Today I’m going to share some final thoughts from The Wall Street Journal Complete Retirement Guidebook.
In case you missed the first three posts in this series, check out Basics of Retirement Planning, Working or Volunteering in the New Retirement, and Moving to a New Location in Retirement.
This post will address the book’s suggestions on what steps to take (and when) in planning for retirement.
I’ll share their take and then add my comments.
Knowing Retirement Expenses is Vital
Let’s begin with these thoughts:
In the end, there’s a simple way to tell if your retirement budget is reasonable: Try living on that budget for a full year before you retire.
I would say you need to live on your retirement budget about three years before retirement.
If it works, then you’re set and will be ready to go at retirement.
If it doesn’t work, you have time to adjust and get to a workable budget before you get to retirement.
The exception is if you have a pretty good handle on your spending already. Fir example, we had been tracking costs in Quicken for almost 20 years by the time we were ready for retirement, so we had a pretty good idea of our spending backwards and forwards. Hahaha.
But if you haven’t done well at tracking and/or you plan some major changes in retirement, my suggestion is to begin the process three years out.
Next the book starts to get specific with what to do 5 years, 3 years, and 1 year out from retirement…
Five Years Before Retirement
Here’s what the book says people need to do five years before they retire:
- Set a rough date for retirement itself. Do you plan to retire at a specific age? Do you plan to take early retirement?
- Begin thinking about — and talking with your partner about — how you wish to spend your time in retirement. Develop a plan. Put your goals in writing. Start “test driving” some of your ideas.
- Take a first stab at calculating your spending and income needs in retirement.
- Consult a financial planner. Get a critique of your financial preparations.
- Get your paperwork in order. If you haven’t done so already, make sure you have a will, an appointed power of attorney, health-care directives and an estate plan.
- Begin thinking about health insurance. Will there be a gap in coverage between the time you leave work and when you qualify for Medicare? If so, where will you find insurance for that period time?
- Take advantage of catch-up provisions (which allow you to contribute additional funds) in your retirement plan at work.
- Determine where you want to live in retirement. If a move is a possibility, begin exploring promising destinations.
Lots of great suggestions here IMO. My thoughts:
- “Set a rough date for retirement itself.” I like the idea of having a “rough” date as I think it makes planning more concrete/real. That said, we didn’t do this until retirement was right upon us. We had maybe a 2-3 month period from when we decided to retire to when it was done. Then again, we had considered it a year earlier and decided not to retire, so that was a mini test run. Still, it was well short of being five years out. It all depends on how much of a handle you have on your finances, so for the average person, five years sounds right to begin thinking about it.
- I’m glad they mention thinking about how to spend your time in retirement since so many people give very little thought to this. And I can’t agree more with the idea of “”test driving some of your ideas.” I would say to try and find 8-10 activities you think you might like doing, try them out, and see which ones stick. The goal will be to have at least five you can take into retirement — things you love doing that will fill your time productively in retirement. If you need some help thinking of possibilities, see Huge List of Awesome Retirement Activities.
- Working on a budget five years out is even better than what I suggested above (three years out), though this seems to contradict their “one year” plan I quoted at the top of the post. Anyway, I’d say three years at a minimum but five years is even better to begin getting a handle on a retirement budget.
- If you must, see a planner. However, if you’re competent enough to do the work yourself (like I did), then by all means work the numbers for yourself. If you need help getting competent with finances, consider reading the books noted in 12 Books that Will Make You a Financial Expert in One Year.
- I would say you need to “update” your will, etc. about a year out from retirement. But if you don’t have one at the five-years-out point, certainly get one ASAP.
- Health insurance is the big unknown, especially if you retire early. You can consider COBRA for a time, one spouse continuing to work, ACA insurance on the exchange, or a health share ministry option. But you need a plan for this for sure. Here’s what we did: Picking the Right Early Retirement Health Insurance: Reviewing the Options.
- Instead of a blanket statement like “take advantage of catch-up provisions,” I would say that as part of your financial plan, look to save/invest monies in places where you can get at them when you need them. For instance, if you retire at 52 like I did, you can “take advantage of catch-up provisions” in retirement vehicles, but those funds may be hard to access until you get to 59.5 years old. Can you wait that long or are you better off putting the money in an after-tax account? Something to consider…
- If you are thinking of living somewhere new, five years out is the time to begin taking vacations to these new places and trying them out. Assuming you have three options and a couple long vacations a year, you’ll have time to visit them all, then make repeat trips to the one(s) you like (after which you can make a decision about moving or not).
- I would also add that you should begin studying the retirement process in earnest five years out. You need to know what to plan for, how to do it, etc. This is a multi-million dollar, 30-year decision, so it’s worth the time investment. A few things to consider in educating yourself: 1) Read The Best Retirement Books to Retire Sooner and Better. They are the best of the best books and well worth your time. 2) Check out my Retirement Interviews and Retirement Countdowns in my retirement category. These will detail the obstacles/issues others have faced and how they overcame them to be successful. Lots of great learning here. 3) Check out my free Create a Great Retirement email series.
Let’s move on…
Three Years Before Retirement
Here’s what the book says people need to do three years before they retire:
- Pick a firm date for retirement and begin to work toward that goal.
