7 Guidelines for Transitioning Your Finances Toward Retirement

Retirement represents a big change in your finances. See seven tips on handling this transition smoothly by beginning your preparations well before you retire.
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Retirement is likely to represent an inflection point in your finances, as you go from earning and accumulating money to spending down your wealth. Think of that extreme turnaround as a sharp, hairpin turn in the road – taking it smoothly doesn’t depend solely on how you react when you are in the turn itself, but also on how you approach it and how you proceed on the other side of it.

In other words, transitioning your finances for retirement should not be something that happens all at once on the day you retire. You need to start planning this transition in the decade leading up to retirement, and then be prepared to continue to adapt to changing conditions as you move through your retirement years.

7 ways to transition finances for retirement

The following are 7 components of transitioning your finances for retirement:

1. Ramp up retirement savings

For many, the years leading up to retirement are their peak earnings years, so that period is a golden opportunity to ramp up your savings. Also, once you reach age 50 you can take advantage of higher contribution limits on 401(k) plans and individual retirement accounts (IRAs), so your savings can also benefit from additional tax deferrals.

2. Identify what lost benefits will cost you

Tracking your expenses is a basic building block for budgeting, but simply projecting your current expenses into the future might not work for retirement planning. If your job has generous medical and dental benefits, you may incur a sizable new expense once you retire and have to replace some of those benefits out of your own pocket. On the flip side, there may be expenses related to your work, such as commuting or wardrobe costs, that will be reduced once you retire. In any case, recognize that the nature of your spending is going to change when you retire, and plan around that.

3. Take the retirement budget challenge

Once you have an idea of how much you will need to spend in retirement, calculate what this represents as a percentage of your retirement savings so far. Financial planners have traditionally used 4 percent as a rule of thumb for a sustainable spending rate, though some have begun to question whether that number still works in an era of minuscule bond yields and even lower bank rates. In any case, if your annual spending needs represent more than 4 percent of your nest egg, it is a sign you need to save some more before you retire.

4. Re-think retirement age

Age 65 has traditionally been thought of as retirement age, though some professions have different targets. However, with people aging more healthily and living longer, it might make sense to challenge traditional retirement age thresholds. Every additional year you work is an opportunity to replace a year of spending with a year of earning. If you are in good health, you might not want to surrender your income so soon.

5. Assess your mortgage situation

The ideal situation is to synchronize your retirement with paying off your mortgage, so that a major expense goes away at about the same time your wages stop coming in. If this is not possible, then before you retire, take a good look at whether you could benefit from refinancing or a home equity loan. You might find it easier to qualify for a mortgage while you are still earning a steady income, so don’t put these decisions off till after retirement.

6. Prepare for your liquidity needs

Make sure money is available when you need it by planning for how to efficiently withdraw funds from tax-advantaged plans, and how to create liquidity without forcing untimely security sales.

7. Don’t get too financially conservative

Between the need for liquidity and the likelihood that your savings will go from positive to negative cash flow once you retire, your investment approach should become somewhat more conservative. Just don’t go too far in the direction of stability and liquidity. You may still have decades ahead of you, and you will need some growth to keep up with inflation over that period.

One fundamental way that financial decisions are different in retirement is there is less room for error. Once you start depending on your nest egg, you no longer have years and years to ride out any investment volatility, nor do you have a weekly paycheck to shore up your savings. Financial decisions in retirement mean the rehearsals are over and the action is now live. The plus side is that in addition to a sizable savings account, you will have had many years by then to accumulate the experience needed to make good financial decisions.

More from MoneyRates.com:

Pre-retirees, could you handle the retirement budget challenge?

Retirement Saving Stories: How 5 Regular People Save for Retirement

6 reasons retirement saving fails (and what to do about it)

Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).