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Preparing A Smooth Retirement Transition

The final 10 to 15 years of your working life can feel like a last push toward a finish line. But retirement is not a point in time; it is a stage of life.

Given current trends in health and longevity, many of us can expect to enjoy 20 years or more after we retire. If we are lucky, we may be active and in good health for much of that time. Regardless of when you retire, you should regard retirement as the beginning of a chapter just as much as it is the end of one.

Retirement Planning Between 55 And 72

You may have spent much of your adult life thinking about retirement. Or perhaps you’ve put it off because of more pressing short-term needs. Regardless, the span between 55 and 72 years old can be especially crucial. By this time, you probably have some idea of when — or if — you want to retire. You also still have opportunities to make adjustments to ensure you are on track for the sort of retirement you envision. Even if you have no formal retirement plan, starting in your 50s is better than arriving at retirement with no plan at all. Saving aggressively during your peak earning years can still make a material difference to your long-term financial situation.

You may enjoy more cash flow in these years as you pay off your mortgage, watch your adult children set out on their own, or reach the top of your professional game. If any of these circumstances apply to you, you can benefit from increasing your monthly savings. Specifics will vary, but some advisers suggest setting aside 20% of your income as a good rule of thumb in the final years you plan to work. The optimal amount will depend on your plans for retirement, as well as on how much you have previously saved.

If your 50s and 60s are your peak earning years, as they are for many people, accelerating savings can be especially sensible. Earning a higher income makes it more likely that your marginal tax bracket is also higher than it will be in your retirement years. This means you will benefit from deferring taxes through contributions to an individual retirement account, 401(k), or any other plan where you can benefit from a tax deduction when making contributions and pay taxes later when taking distributions.

You can also take advantage of rules for catch-up contributions if you hope to increase your savings. The Internal Revenue Service limits the amount you can contribute to an IRA in a year; that limit is set at $6,000 for 2022. But savers 50 or older can contribute an additional $1,000 annually. The maximum amount you can contribute to a qualified retirement plan through your employer, such as a 401(k), is also adjusted annually for inflation. In 2022, contributions are capped at $20,500, but employees age 50 or older can contribute an additional $6,500, for a total of $27,000.

In addition to jump-starting your savings, you may want to consider converting a traditional IRA to a Roth IRA. While this step is not right for everyone, it can be a powerful tool for savers in certain situations. If you are paying lower taxes now than you expect to pay in the future, converting can mean paying less in tax overall. A conversion will also remove uncertainty around the potential of higher tax rates in the future. If you use savings from a taxable account to pay the present tax, you are effectively converting tax-inefficient assets into tax-efficient assets, since you will not owe tax on distributions from a Roth IRA. You secure more flexibility, too, since Roth IRAs do not have required minimum distributions later in life.

That said, if you do not have funds available outside your IRA to pay the associated tax, you may not find conversion worthwhile. Your starting balance for your new Roth IRA will be significantly lower if you pay the tax out of your existing IRA funds, which means losing some of the benefits of compounding. In addition, taxes are a sunk cost. Even if tax rates go down or if your assets lose value in the future, you will not be able to recover the taxes you paid when you converted the account. Finally, it is worth remembering that a conversion can push you into a higher tax bracket than usual. You may want to mitigate this possibility by converting a portion of your IRA over the course of several years. (At this writing, in late 2021, the House-passed version of the Build Back Better legislation would have prevented conversions of after-tax IRA and 401(k) balances to Roth IRA accounts beginning in 2022, and ultimately banned all Roth conversions by high-income taxpayers beginning in 2032. That legislation was awaiting action in the Senate.)

In both your dedicated retirement accounts and your overall portfolio, your 50s and 60s are a great time to revisit your overall investment strategy and asset allocation. Most people understandably want to move toward less volatile investments as they approach the end of their careers. It is important, however, not to abandon stocks entirely. Otherwise, inflation could eat away at the spending power of your savings. A conservative portfolio could look something like 55% bonds, 40% stocks and 5% cash equivalents such as money market funds. This is only an example; the right balance will look different for different individuals. The key is to move toward a more conservative mix without becoming so overly conservative you leave yourself vulnerable to inflation. Given the long-term risks of inflation, it’s important to remember that being too conservative within your investment strategy can be just as risky as being too aggressive.

You should also take time to familiarize yourself with the rules of any other retirement accounts you may hold. While they are becoming rare, defined benefit plans such as pensions do still exist. Participants in these plans may have options for how they pay out, such as the choice between a lump sum and an annuity. Workers who hold appreciated company stock may also want to consider an in-kind contribution. While these details are beyond the scope of this article, in these situations it is worth talking to a fee-only financial planner who can help you weigh the pros and cons of your various options.

