At Thanksgiving, my son-in-law was asking me a number of financially related questions about retirement. He’s about 10 years away from retirement, but he knew I retired last year, so it was fresh in my mind. I created the following pre-retirement list for him to think about.
HD Community: Are there any financially-related things you did to prepare for retirement that aren’t listed below? Any ‘gotchas’ you experienced that could be avoided?
PRE-RETIREMENT:
- Pay off Debt: Fortunately, we didn’t have any car loans or credit card debt (> 30 days). When the standard deduction was increased as part of the 2017 Tax Cuts and Jobs Act (TCJA), we paid off the remaining balance of our home mortgage.
- Emergency Fund: Now that we didn’t have a house payment, we were able to increase our emergency fund for peace of mind.
- Consolidate Like Accounts: Over time, we accumulated multiple 401k accounts, Traditional IRA accounts, Roth accounts, HSA accounts, and/or brokerage accounts. We consolidated like accounts across two firms. I also transferred my HSA account to Fidelity which doesn’t charge administrative fees.
- Verify Beneficiaries by Account: It’s good to review your account beneficiaries any time, but be sure to verify them after you consolidate or transfer accounts. I’ve been surprised in the past to find accounts that did not have beneficiaries on file.
- Roth Conversions: I plan to do some Roth conversions (fill up the 12% bracket) before I start my RMDs, so I set aside funds for taxes while still working.
- Get Educated: Research the following topics to be better prepared to answer key questions when the time comes. Why? You’ll make a better decision if you know the terminology, nuances, and ramifications of your decision. And in some cases, your decision is irreversible or can be challenging to change.
- Pension: Should we take a lump sum or monthly payments?
- Social Security: When should we start collecting social security?
- Medicare supplement: Should we choose Medicare Advantage or Medigap supplement?
- Annuity: Should we purchase an annuity that pays lifetime income? When should the annuity start?
- Spending: What is our withdrawal strategy?
- Bridge the Gap: Do you have an income gap between retiring from work and collecting social security? See the Forum topic ‘Bridge the Gap’ for an HD discussion on strategies.
- Home: Do you plan to stay in your current home or are you considering moving or downsizing? Are there any repairs in your current home that need attention? Are there things that can be sold or donated? My brother stayed with us for a couple of months and, one weekend, he decided we should clean out the attic above the garage. My brother’s enthusiasm was contagious and by the end of the weekend we had three piles ready to go: donation, trash, and a local auction dealer. I can’t imagine dealing with this task when we sold our home and downsized 5 years later.
- HSA: Once you enroll in Medicare Part A and/or B, you are no longer eligible to contribute to your HSA. Plan ahead to determine how much you can contribute to your HSA before enrolling in Medicare, and when to stop HSA contributions to avoid exceeding the limit for the calendar year (prorated). If you plan to continue working after age 65, you may need to stop your HSA contributions up to 6 months prior to taking Medicare or face a 6% excise tax on excess contributions and earnings. If you aren’t able to stop your HSA contributions in time, work with your HSA administrator to remove the excess contributions and earnings from your HSA account.
Quite appreciated the list Cheryl. To be up front, am a public health physician and member of Physicians for a National Health Program (PNHP), which has long advocated for single payer / Improved Medicare for All, and practiced military medicine (“government/socialized/Military & Public Health Service Hospitals”) for most of my adult life. // Suggest looking at PNHP’s web site regarding significant cautions on Medicare Advantage plans; Nice to cover Silver Sneakers, etc, and clearly cheaper if healthy. A big potential landmine is if develop a significant illness later and want to “switch back”. As profit making entities, sponsoring insurance companies, with very different allegiances (i.e., to stockholders, not patients as their primary interest), overhead will be likely 12-14%+, whereas Medicare runs around 2%. IMHO, it is the patient, and the taxpayers, who are left in the lurch all too often by this “system”. – Konrad
Cheryl great info, however when it comes to large financial items, your home and banks and the like, use a trust. IRA’s go by Beneficiary. SS wait until 70, if you can. For Medicare always choose Medigap supplement, Medical Advantage look so promising lower costs and you get Dental, Hearing and Eyes, however there are serious limitations on doctors, what hospitals, and some places will not even take Med Advantage. The resist higher costs tests and the like. I have seen it happen, and as I understand it, you cannot easily go back to Medigap if at all, from Med Advantage. Be very careful. Invest wisely using Index Funds, and always have an Emergency as best as possible, crazy things happen! Best to your Family.
Regarding beneficiaries, I also filed a transfer on death affidavit with our county recorder in order to keep the house from going through probate.
My parents had a trust, but the house was not retitled to the trust name. Upon death of the last parent, the home automatically became part of the trust. Not sure the exact wording how that happened, but nothing had to go through probate.
My state, Tennessee, does not permit a TOD designation on real property as I understand my state’s laws. Also, as our home is owned JWROS the surviving spouse will own the home when the first of us dies thus avoiding probate on the home for the surviving spouse. I have considered a revocable living trust to hold title but I can’t transfer title to a RLT and retain the HELOC that we have according to my inquiry to my banker.
Currently I am willing to wait to do the RLT.
I put my house in a trust for the same purpose.
We did the same, Mike.
We are overdue for having a conversation with the lawyer (that did our original trust) on how to title some of our accounts to take into consideration the stepped up basis.
Cheryl,
That is an excellent list!
Thanks for your post!!
Thanks for the kind words, Winston!
Will, financial POA, healthcare POA. Make sure beneficiaries align with will.
Thanks Harold, I’ll add those to my list!
We do not have a dedicated emergency fund. We always have two years worth of savings withdrawals in cash, and replenish quarterly.
