7 Steps to Pre-Retirement Planning (for any age) - Theorem Wealth Management

Client Login

Complete the required fields below in order to access this digital guide.

June 2, 2020  |  Retirement

7 Steps to Pre-Retirement Planning (for any age)

Follow us

By: Johnathan R. Rankin CRPC®  CEPA®

Retirement is a process that takes years of planning, saving and investing. Most retirees don’t just wake up one day and decide “today’s the day I am going to retire.” It all starts with pre-retirement planning and the earlier you get started, the better prepared you will be. As the old Benjamin Franklin saying goes, “If you fail to plan, you are planning to fail”.

Step 1 – Calculate How Much You Spend

This may seem as basic as 1+1, but I have met with hundreds of people who have no clue how much they actually spend per month or year. As a part of your pre-retirement planning, this is a critical starting point. Having an idea of how much you spend, will allow you to maximize how much you can save. The easiest way to see how much you spend is to create a budget.

Writing out a budget will give you a starting point. The best way to work with that budget is to go back and look at your bank statements to see where you REALLY spend money. In my experience, people always underestimate what they are spending.

Step 2 – Save

I have never met a person who said, “I saved too much”. Whether you have been saving for years, or haven’t started, just start saving and investing somewhere. For most, the easiest place to save is in a 401K plan where the money is automatically taken out of your paycheck. The goal is to start putting money aside on a regular basis. Now that you have determined exactly how much you spend, creating an automated savings plan will help maintain discipline.

Step 3 – Pick Your Investments

So, you started saving and you want to make that money start working for you, but what should you invest in? The first thing you should do is consider is how you want your money allocated and your risk tolerance.  Are you comfortable taking risk? Understanding your appetite for risk will help determine your target asset allocation.

How are you able to stomach fluctuations in your portfolio? If you looked at your monthly statement and noticed there was 20% less money than the previous month, how would that make you feel? Would it cause you to panic? Imagine if you have saved money for a down payment on a home that you would like to purchase in the next few months and instead of investing in something stable, you invest in a stock with a high level of volatility. You find the perfect home, look at your investment account and realize you do not have enough needed to purchase the home.

That is why it is important to consider other factors such as your age, your time horizon, your appetite for risk, your capacity for risk, your savings goals, and your income needs.

Now that you know how much risk you can tolerate; you can begin to build a portfolio with actual investments.

When most people think of investing, they think of stocks. Investing in an individual stock can be difficult and require time to analyze potential investments properly. It is common for many investors to start investing in mutual funds and ETF’s (exchange traded funds).  Generally, mutual funds and ETF’s offer broad diversification in a liquid, transparent, and inexpensive manner. These investment vehicles typically have exposure to a basket of holdings, which can help spread out the risk.

With that said, there are many different types of mutual funds and ETF’s.  You’ll want to be sure you understand what you are investing in to ensure have the appropriate allocation that provides diversification and fits your risk tolerance.

Step 4 – Evaluate Your Retirement Income Streams

One of the biggest questions people face when thinking about retirement is about Social Security benefits. Social Security can provide an important source of cash flow to help fund a successful retirement. As we discuss in our Social Security Guide, it’s important to know your retirement options as they pertain to Social Security.  Understanding how to maximize Social Security for your specific retirement is very important. Be sure to check out our Free Guide on Maximizing Your Social Security For Retirement.

Analyzing the impact of staring benefits early, at full retirement age, or at age 70 is a good start.  Determining the optimal time to take Social Security is different for each person. Do you plan to work part-time or have other income sources? All income sources should be considered prior to starting Social Security as it can impact your benefits.

What about other income streams? Do you have rental properties or previously purchased annuities? Do you have a pension from a previous employer?  If so, what are the options.  Can you take a lump sum or a do you have to take an annuity?

Forecasting your retirement cash flow early can help you make the most efficient decisions in the pre-retirement process.

Step 5 – Create a Tax Plan

At least a few times a year a retired client will ask “How can I reduce my taxes in retirement?”. This is challenging because retirement tax planning is something that should be done early in the pre-retirement planning process.

The Traditional Approach to Tax Planning & Retirement 

The traditional approach to taxes and retirement used to be save as much as possible in a retirement pre-tax account like an individual retirement account (IRA) or workplace 401 (k). The thought was you should shelter as much pre-tax income in these channels as possible and avoid payroll taxes at the time your income is the highest, their mid-career. 