- Request an estimate of retirement benefits from your employer. What benefits (if any) will you receive after leaving work, and are any of these benefits subject to change?
- If you wish to “ease” into retirement, ask about the possibility of entering, or starting, a “phased retirement” program at work.
- Contact Social Security two to three months before you reach age sixty-two and evaluate the advantages and disadvantages of filing early for benefits.
- Refine your spending and income plans. Develop a firm budget for retirement.
- Consult a financial planner for a second critique of your financial preparations.
- Familiarize yourself with both Social Security and Medicare – how they work, the benefits you can expect to receive and when you should file for benefits.
- Look at your insurance needs. What coverage do you need and what can your drop in retirement?
My thoughts on these:
- I don’t know if you need a firm date at this point, but if you were 25% sure of the date at 5 years, I think you need to be 50-75% sure of the date at the three year period.
- 100% agree with the idea of finding out about employer retirement benefits. I would NOT tell them that you are thinking of retiring (see below) but rather that you simply “want to be aware of all the benefits the company offers employees” (or something similar).
- I wouldn’t ask anything that would make an employer think you were going to retire until you were pretty close (and completely able to retire if you needed to) to the actual date. The reason? Some employers see potential retirees as not being committed to the company and they may prematurely “retire” you themselves.
- Ah, yes. The never-ending question about Social Security. I’d actually begin reading up on it and formulating a strategy around 60 or so just in case your answer is “take it at 62.” That way you’ll be ready if you need/want to do that.
- “Develop a firm budget for retirement.” Yep. And live on it. If it doesn’t work, you can adjust as I noted above.
- Same thoughts as above on the planner. Not sure if they are suggesting you get a second opinion or that you should get the same planner to re-look at their plan now that you’re two years closer.
- And a double “yes” for Medicare. If you thought Social Security was confusing, wait until you dive into Medicare! Yikes!
- We dropped disability and (eventually) life insurance in retirement (only keeping the latter because we were near the end of a 20-year term and it was so cheap). Our current insurance line up is homeowner’s, car, health (health share ministry, technically not insurance), and umbrella.
And on we go…
One Year Before Retirement
Here’s what the book says people need to do one year before they retire:
- Get a final estimate of benefits from your employer.
- If you expect to receive a pension, contact the plan administrator to verify your length of employment and benefits.
- Put a final spending and income plan in place. Spend the year before retirement living on the budget that you have prepared. Will it work in retirement?
- Set up a system (or have a financial adviser do it for you) that creates a “paycheck” in retirement. Organize your nest egg so that income flows from long-term investments into short-term investments and, eventually, into a checking account.
- Address, as best as possible, any hearing, vision or dental needs through your health insurance at work. Medicare covers almost none of that.
My take on these:
- I agree with all of these, with a few modifications…
- As for the spending, this last year should be for minor adjustments at a maximum. You should have lived on a budget at least close to your final retirement budget for a couple years by this point, so if you’re not close by now, something is really wrong. And if it’s really wrong, you may need to delay retirement…so better to get it right early than have a bad surprise at the last moment.
- I am a big, big fan of retirement income and highly recommend it, even if it just covers part of your expenses. For us, we have business income, dividend income (some from index funds and some from stocks), real estate syndication income, and income from private loans which more than cover our annual expenses. This allows our investments to keep growing and provides a very nice margin of safety for us.
- I would say to utilize as many employer benefits as possible before you leave — those dealing with healthcare or otherwise. Once you’re gone, the benefits will disappear, so use them while you can.
That’s it for this book. I only covered the areas where the book said something I thought added to what we’ve already discussed, but I did leave some things out.
I noted it’s an old book (written in 2007), but it was a very one IMO and if you’re looking for an insightful retirement book, I would suggest checking this one out.
How about your retirement timetable? Are you working on anything specific for your big day?
A few thoughts:
1. Keep in mind annual 401k match dates/bonus dates and vesting schedules. No sense retiring before you get the prior year’s match/bonus or with unvested shares (within reason).
2. Absent unusual circumstances (minor children, low life expectancy, etc.) no single person/higher earner in a married couple retiring early should be claiming Social Security at 62. The basically guaranteed return on COLA adjusted Social Security is really hard to pass up as longevity insurance. This is especially true in married couples, where the higher earner’s delay until 70 (ideally) gives the surviving spouse (regardless of which one it is) that higher payment for life. I’d be very, very hesitant of any advice that a single person/higher earner in a married filing jointly couple should claim at 62.
Some would disagree with your point #2 as they have a different POV, family history/issues, etc. There’s no one size fits all in any part of personal finances.
That said, what you’ve laid out will work well for many and is the plan we intend on using — my wife taking SS at FRA, then me taking it at 70 and her taking half of mine then. The way she eats, she’ll live to 120 and can enjoy that income for a long time! 😉
ESI…. good overview and just in time. I’m currently in the early 3-5 years to retirement planning stage now. You just created my checklist of to do’s. Thanks for the help! I already completed my review of our 2022 expenses and created a draft retirement budget.
Awesome!!!! Best of luck to you!