Retirement on the horizon: A financial planning checklist
Retirement is one of the biggest events you will experience in your lifetime and requires you to have a retirement checklist to plan your finances correctly.
Here is a retirement checklist of items to consider as you plan for your life after work.
1. Figure out your retirement timeline
This sounds simple, but it can be one of the hardest decisions you have to make. There tend to be two different scenarios -- your company picks your retirement date for you (mandatory retirement at a certain age) or the date is flexible.
If the decision is up to you, how do you pick your date? A cash flow plan can be very helpful when considering your options. It will show you a financial picture of where you are today and model out, with targeted financial goals, how financially stable you will be at various retirement ages.
2. Determine your spending and savings goals
When preparing your cash flow plan, you will be asked how much money is coming in each year and how much you are spending each year. This will determine how much you can realistically save annually for retirement. The sooner you do your cash flow plan, the more time you will have to adjust any spending and savings goals in your working years to be where you want to be financially by the time you retire.
3. Understand where you should be saving your assets
After you know how much money you need to save, the next consideration is where to save your money. There are three main account choices to help grow your assets:
• Traditional tax-deferred retirement account
• Roth tax-free retirement account
• After-tax taxable investment account
Where to save your money is largely a function of your tax bracket while working and your projected tax bracket in retirement. Saving in the right "bucket" can help reduce taxes over your lifetime as it can allow you to maximize tax-savings strategies through tax-deferrals, and equally as important, it can allow for a tax-efficient draw-down strategy in retirement.
4. Review your portfolio allocations
For the next item on your retirement checklist, consider how your portfolio is currently allocated. Where are you on the scale of aggressive to conservative? More importantly, why are you allocated the way you are allocated?
If you do a cash flow plan, you can then become comfortable with how much risk you need in your portfolio to meet your spending needs in retirement. You may need to change your strategy, but first you need to understand your financial picture now and in the future. This will give you the comfort level you need to make the best decisions about your portfolio allocations.
5. Create your multiyear tax plan
Many taxpayers pay the highest tax rates of their lifetime at the end of their working years and will see a decrease in tax rates once they retire. In high income tax years, consider accelerating deductions to minimize taxes. In lower tax years, consider bringing in additional income to absorb the lower tax rates. This tax planning can be especially important if you retire prior to age 70 and you do not yet have to take Required Minimum Distributions from your IRA.
Consider what will happen when your RMDs start at age 70. How much additional taxable income will the RMDs create and at what rate will the income be taxed? Doing a multiyear tax plan will show you any tax-saving opportunities and allow you to maximize your after-tax wealth.
6. Get an insurance review
Try to approach your insurance situation from a planning perspective. A great place to start is by looking at what insurance products you already have and see if they are still the right fit. If the cash value of a whole life insurance plan is no longer important to you, it might make more sense to exchange the policy for a different type of life policy that also can be utilized for long-term care insurance should you need it later in life.
7. Review your estate plan
Your estate plan is something that should be reviewed as your personal situation changes and as estate laws change. When is the last time you looked at your will, your trust or your beneficiary designations? If you believe you may have a taxable estate when you pass, start planning now if one of your goals is to reduce the amount of estate taxes paid when your assets transfer to the beneficiaries. The more time you have to plan for asset transfers, the more wealth you can preserve and pass to your beneficiaries.
• Cammy Corso, a Certified Financial Planner and CPA, is a principal with DHJJ Certified Public Accountants & Business Advisors in Naperville.