Time and avoiding spending were expected to work to your advantage. Then, when retired, begin withdrawals from the given retirement accounts because your income tax bracket would then be lower since you are no longer working. This would then save considerable tax avoidance versus using the money when one is younger and making the most in income.

Longer Lives, Longer Careers, More Savings

However, a funny thing happened over the last two decades that completely changed traditional retirement tax approaches. People started living considerably longer, they stayed working or beginning new careers on top of their pensions or retirement, and many were more successful. All combined, some savers began to have more income in what their retirement years should be than what was earned in mid-career points. That completely negated the advantage of pre-tax retirement accounts as a result.

Today, the average income earner in his or her 40s faces a retirement of higher medical costs, longer mortality and resource need, kids living at home and needing help longer, and inflation. All of these make a simple 401K or IRA strategy not as cut-and-dry and could cause real losses by the time the money is actually withdrawn.

A solid retirement strategy has to hit the tax implications of retirement on multiple fronts.

Advantages of Roth IRAs

The first step is to take explore the advantages of a Roth IRA. This the most common and widely available form of a retirement account shelter that can be used to protect gains from taxes with post-tax monies (funds that have already been accounted for in your income tax filings like net pay, gifts, etc.). The funds within a Roth IRA can be invested and grown significantly without the curtailment of payroll taxes all over again. That in turn can result in big savings when the money is used in retirement versus a traditional IRA that then goes through income tax filing the year it is tapped. For those who see investment as a big tool for recovering ground for a retirement portfolio, investing through a Roth IRA with post-tax monies is worth exploring.

Balancing Education Costs with Retirement Savings 

Think about education needs second. If you have kids and you foresee needing to be able to pay for their college when you are in retirement, don’t plan to take it out of limited funds then. Save up for college now with a 529 Savings Plan tax shelter. These are similar to a Roth IRA in that funds in a 529 are protected from taxes as long as they are used for higher education.

Life Insurance

Lastly, consider a life insurance policy. To the extent that something unplanned occurs, you’ve taken steps to ensure your family is taken care of. Retirement planning and savings are a traditional path, but sometimes life doesn’t give a person enough time to follow a plan. A life insurance plan provides the necessary safety net for your family not to get turned upside down with estate taxes and probate.

In order of liquidation, your retirement spending typically would be as follows – burn down post-tax accounts first except for your Roth IRA. This one you can keep into your later years. The second group should be your pre-tax retirement accounts. These will have to be withdrawn from starting at 72, so you have to plan to start spending them anyways. By waiting until 72, you will have maximized their tax shelter benefit. Leave your Roth IRA accounts for last. They can be held far longer, and you can even will them to a relative if desired without negative impact to you. 

Step 6 – Review Your Estate Plan

Estate planning is similar to a root canal… Nobody likes to do it, but it is something that should be done. Talking about death is challenging but making sure everything is in place should something happen to you is important for what happens to your wealth. For example, did you know your beneficiary designations precede your will?  You may have spent thousand on an attorney to draft an estate plan for you, but if the beneficiaries on IRA’s, 401k’s, and life insurance policies don’t match, your money might not go where you intended.

Don’t forget about other items such as power of attorney documents. There are many financial institutions that require additional documentation above and beyond what was created by a lawyer. Having those documents in place early can help avoid a headache down the road.

Step 7 – Stress Test Your Plan

Retirement planning changes constantly. As the market moves, the impact to your retirement plan should be reviews. There are many scenarios that are important to plan for. We believe it is important to test your retirement in good and bad markets, higher than normal inflation, longer life expectancy, and long-term care events, just to name a few.

Retirement planning is different than putting together an estate plan. One it is built, it should be reviewed, tested and analyzed in many different ways both before and after retirement. I meet with many people who are retired and have not updated their retirement plan in years. I believe that planning IN retirement is more important than pre-retirement planning. Most people who retire never want to run out of money and be forced back into the workforce or change their spending. Stress testing a retirement plan on a routine basis will help reduce the chances of this happening.

Make sure to check out our Free Financial Guide: Top 10 Retirement Considerations

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC.- Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. –  Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. – Theorem Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. Third party posts do not reflect the views of Theorem Wealth Management or Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and have not been reviewed for completeness and accuracy. All further communications from this representative must be sent from and received by [email protected] . For additional information, please refer to one of the following consumer websites: www.finra.org, www.sipc.org

Share this article

Stay up to date.

Subscribe to our blog and get up to date on what’s happening today, get useful financial tips and stay informed on Theorem’s latest news.