This year we paid for installation of AC, and purchase of a new vehicle from this kitty.
My philosophy is all of our retirement resources are available if necessary for emergencies, it’s just a matter of whether the money comes from the two years of cash, Roth, brokerage, or traditional IRA. It’s just a question as to what is the most tax efficient kitty to withdraw from.
I’ve read a few articles that support not having a dedicated emergency fund especially if withdrawals are tax efficient like you said and not selling an investment in a down market.
I invested my ‘fun money’ in dividend stocks (stocks with history of 25-50 years of paying dividends). When I retired, I decided to use this portfolio as our emergency or contingency fund. I keep a set amount in cash (now only earning 4.3%) and reinvest the dividends. If I withdraw cash, then the dividends eventually replenish the cash back to the set amount. Note: I probably would withdraw from my HSA if I had out-of-pocket medical expense.
If you are on Medicare your Federal part B premiums, but not supplemental insurance with the traditional plan is eligible to be paid from HSA funds.
Also remember that if you die with funds still in your HSA they must be distributed in the first year, the funds can not be stretched over 10 years like inherited retirement accounts, so the general recommendation is to use it up as soon as it can be emptied for qualified expenses.
A spouse can inherit an HSA and treat it as their own. Otherwise the “deathbed drawdown” is the most efficient use of an HSA. It can also be used to reimburse expenses after death for up to a year I believe.
Excellent list, but a few more especially if one is retiring before 65:
1) Figure out how you are going to pay for healthcare (ACA policy?)
2) Make sure some of your investments are in a taxable brokerage account to control your taxable income for paying for number 1.
3) Research mechanisms for deciding how to most efficiently tap your assets (ie retirement vs brokerage), to pay your expenses (this was my biggest deficit I’m my retirement knowledge prior to retiring).
4) “Plan” out your early years of retirement taxes.
5) Meet with a fee only financial advisor to get a second opinion as to whether your finances will be adequate for when you plan to retire.
These are all good points, David.
Cheryl, great list and very comprehensive, but is this really what your family discusses around the Thanksgiving holiday table? LOL 😂
One other thought or piece of advice I would add is to start diversifying your financial strategies and redeploying assets BEFORE you retire by moving assets from your 401k. Assuming you are 59 1/2 and can qualify for “in-service distribution “ which many plans allow (mine did) and you have a signifiant part of your “retirement assets” in such accounts, as I did.
Without going into details, I did this 3 years before I retired and set up buckets of investments to be used for various time frames after I retired, including a fixed rate MYGA (at a decent interest rate at the time) to be used if needed to supplement my reduced income level when I retired. The timing worked out well with a 3 year horizon that I ended up not needing immediately anyway as I got a consulting job with my company after I retired that provided additional income. Some of the other assets I moved my funds to have done very well, with more flexibility than the choices within my 401k for various time frames after retirement.
Not an earth shattering strategy and not available to all, but an easy one to consider if your plan allows.
Ha! not during Thanksgiving dinner, but in a private conversation. I could see it was weighing on him, probably more out of frustration with his job. I hope to give him some clarity without overwhelming him. Our second daughter and her husband asked if I could help them set up her 401K at her new job. Our kids are in their 50s, so retirement is on their mind.
Thanks for discussing your strategy. You noted that you set up investment buckets 3 years before you retired. I think this is a good timeframe, because a lot can change between 10 years before retirement and 2-3 years before retirement. Sounds like there will be additional tax law changes in 2025.
Thanks for the great list of financial to-do items. I’d encourage readers also to have a wish list of activities they’d like to pursue once they’re retired. While many folks have no problem settling into a happy retirement routine, I know many others struggle — and it’s good to have a sense for how you might fill your days.
Your last line is exactly where I am right now. I retire on Friday. I am 67, I am fairly healthy, and I enjoy my job. But I have times when I say to myself “I’ve worked fifty years” and I want to enjoy the rest of my life. So I set a date a few months back but now I’m regretting my decision
Just remember this is, in a way, a reversible decision. By that I mean you can’t go back to your enjoyable job, but if you miss it, you may be able to do the same enjoyable work as a consultant. Or you can look for different work altogether, perhaps part-time or volunteer. You may be surprised to find it equally fulfilling.
I’m 68, consulting maybe ten hours a week (for money) and volunteering for Meals on Wheels and a local sports club — all of which I consider to be highly enjoyable work. Some might call that retirement. I don’t.
I enjoyed my job, retired at 67 in 2010 and have not regretted the decision for one minute in the last nearly 15 years.
Do something when I want to and do nothing when I want to.
What are you regretting?
That I still enjoy it. As an FYI,I retired from my career in sales in 2010 at the age of 52 and took a part-time job as a teachers assistant ever since.
I have heard this described as “what to do after breakfast each morning?”
It is a serious question that each retiree must figure out.
Never had that as a problem. Always something to do. I look forward to a day with nothing on the agenda.
That’s one problem we don’t have.
Lots of grandchildren to spoil.
I love to read and my ‘to be read’ list seems to be growing daily.
I love working on puzzles and now there seems to be more than ever.
My wife loves to travel so she is always planning the next trip we can take.
Even (especially?) in retirement there is too much to do and not enough time.
I agree. Just keeping up with 11 grandchildren and their events is a part-time job.
Good point, Jonathan, that should definitely be on the list. My challenge when planning for retirement was figuring out exactly what I should/could be doing now to prepare. While I found individual articles on the topics above, I couldn’t find a comprehensive checklist that guided me through all the key decisions and considerations. I believe this uncertainty is one of the main reasons people question whether they are ready to retire—they don’t know what they don’t know.