Published April 20, 2012
Usually, when people talk about someone "going through a stage" they are talking about a 2-year-old or a teen. But there's another age at which people go through a key transitional period, also marked by angst and rebellion: Call it pre-retirement.
It sets in by the time workers hit their late 50s, even though they are told they should work for another decade or so to maximize their retirement security. But it hits for real about five years before an expected retirement date. It's the period that Prudential Financial Inc calls "the red zone" and another insurance company, Allianz Life Insurance Company of North America, calls "the transitional phase."
Both of those companies talk about that pre-retirement period in the context of selling annuities -- insurance products that offer tax benefits and lifetime income in exchange for large sums of money. But buying insurance or some other financial product is the easy part of retirement planning; the hard work should happen first.
Here are some guidelines for getting through that phase with a minimum of stress and strain.
-- Get specific about life planning. This can be the most challenging part of the exercise; the rest is just numbers. What are the activities you really care about? Where do you want to travel and need to travel? What kind of lifestyle do you think you will have? There are ways to get help with this. The University of North Carolina at Asheville runs "Creative Retirement Exploration" weekends. A variety of books and websites claim to be able to help with lifestyle planning. Mutual fund company T. Rowe Price has a new interactive online exercise called "Ready 2 Retire" that walks older workers through some of these questions.
-- Become a Social Security savant. The program is complicated, but will make a significant contribution to almost everyone who retires in the United States. There are a series of strategies you can use to maximize your benefits, especially if you are married. Couples can tag-team their benefits, claim them and suspend them, defer them and more.
It makes sense to get a good numbers person, an actuary or an accountant, who understands all of this, to help you figure out which strategy is best for you. At least one company, Social Security Solutions claims to have all of that down to a science. For a fee, it will come up with a comprehensive benefits plan for you.
-- Do a health-care plan. Private health insurance will change over the next few years, regardless of whether the Obama healthcare reform law is permitted to stand. And it's impossible to predict the future in the way that some companies ask you to. For example, T. Rowe Price asks: "Where would you prefer to receive long-term care? At home, adult day-care center, assisted living facility, nursing home?"
But you can figure out if you're covered for gaps before Medicare kicks in at 65 and afterwards. How is your health? Do you need to be near certain medical facilities? What drugs do you take regularly? Will they be covered under Medicare? What are your personal priorities in a gap-filling policy and how cheaply and reliably can you fulfill them?
-- Take inventory of all of your assets. Retirement accounts, savings, company retirement plans, the value of your home and more. Take the time between now and actual retirement to decide, either on your own or with expert help, which of those assets will fund your early retirement and which will fund your late retirement and how much they will allow you to spend.
-- Study taxes, too. Learn about the tax properties of those various baskets of money. Which ones will provoke taxable events when you withdraw money? Does your state and municipality offer any property or income tax breaks to retirees? How much could you save on taxes if you moved in retirement? Taxes are just one line item in a family budget, but retirees have a lot of options for managing their tax bills.
-- Get real numbers. Ask your employer and the Social Security Administration exactly how much you have coming to you in retirement benefits at various years.
-- Organize your debts. It may be okay to go into retirement with debts, especially something like a very low interest rate mortgage. But not if you have to withdraw tax-deferred money to make payments on high interest loans. Furthermore, once you are retired, it may be harder to line up a home equity line of credit. So prepare to pay off the loans you don't want to keep, and lock in the ones you do.
-- Think about getting help. The most expensive, dangerous decision you can make at this stage is choosing the wrong financial adviser and turning all of your money over to him or her. Don't rush to consolidate all of your money with one person, even if you eventually move in that direction. Figure out what aspects of retirement financial planning you do or do not need help with. Learn about the different kinds of financial advisers and what they specialize in. Talk to several before choosing your favorite.
-- Survey retirement services. Big discount brokers and mutual fund companies will do a lot for a little in terms of organizing and automating retirement withdrawals for you. Local nonprofits and governments offer many services and activities to retirees at free or reduced cost.
-- Line up your next gig. Do you want to go cold turkey, working full-tilt one day, and be fully retired the next? If not, use the last three or four years before retirement getting ready for the next phase. Take classes, set up a side business or start laying the groundwork for Phase II, so that when retirement comes, you're ready. It also helps to spend money while you are still earning it. Outfit your retirement wood-shop or art studio before you stop working; the expenses will be easier to bear.
-- Start doing lifestyle experiments. If you intend to dramatically change your life in retirement, use your vacations between now and then to live a little. Travel to the places where you expect to spend time. Immerse in weekend activities like the ones you think will take up your days when you're done working. You may even change your mind about retiring, but you'll have fun on the way.
(The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at firstname.lastname@example.org; She tweets at http://www.twitter.com/lindastern.; Read more of her work at http://blogs.reuters.com/linda-stern; Editing by Gunna Dickson)