We recently wrote about the importance of planning in the years leading up to your retirement. But once you retire, that doesn't mean the importance of financial planning is diminished.
If anything, financial planning becomes even more important, because you won't have a steady paycheck that you can fall back on. You're now responsible for generating your own retirement paycheck by drawing on Social Security, a pension (if you're fortunate enough to still have one), and your savings and investments.
With that in mind, here are three things that you should do within the first three years of your retirement.
Prepare for the Long Haul
In 1950, the average length of retirement was eight years for men; in 2010, that number rose to 19 according to research from the Stanford Center on Longevity (because the workforce was overwhelmingly male in 1950, there is no comparable data for women). We're even seeing clients who may spend a longer time in retirement than they did in the workforce—upwards of 40 years!
This underscores the point that today's retirees have to be ready for a significantly longer retirement than what their parents or grandparents experienced. While no one is guaranteed tomorrow, we all have to plan for a retirement that could last several decades. This means having a percentage of your portfolio allocated in stocks and other growth-oriented investments that have historically provided the returns needed to preserve your portfolio for long periods of time.
Investigate Roth Conversions
We're big believers in diversification, and that also means having diversified tax treatment on your savings. It's not uncommon for us to meet with a prospective client that has the overwhelming majority of their savings tied up in a 401k.
The issue with having the bulk of your savings in a tax-deferred savings is twofold. First, just about every dollar you withdraw in retirement is going to be taxed. Imagine you want to buy a new $35,000 car. If your savings are solely tax-deferred, you might have to withdraw close to $50,000 depending on your tax bracket just to net the $35,000 you need for the car. Suddenly, that new car may have become more than 40 percent more expensive.
Second, you'll be slammed by required minimum distributions once you reach age 70.5. Required minimum distributions are a required percentage of your tax-deferred savings that you have to withdraw each year, whether you need the money or not. This can cause your taxable income to potentially skyrocket later in retirement.
The solution is to proactively make Roth conversions. The money will potentially grow tax- free, and you won't have to pay taxes on qualified distributions. Plus, you're reducing the amount of your savings that will be subject to RMDs going forward. The downside is that you will pay taxes on the amount you convert, so it's important that you evaluate the tax ramifications before executing the conversion.
Have Important Estate Planning Details Squared Away
Estate planning isn't just about limiting estate taxes, although that may be a factor if your taxable estate is large enough. A better way of thinking about estate planning is to consider it "legacy planning." In other words, when you die, where do you want the remainder of your assets to go? That means having a will in place and, potentially, a trust as well, although you'll want to speak with an estate planning specialist to see if a trust is appropriate for you.
An estate plan isn't just about securing your assets—it's also about securing your self. A power of attorney and a living will are both important legal documents to protect you in the event you become incapacitated. A power of attorney allows you to designate someone to step in and manage your finances if you become incapacitated. A living will is a written statement providing instructions for your health care decisions if you are unable to do so. Just as with wills and trusts, an estate planning attorney can be invaluable when crafting these documents.
The key element uniting these three actions is that they help set your financial plan on a course that's geared for long-term success. Taking steps that allow your retirement to succeed for both the next three years and the next 30 years can help you feel more secure about your financial future and, ultimately, help you be better positioned to reach your long-term financial goals.