One way to make any event stressful is to head into it unprepared. If you're within five years of retirement, to ensure a smooth transition, take the following five steps as soon as possible.
- Increase cash reserves
The process of applying for pensions, social security and setting up withdrawals from IRA's and 401(k) plans does not always happen without a glitch or two along the way. Be prepared for delays by having extra money tucked away in your savings, checking and money market accounts.
- Run a cash flow projection
Develop an accurate estimate of the amount of money you spend and the amount of income you will have each month. Take out a yellow pad and write down the following: your current take- home pay and your current monthly expenses. Don't forget about variable costs like recreation, home improvements and vehicle repairs. Then write down the monthly income that will be available from pensions, social security and IRA/401(k) withdrawals. Is this number close to your current take home pay? If not, you have four choices: spend less in retirement, save more now, work a few extra years, or earn a higher rate of return on your investments.
- Evaluate tax consequences
Will you be in a lower tax bracket in a few years? Then be sure to maximize tax deductible contributions to any employer sponsored plans now. Are you thinking about moving? You may be able to receive $500,000($250,000 if single) of capital gains from the sale of your primary residence completely tax free(subject to applicable IRS regulations). Do you have company stock that needs to be diversified? Plan for the amount of tax that will be owed the year you sell the stock, or spread the sale over several calendar years.
- Diversify your investments
Watching your portfolio go up and then back down again is never enjoyable, but as long as you end up with a large enough pot of money at the end, it doesn't really matter how you got there. Once you are retired, however, it's a different story. When you are taking regular withdrawals from a portfolio, volatility has a much greater impact. Reducing the up's and down's can significantly increase the odds that your money will last through your life expectancy. Spend time figuring out what mix of investments will achieve the rate of return you need while having a level or risk that is reasonable for you. The risk/return characteristics of your portfolio will determine how much income you will have and how long it will last.
- Educate yourself
Although it is advisable to seek professional guidance, the truth is no one will ever care about your money as much as you do. Take the time to learn about financial planning and investing. Some suggestions: attend an investment class at the local community college, read a book one or two or three, and research terminology on the internet. You likely spent forty hours a week for over twenty years of your life earning this money; now it's time to learn how it will provide for you for the next twenty to thirty years.
Start taking these five steps now and you will significantly reduce any stress or anxiety you may feel. Let your retirement years be a time to relax, enjoy your family, travel and devote time to your favorite hobbies or even start new ones.