As you come through your 50s and into your 60s, there are a number of very important things that need to be addressed. The specifics of these areas may change with revisions in Federal and State laws, and certainly with your own goals, preferences, and desires. However, this is the time when delaying some considerations, decisions, and actions can cause you big issues down the road. The hard truth is that you may not be able to easily recover from certain missteps or missed deadlines, or you may find that course corrections are difficult and even painful later on.
The implicit assumption here is that you will “retire” somewhere between ages 55 and 70 (probably between 60 and 67 – although, according to a recent Gallop poll, the average retirement age in the U.S. is 62). “Retirement” in this context means that you are no longer working full time in your “high” (relatively speaking) paying job; however, you may start a second career, a small business, or volunteer your time in any number of ways.
In any case, a number of specific things are critical during this period – at least under existing laws and regulations. Therefore, this section is a little more detailed in terms of what you need to do for wise retirement stewardship, so please look at it carefully. Even if you don’t plan to retire until well after your “full retirement age” as defined by Social Security, this is still a very critical period.
Know what and where your investments are. By age 56, be sure to track your retirement investments and pensions very closely. (You may or may not have any pensions to be concerned with, as they are becoming increasingly rare.) Unless you continue to work after you retire, your savings, retirement assets, and pensions will be all you have to live on, so you need to manage them very carefully. Plus, you want to make sure they can last a good long time! Remember, you can’t receive Social Security retirement benefits until age 62, at the soonest, and they will be less than what they would be at your full retirement age, usually between age 66 and 67 for most people. Survivor and Disability Benefits are the only exceptions.
Know how your investments are doing. You don’t need to (and probably shouldn’t) check on your investments every day. (If you do, you probably have a very low risk tolerance, so you may want to make sure your assets are in relatively low risk investments.) Understanding you total return on a quarterly basis should be fine. Some may find that doing it annually is adequate. The good news here is that most financial firms will track and calculate returns for you, both capital gains and income. That way you can ensure that you are getting the level of returns you expect based on the economic and market conditions at the time. [See Note (1), below.]
Calculate the income you’ll need. If you plan to retire before your “Full Retirement Age” (date you can start receiving full Social Security benefits that are not reduced), make sure you know exactly how much income your pensions and retirement assets can generate without having to dip into principal. Loss of principal so early in retirement can have disastrous effects later on. If you plan to retire before age 59 ½, be sure you don’t need income from your IRA or other retirement accounts to do so. Generally, you can’t take early withdrawals without paying tax and penalties. There are exceptions, but we won’t discuss them here.
Start thinking about where you may want to live in retirement. Start thinking about where you’d like to live in retirement, even if you wouldn’t make a move for quite some time. If that location is not where you have lived previously, make plans to spend some time there before making a permanent move (perhaps a couple of months). The location may be determined by where your kids live, where costs are lower, or somewhere that just seems fun and exciting. You could do this by saving up vacation time over two or three years so you can spend enough time there to evaluate whether the location will meet your needs. If you anticipate retiring in a location outside the U.S., determine how you’ll receive medical treatment (in the absence of Medicare).
Consider staying in your current location. Perhaps you will decide to downsize but stay in the same area. Many (in fact, most) do, in order to remain close to their family and friends, as well as doctors and others services. You are probably part of a local church. If so, consider whether leaving your local church community really makes sense. Moving may make good financial sense for a lot of people, but it’s still important to do a financial analysis of your expenses in your current location or the alternative location so you can project your living expenses and income requirements in retirement. Don’t just assume that your income requirements will decrease just because you move to a lower cost area.
Understand all employer retirement plans. If you have one or more employer retirement plans (e.g., pension, 401(k)), get the specifics (value, options for payments, administrative requirements, tax implications, etc.) by age 57 so you can make comprehensive plans. If several employers (and plans) are involved, this may take considerable time, many months at least.
Make your will and estate plans. By age 59, ensure that your estate plan is in good order (including wills, trusts, beneficiaries, trustees, executors, etc.) Update all the documents you may have prepared earlier, especially executors, bequests, trusts, and health care wishes. Also complete an instructions letter that would give a surviving spouse, executor, or family member all of the necessary details about financial accounts, insurance policies, etc.
Understand your Social Security benefits. By age 60, if not before, you need to understand the major characteristics of Social Security (as it exists at that time). You should also be reviewing your annual Social Security Statements that provide your future benefits information. (If you’re not receiving them, go to SocialSecurity.gov.)
Make your first downsizing and/or relocation decision. By age 60 (or retirement age minus 5 years, whichever is lower) develop a plan to move to your desired location at minimum cost. If you decide to stay put, think about any upgrades or changes you need to make to you current residence to remain in it or whether you plan to downsize but remain in the same area; if the latter, consult with a real estate professional about how to prepare your house for sale.
Decide when to start receiving Social Security benefits. By age 61¾ decide when to begin Social Security benefits. (Under current law, benefits can begin no earlier than age 62.) Even if you don’t start receiving early retirement benefits at age 62, you can start anytime thereafter. Many people elect to receive the early benefit, but that isn’t necessarily the best decision in most cases. There is no benefit to delaying past age 70.
Learn about Medicare. Start learning about Medicare by age 62, if not sooner, so you can plan for your medical care both before age 65 (when Medicare is first available) and after that time.
Plan for Healthcare Insurance prior to Medicare. Understand the new health care laws, impact on your current insurance, and Medicare in the future. If you are paying for high cost (i.e., non-employer subsidized) health insurance, consider insurance through the Health Care Exchange (aka, “Obamacare”) as you may be eligible for a government subsidy. If you don’t currently have a primary physician – get one. (It may be harder to find a doctor who accepts Medicare after you reach Medicare eligibility. If you only have a General Practitioner, consider getting an Internist as well.)
Decide what to do with employer pension (if you have one). By age 62, research your available options and decide what you will do with your employer pension(s) if any – lump sum and roll over to IRA, lifetime annuity payments, etc. Different plans afford different options, so research them carefully. Also, you should consider getting professional advice before making any final decisions. But, as I have stated before, beware of commissioned sales personnel; get several consults and recommendations before making a decision. (Just to be clear, it’s not that I think commissioned financial representatives are dishonest or insincere, most are not. Rather, my concern is possible conflicts of interest in terms of their tendency to promote high-commission/high fee products due to pressure from their employers to do so.)
Decide what to do with your 401k/403b/457 Retirement Accounts. By age 63, decide whether to roll over your retirement accounts into an IRA or other tax-deferred plan. Consolidation and simplification to make things more manageable should be your goal. Also decide whether to hire a money manager or do-it-yourself.
Make your final Medicare decisions. By age 64½, decide on what medical insurance plan you will use (e.g., Medicare or whatever wonderful alternative Congress creates). If you choose Medicare, you will also need to decide which type of Medicare plan you want. They are too numerous and complex to elaborate on here.
Apply for Medicare. By age 64¾, apply for Medicare (if that’s your plan). (Employees of the Federal Government have the alternative of a more generous plan, so they probably won’t want to apply for Medicare. Many employees of municipalities have been promised better medical care than provided by Medicare, so they probably won’t either. We should all be so lucky.)
Decide whether you’ll work in retirement. This may be based on necessity or that you just enjoy working. Perhaps you’ll start a new career or a small business. If you do, make sure you understand the tax implication of working while receiving Social Security income. It doesn’t reduce your benefit, but it may increase the percentage of your Social Security income that is taxable.
Note (1): According to Morningstar, total return is typically calculated by taking the change in asset price, adding in all relevant income and capital gains distributions during the period, and dividing by the starting price of the asset.