Retirement countdown

Here's how to plan the last year before retirement and ease the transition

Your Money

September 05, 2004|By Lorene Yue

Bill Griesmer has been through the retirement process hundreds of times in the past 20 years.

"I didn't let anybody retire unless they talked to me," said the 70-year-old Pittsburgh resident, who once managed a Sears, Roebuck and Co. store.

When it was his turn, he knew the drill by heart. But not everyone is so lucky.

In the next decade, 76 million Americans will reach retirement age, the largest retirement generation ever, said Cynthia Egan of Fidelity Retirement Services in Boston. And while the necessity of saving for retirement has become a truism, making the transition to retirement might be a bit trickier.

"Four out of five [retirees] don't have an orderly plan of disbursal of their nest egg," Egan said. "They need to be prepared to handle the paperwork and the calendar."

With so many possible sources of retirement income -- Social Security, pension, 401(k), individual retirement account, certificates of deposit and the traditional savings account -- figuring which one to tap first can be complicated.

"Putting off decisions until the week before retirement is very risky," said Paula Dorion-Gray, president of Dorion-Gray Retirement Planning Inc. in Crystal Lake, Ill.

Egan suggests beginning to plan how to make use of your various sources of retirement income three to five years before you quit working. Figure out how much income you'll need and then get help in figuring out which sources the money should come from and the order that makes the best financial sense for you.

Here's a countdown guide to help make the transition smoother:

ONE YEAR

See a tax accountant and a financial planner

"Even if you do your own income taxes, it makes sense to pay for one hour of an accountant's time that first year," said Sharon Burns, executive director of the Association for Financial Counseling and Planning Education in Upper Arlington, Ohio. An expert can help sort out your tax obligations.

A tax accountant might advise you to begin making quarterly tax payments as soon as you retire to avoid a whopping April 15 bill. You could also have taxes taken out of your Social Security payments or adjust the withholding higher from any pension distribution you might receive.

A financial planner can help sort out your goals and set up that withdrawal plan.

You may want to use a fee-only planner if you worry that one with a commission structure could pressure you into making investments that aren't right for you.

Prepare a budget

Track your spending and see what expenses might decrease, such as dry cleaning and commuting, and what might increase, such as eating out. Also factor in new costs such as classes and travel, and don't forget to account for inflation.

Making that first budget will tell you if you'll have more money coming in than you anticipate going out. If you don't, you may have to drastically reduce your spending or consider staying at your job longer.

Paid off mortgage early?

If you hold a mortgage, determine whether it makes sense to pay it off before or during retirement. There could be tax advantages as well as pitfalls to either approach. Having one less financial obligation may put you more at ease, but you could also lose a big tax deduction and even the ability to itemize on your tax return.

You'll still be responsible for keeping up with your homeowner's insurance and property tax bills if you pay off your home, so don't forget about setting aside money for those bills.

Barbara MacNeil, 56, of Wells, Maine, took that into consideration. She took an early retirement offer from Gillette Co. in May and is living off her pension. Her property taxes are escrowed and she has nearly paid off her mortgage. She knows she will have enough to cover her property taxes once she has paid off her home.

SIX MONTHS

Estate planning and beneficiary update

Make sure your will and estate plan are current. Don't have either? Now is a good time to get both. Track down all your beneficiary designations and see if changes are needed.

"Maybe you have an elderly parent that may now need assistance or a spouse who may not need as much income," Burns said.

Consider a transfer-on-death deed for your home if it's allowed in your state. This lets you transfer ownership of your home without going through probate. Think of it as naming a beneficiary for your house, Burns said.

Evaluate health insurance options

This is likely to be among your biggest expenses during retirement, said Dorion-Gray. And you will need to find a cost-effective patch if you retire before you are eligible for Medicare.

Fewer employers are helping to fill that gap. In 2003, only 28 percent of companies with more than 500 employees offered health coverage to pre-Medicare eligible retirees, according to Mercer Human Resource Consulting. That's down from 46 percent in 1993.

Don't forget about health-care coverage for family members. If your spouse was included in your company's health plan, find out what happens when you retire.

Examine company benefit-plan options

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