Beyond Your 401(k): What to Consider When Preparing for Retirement

Save for your retirement. This has been drilled into our brains since we first entered the workforce. And rightly so. While you can borrow for a car, house, and higher education, the one thing you can’t take a loan for is your nest egg.

And when the glorious moment does arrive when we can bid farewell to our working years and enter those Days of Leisure, we might be faced with a host of new considerations. Beyond one’s actual retirement savings, what financial considerations do seniors need to think about as they’re about to transition into retirement?

For those preparing for their golden years, here’s what to mull over beyond their 401(k):

When to Begin Collecting Social Security Benefits

Depending on when you were born, full retirement benefits begin between age 66 and 67, explains Jeffrey Burke, financial advisor of 7th Street Financial. “You can start to collect as early as age 62, but if you decide to collect early, beware that benefits are reduced by about 6 percent a year,” says Burke. “On the flipside, if you can wait until age 70 before collecting, your benefits will increase 8 percent each year you wait. So this really comes down to how long you can wait before needing this income.”

You’ll have to look at your entire financial picture to see when you should start collecting your benefits. For instance, you’ll want to review how much you have in personal savings, any pension plans, and assets such as income from rental properties or a business. Other financial considerations include what your preferred standard of living is — or what you can reasonably afford — and if you’ll be making any other lifestyle changes.

Consider Semi-Retirement

Many seniors may struggle with how to fill their day—or might not be able to afford to retire completely. Nearly one-third of people ages 65 to 69 work at least part-time, according to the Bureau of Labor Statistics. Many others go back to work later or just keep working past the age of 70. This may be because they didn't really have a plan for what to do with themselves, or realized they weren't as secure financially as they thought.

Create a Spending Plan

First, come up with a budget to figure out how much you need each month. For most, it’s typical that you’ll be living on anywhere from 70 to 80 percent of your pre-retirement income. Figure out how much you’ll need for your monthly expenses, such as food, transportation, and housing. Be sure to factor in your healthcare costs, such as Medicare supplemental plans and prescription medication.

Will you be taking up costly hobbies or traveling more? If you’re tired of maintaining the upkeep of your home, you might consider downsizing to a smaller place. Or perhaps you’d like to move to another state to enjoy a lower cost of living, to save on taxes or to be closer to family.

While some expenses, such as your housing and transportation, might go down, you might spend more on travel and recreation, especially in the first few years of retirement. So plan accordingly.

Understand Your Lifestyle Needs

While culturally it's acceptable—and celebrated—to be retired from work, for the lifelong workaholic, your busybody tendencies don't just go away when you call it quits, points out Robinson Crawford, CFP® and founder of Montebello Avenue. “It’s critical that you have practical considerations about ways to fill your time when you retire from work,” says Crawford. “It’s absolutely critical to a healthy retirement.”

If you’re anxious about how you’ll be spending your days when you’re newly retired, consider semi-retirement and working part-time. Besides boosting your income, it’s a great way to expand your social network and learn new skills. Or take up more hobbies — writing, art-making, hiking, volunteering, or traveling.

“Try to describe the ‘fabric’ of your everyday life in retirement,” suggests Crawford. “When do you wake up? Where do you live? Who do you call? What's on your schedule? It can be challenging as most of us are really used to our jobs taking up a lot of our time.”

Have a Cash Flow Plan

This is often overlooked, but can cost the newly retired set a huge amount of money if not executed properly, explains Burke.

“Understanding how much you will need to withdraw and from which accounts will enable you to have a smart tax strategy while still meeting your spending needs,” says Burke. “The rule of thumb is to withdraw in order from taxable accounts, tax-deferred accounts, and finally tax- free accounts. But this can differ though depending on your specific circumstances,” says Burke.

With tax-deferred accounts, your contributions grow tax-free. You won’t owe taxes until you start taking money out. Examples of tax-deferred accounts include Traditional IRAs and 401(k)s. On the flipside, with tax-free accounts, you pay taxes the year you put money into the account, but don’t owe taxes on the withdrawals. Tax-free accounts include Roth IRAs, 403(b)s and Roth 401(k)s.

Check If You’re a Good Candidate for a Roth Conversion

Also known as a “backdoor” Roth IRA, a Roth conversion is when you convert qualified withdrawals from a traditional IRA to a Roth IRA. Why would you want to do this? When you do this conversion, you can enjoy tax-free withdrawals. (However, you’re on the hook for paying any taxes from the conversion.)

“The prime candidates for this as retirees are those that are at a lower income for a period, but have the resources to pay any tax owed on the conversion,” says Burke. “This tends to occur when someone can live off a single source of income such as Social Security, cash savings, or investments in a taxable account that can be cashed in at a preferred tax rate.” Because you’ll be taxed at a lower bracket, you won’t owe as much tax on the conversion.

By understanding your financial needs beyond what’s sitting in your retirement accounts, you’ll have a greater chance to plan well and live comfortably throughout your retirement years. If you have any questions on resources available to save and plan for your retirement, reach out to Money Management International (MMI). Our savvy accredited counselors are here to help.