An irony of personal finance is that retirement can take work. More than once I’ve heard a retiree express this sentiment: “Working was easy. Retirement is complicated.” There is, I think, a lot of truth to this, because when retirement appears on the horizon, a number of new questions enter the picture. Of course, there are financial considerations: “How much will I need? Do I have enough? And how should I invest my savings?” These questions are important, but they’re not the only ones. Below are nine other topics you might include on your retirement planning checklist.
Work. It might seem counterintuitive to include work as the first topic on a retirement planning checklist. But I mention it because the traditional concept of retirement just doesn’t match reality for many of today’s retirees. While some are happy to step out of the workforce and directly into their easy chairs, many prefer a less abrupt transition. Some spend time consulting, teaching or working part-time in other roles. Why continue working when you no longer need to? I see at least three benefits: First, it can provide welcome structure to a retiree’s daily schedule. It makes retirement feel less like an endless weekend in which the days begin to blur together. Second, it provides socialization, a consideration which is often overlooked. And finally, it allows you to keep a foot in the door of the workforce, should you decide to return.
Play. Retirees, I’ve found, tend to fall into two groups. The first say they’re so busy with family, friends and hobbies that they don’t know how they ever had time to work. Others, however, can relate to the joke about the fellow who retires one Friday afternoon. On Saturday morning, his first day of retirement, he gets up and happily plays a round of golf. He plays again on Sunday, and on Monday too. But by Tuesday, he’s tired of golf and has become bored. While this is perhaps an exaggeration, it highlights an important consideration: When your days are no longer spoken for by work, which of these groups do you think you’ll fall into? If you aren’t sure, this is another reason you might consider keeping a foot in the door of the workforce, so you can adjust your schedule if need be.
Timing. Some of the happiest retirees I’ve seen over the years are those who coordinate their retirement dates. That ensures that one spouse isn’t left home alone while the other continues going in to the office each day. It also allows a couple to enjoy travel and activities together. This is hardly a requirement, but if you’re married, it’s something to consider.
Housing. This topic has a number of dimensions. From a purely financial perspective, I always encourage folks to enter retirement without a mortgage, if at all possible. That can provide needed flexibility if money becomes tight later on. It can also open the door to a reverse mortgage, if need be. There are also many non-financial aspects to the housing decision. Some might want to move to a quieter location, while others choose to move into the city, where there’s more to do within walking distance. For others, proximity to friends, children or grandchildren is the overriding factor. Depending on your age, you might consider a continuing care retirement community, commonly known as a CCRC. These offer independent and assisted living on the same campus, with the option to move between them as needed.
Cash flow. Many retirees orient their budgets around Social Security and required minimum distributions from their tax-deferred accounts. That isn’t unreasonable, but I suggest another approach: After determining a sustainable withdrawal rate from your portfolio, set up consistent, automated transfers from your investment account to your checking account—on the first of each month, for example. Giving yourself this sort of “paycheck” in retirement makes it much easier to know whether your spending is on track. And it allows you to take more of a set-it-and-forget-it approach to financial management.
Taxes. During our working years, most of us have little control over our tax bills. While there are strategies that can help trim taxes at the margin, they don’t begin to compare to the tax levers available in retirement. For starters, retirees have control over the timing of their Social Security benefits. They can also choose when to realize capital gains and how much to distribute from each type of retirement account each year. Retirees can also choose to employ strategies like Roth conversions. As a result, retirees have quite a bit of control over their tax rate and tax bill from year to year. That’s great, but to take advantage of this opportunity, you’ll want to be more intentional with your approach toward taxes.
Charitable giving. In the past, I’ve discussed a tax strategy known as deduction bunching. The idea is to make larger-than-average charitable contributions to a donor-advised fund every other year, or every third year, to lift your deductions well above the standard deduction in those years. If you have charitable intentions, this can help you increase your tax savings. While this strategy can be useful for folks at all stages, it can be particularly valuable during your last full year on the job. That’s because, assuming you don’t have significant post-retirement income, your tax rate in your final year of work will likely be higher than in any future year once you’ve retired. All things being equal, that can make a deduction in your last high-income year much more valuable. To take advantage of this, I often recommend folks front-load a donor-advised fund with as much as five or ten years worth of annual giving while they’re still in a high tax bracket.
Insurance. In addition to the all-important Medicare decision, retirees should also take time to revisit their life insurance coverage. In most cases, if you have sufficient assets to retire, then you likely don’t need life insurance and could cancel your coverage. But there are some exceptions. If you have a whole life policy, for example, you want to be sure you don’t generate a taxable gain. Or if you have a pension that doesn’t have a survivor benefit, that’s another reason you might want to hold onto some coverage.
Levers. Retirement involves many moving parts, and despite our best efforts, we can’t predict precisely how things will turn out. That’s why I recommend that retirees think in terms of levers. What levers would you be able to pull to adjust your financial situation, if need be? Some, as I mentioned, keep a foot in the door of the workforce. Others will want to establish a home equity line of credit while their income still makes them eligible. Even if you don’t take any specific action, I recommend taking time to sketch out a playbook for how you might navigate a financial challenge. Some folks know they could sell a second home, for example, while others know which expenses they could easily trim. What’s most important is to map out these plans in advance. Even if you never need them, simply having them can deliver a valuable peace-of-mind benefit.
A final note: In these emails, I try to stay within the domain of personal finance. At the same time, however, it would be impossible to not acknowledge the atrocities committed this week in Israel. Many have been affected, including three young people connected to my own community who sadly lost their lives. It is a terrible situation. If you have family or friends in Israel, I hope that they are okay.