point but there are caveats to consider. For instance, Whitcomb notes that the “days of providing generalized one-size-fits-all suggestions are over given each person’s unique financial circumstances and behavioral priorities.”

What’s more, he notes that no one, because of growing complexity, should consider retirement planning a DIY project. 

“Is it reasonable to think that the retirement income planning process that not only involves taxes, but also Social Security, Medicare/Medicaid, multiple tax-advantaged account types, corporate/union pension plans, insurance, debt, annuities, trusts, wills, and the investment of hundreds of thousands if not millions of dollars over a planning horizon that can span decades can be left in the hands of anyone other than financial professionals?” asked Whitcomb. “No.”    

Others share this point of view. “Overall, don’t recommend clients DIY this unless they have a plan to dedicate 1,000-plus hours in learning retirement planning,” said Dong.