While preparing adequately for retirement is a long-term process, there are some things you can do in the years immediately before hanging it up that will help smooth the transition and keep nasty surprises to a minimum.
Experts say one of the most important steps to take in this phase of your financial life is determining just how much money you can expect to have. There are three basic components of retirement funding: Social Security benefits; pension benefits; and personal wealth, a catch-all category that includes money in the bank, home equity, investments and other assets.
Finding out how much Social Security money is coming your way will soon be easier than ever, as the federal government prepares to begin sending out annual Social Security statements on Oct. 1.
This four-page statement, which will go to workers ages 25 and older, will provide an estimate of what your monthly Social Security benefit will be when you retire.
In the case of pensions, which are held by only about half of all American private-sector workers, employees are entitled to a record known as the individual benefits statement, which will tell you how much is in your account at any given time and how much you will have at different stages in the future.
By toting up these numbers and the value of your other assets, you can get an accurate sense of how much you'll have in retirement.
A rule of thumb cited by retirement gurus is that you should be able to fashion an annual income stream equal to 65 percent to 85 percent of your pre-retirement income. You probably won't need 100 percent, the conventional wisdom goes, because you won't have to worry about work-related expenditures such as commuting.
Even if your resources fall short of that, "you've got a couple more years to beef them up as best you can," said Michele Varnhagen of the Pension Rights Center, an education and advocacy group based in Washington.
The most affluent few may find their expenses actually going up as they indulge their desire to travel and otherwise dispose of more of their disposable income, said William I. Kissinger, president of Kissinger Financial Services Inc. in Timonium.
Kissinger said, "The people I see really want a different kind of lifestyle" from past retirees who maintained their low-spending ways well into old age.
Of course, most people don't have such luxury. "For the bulk of people out there, a lot of this is not in their lives. They're going to live on Social Security," said Varnhagen. "They don't have pensions. They don't have retirement plans."
In their planning, people of all income levels will have to factor in a relatively recent and generally welcome development: With increased life expectancies, retirement can now last a long time. "Your needs will change throughout your retirement life," said Louise D. Piazza, senior programs specialist at senior citizens' lobbying group AARP in Washington. "People are living 20 and 30 years in retirement."
Retirement triggers numerous tax consequences, which can be employed to your advantage. If you have a 401(k) plan, one decision to make is whether you want to take out the money in dribs and drabs, or in a lump sum.
Todd Cleary, vice president of financial planning services at T. Rowe Price Associates in Baltimore, said most people prefer to leave their money in a 401(k) or roll it over into an IRA, but added that some retirees might want to look into taking the money out in a lump sum, paying a relatively low tax in doing so.
There are special 401(k) taxation rules governing any stock you have in the company that employs you.
As with so many tax issues, timing can be crucial.
Your income may well be higher in the year you retire than it will be in subsequent years. If you determine that this will be true in your case, you may want to accelerate your deductions into the year you retire, so that they can go to work for you when your income is highest.
Another issue to consider is the status of your will. If your will is years old, make sure it still reflects your wishes as to how your wealth will be used upon your death. Bear in mind that your beneficiary designations for your 401(k) plan and other savings programs may not be consistent with your will; now is the time to ensure that such designations and your will are working in concert.
It is also a good idea to establish an investment strategy for your retirement years. "It used to be that people pulled back from stocks and went all to CDs," said Cleary. "That was back in the time when the paradigm was that you retired and then died. So it's important to maintain the long-term investment horizon. You could be around a very, very long time."
Cleary said retirees should ideally determine how much money they would need for two years in addition to their Social Security and pension income, and then keep that amount in very safe, short-term investments such as money market accounts or CDs. This will provide a measure of security in case stocks decline, and will allow you to hold onto your stocks through a bear market.
Kissinger advised that people entering retirement plan a conservative, diversified investment portfolio to ensure that their financial position remains solid.