So many of you ask about how to become retirement-ready. Well, if you follow these 5 steps, it might seem a little bit easier to attain. Happy learning, darling! 

5 Steps to Becoming Retirement-Ready

The retirement landscape that baby boomers must prepare to navigate is simply not the same world their parents lived in.

Boomers are the healthiest, most active aging demographic the country has ever seen, but many of them are facing expenses and risks unfamiliar to earlier generations. This creates a somewhat scattered puzzle to assemble as retirement approaches.

If you want to solve that puzzle, you need a solid financial plan. It will tell you whether you’re ready to retire, what actions you might need to take, and what professional guidance you’ll need moving forward.

To start generating that plan, follow these five steps. With a clear guide, you’ll soon see that a fulfilling, satisfying retirement is well within your grasp.

Step #1: Understand Your Living Expenses

Your first step is to understand your current living expenses. So many soon-to-be and recent retirees tell us, “I just want to be able to maintain my lifestyle,” yet they have only a vague idea of how much that lifestyle will cost them. It’s crucial to have a solid grasp of how much money you routinely spend right now so that you can have a realistic estimate of what you will need in the future.

Carefully account for the money you spend right now and what is expected to be spent in retirement. Gather your account statements, pull up your credit card bills, and go line by line. Figure out exactly how much you spend, and at what frequency, on each of the major expense types. Paint a picture of the last twelve months of expenses. This step will be the basis for everything that follows in your plan, so you need to make sure it’s an accurate reflection of your spending habits.

Step #2: Define Your Goals

Think carefully about what you want out of your retirement. Consider any lifelong aspirations you hope to meet, thinking about travel, housing, and gifts to family, etc. Remember that your goals should be:

1. Prioritized: It’s important to understand which goals are the “must-haves” and which ones fall into the category of “would be nice” to have.
2. Time-specific: A goal should be time-specific, such as, I want to retire at age sixty-five, or I want to purchase a second home in five years. Goal planning is all about the timing of your cash flow needs!
3. Frequency-specific: A frequency-specific goal outlines how often you’d like to do certain things, like travel. A vague goal of “traveling” isn’t specific enough, but “We’d like to take a trip abroad once every two years for the next 10 years,” is.
4. Dollar-specific: Just like your budgeting work, it’s important that you accurately estimate how much the things you want to do in your retirement will cost. “I want to purchase a second home in five years” is less useful to your planning than, “I would like to purchase a second home outright in five years, for a cost of $350,000.”
5. Have a back-up plan: Despite your best planning efforts, nothing is certain. It’s important to keep some flexibility in your planning. Perhaps the goal of buying a second home in five years at $350,000 may not be feasible, but buying a home in seven years for $300,000 is.

Step #3: Gather Your Financial Information

Now that you’ve determined what you need to spend on an annual basis and set your goals, the third step you’ll take is to gather all of your banking and investment statements. This includes 401(k), IRA, annuities, stocks, and bonds, CDs, and savings accounts.

Now, divide these statements into two sums:

1. The total value of the tax-deferred assets, i.e., 401(k), and your IRA(s) (any pre-tax retirement accounts)
2. The value of all taxable accounts (in both individual and joint accounts held by you and your spouse and trust accounts if applicable). You would also include Roth IRA accounts in this sum.

You’ll need to divide your savings into taxable versus tax-deferred money in order to understand the taxes you may need to pay on withdrawals and to plan how best to sequence those withdrawals.

Conventional wisdom holds that you should withdraw your taxable money first; for instance, your cash and savings and investments that live in an account other than a retirement account. Then you withdraw your tax-deferred money, and then you withdraw your tax-free money.

What we find in reality, however, is that the same conventional wisdom often puts the client in a position where they’re paying more tax than what is necessary. Our advice is that the way you sequence withdrawals from your savings requires qualified advice from an advisor who specializes in retirement income planning.

Step #4: Understanding Your Guaranteed Income Sources

Now you’re ready to take step four: understanding your guaranteed income sources for retirement. This requires gathering your social security statements and seeking advice as to how to make the best social security claiming decision.

There are countless claiming options, and there is no such thing as a one-size-fits-all plan for social security. Often, the best thing to do for a married couple is for the higher wage earner to delay taking social security. In the case of single individuals who are in good health and have longevity run in their families, they may also be well-advised to review delaying claiming their benefit as well.

Another source of guaranteed income you’ll want to understand is any pension income that you or your spouse may have. Within that realm, there is one red flag we want to raise: the insurance/pension trade-off. Many times, we see clients taking their full pension option. With the choice of this option, upon the death of the spouse covered by the pension, all benefits cease to the surviving spouse.

What people do in order to make up the loss of income to the surviving spouse is purchase permanent life insurance, so that when the covered spouse dies, that lost pension income, in theory, is replaced with the life insurance proceeds. This seems like a good option, but in reality, it can be problematic. From our experience, the insurance proceeds are usually never enough to replace the lost income.

Step #5: Put It All Together

The fifth and final step you will take, once you have all of the information from the past four steps, is to decide how everything you’ve gathered and assessed translates into income; put more simply, this is where you get a clear picture of how you will need to use your savings combined with other sources of guaranteed income to create an income for life.

Many people get to this step and are still a little lost and unsure of where to go next. They ask us, “Okay, I know how much I have, but how much of that can I spend each year and what will my total income look like?”

There is a simple rule of thumb to calculate income from investments: the 4.15 percent rule. This rule states that a sustainable, growing income can be maintained by spending 4.15 percent of your savings per year, assuming certain investment parameters. For example, if you have a total portfolio value of $1,000,000, you can withdraw $41,500 each year to supplement your other forms of income, have the ability to grow that income over the years to keep pace with inflation. Source: William P. Bengen, CFP, Conserving Client Portfolios During Retirement

Retire in Happiness, Health, and Comfort

Over the combined forty years we’ve served in the financial planning industry, we’ve watched markets go up and down, trends come and go, financial services multiply with complexity, and disruptions like technology change the face of the industry.

Through it all, though, the primary needs and wants of most people remain the same: people need to feel secure in their future, and they want to live out their retirement decades in happiness, health, and comfort. Pulling together these five steps will help you develop a sense of where you stand today and what may need your attention in the future in order to reach those goals.

For more advice on becoming retirement-ready, you can find Income for Life on Amazon.

Joseph DiSalvo, ChFC, AIF and Marie L. Madarasz, AIF of Quest Capital & Risk Management, Inc. are committed to bringing their clients the clarity that will promote and enhance confidence in the future. For more than two decades they have used a proven process that helps clients think through how best to structure and manage their resources in order to produce a growing stream of retirement income for life. As experts specializing in all aspects of Retirement Income Planning, they are passionate about the coordination and integration of their clients’ income, investment, and tax planning strategies in order to help clients live the life they’ve worked hard for. Joseph and Marie are strong advocates of financial education, seeking to teach others how to achieve sustained success and lifelong prosperity.

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