Most Americans also include Social Security in their financial plans. You can boost your Social Security benefits even in your last decade or so of work, since benefits are based on your 35 highest earning years regardless of when they occur. Benefits can also vary depending on when you take them. The longer you defer, up to age 70, the larger each payment will be. Of course, waiting until age 70 is not always practical. Factors including your health, current and future cash flow needs, your spouse’s health and financial situation, and your plans to keep working (or not) will affect your final decision. It also never makes sense to wait past age 70, since doing so offers no additional benefit.

A helpful exercise in determining whether you are on track for retirement is a cash flow analysis. This can help you evaluate whether your savings, projected benefits and other income sources will support the lifestyle you expect for your retirement years. A professional financial adviser can help you to generate and understand this analysis, allowing for variables that could affect your plans. There is no magic number for how big your nest egg needs to be. In reality, the world is ever-changing. Retirement planning is not about predicting the future, but about understanding the range of possible outcomes under various circumstances. This is why cash flow planning under multiple scenarios is so helpful.

If you find you need to cut back on retirement spending, consider living on less while you are still working, to the extent you can. This will both let you evaluate which changes are sustainable and free up more cash to put in savings. Bear in mind, too, that you cannot always predict your future health or long-term care needs. Do not budget as if you, and your spouse if you are married, will always enjoy exclusively good health.

While many people set a date to retire, or in some cases to scale back to part-time or to begin a second-act career, bear in mind that you may retire earlier than you plan due to factors outside your control. A 2021 survey from the Employment Benefit Research Institute found that nearly half of retirees retired earlier than they expected. In some cases, this was because they found they could afford to, but in others it was because of a change in their organization or an unexpected health issue. Plans are useful as benchmarks, but leave room for flexibility as conditions change.

Keeping Track of Retirement Planning Milestones

55IRS “Rule of 55” allows penalty-free retirement account withdrawals under certain circumstances; good time to max out all savings and benefit from catch-up contributions to qualified retirement plans
59½Penalty-free withdrawals from traditional IRAs and 401(k)s; penalty-free withdrawals of investment returns from Roth IRAs and 401(k)s
62First year you can draw Social Security benefits early
65Eligible for Medicare
66-67“Full retirement age” for Social Security benefits (based on birth year)
70Last year to increase monthly Social Security benefits by waiting
72Must begin taking required minimum distributions (RMDs) from certain retirement accounts


Other Planning Concerns

While many people between the ages of 55 and 72 are focused on retirement saving, this is also a great time to revisit other areas of your financial life. As you transition into a new stage, you will want to be sure you keep the bigger picture in mind.

Health Insurance

If you hope to retire before age 65, you should factor in a plan to secure health insurance coverage, especially if your spouse or your young adult children still rely on your plan. You will not become eligible for Medicare until age 65, and before then, you may find coverage more expensive than you anticipated. Freelancers or other individuals who have had to pay for their own coverage are less likely to face sticker shock than workers who have always received insurance through their employers.

You should also factor in the potential cost of long-term care. At Palisades Hudson, we have long advised our clients to be wary of long-term care insurance, but that does not mean the costs of providing such care are not real and substantial. As you examine your health insurance options, it is crucial to know what policies do and do not cover.

Life Insurance

Regardless of when you plan to retire, your 50s and 60s are a sensible time to revisit your life insurance coverage. If you purchased term insurance in your 20s or 30s mainly to protect your dependents from the loss of your income, it may be time to let that policy lapse. Such policies get more expensive as you age, and you may no longer need the coverage.

If you hold a permanent insurance policy, such as whole life or universal life insurance, you should evaluate its performance as part of your overall portfolio. Depending on the policy’s performance, the strength of the insurer and a variety of other factors, you may want to keep the policy, or you may want to borrow against it, surrender it, exchange it for another or let it lapse. Consider consulting a professional who can help you make this determination.

Tax Planning

Balancing tax-free, tax-advantaged and taxable accounts is already a big part of retirement planning. But you should not neglect other elements of your overall tax picture. For example, many empty nesters find it useful to downsize, even if they own their homes outright, in order to pay less in property taxes. Depending on your situation, you may want to move further afield, potentially to a state that levies lower income taxes or no income tax at all. Other fundamentals of tax planning, such as strategically accelerating or delaying income, will also apply in retirement just as they have during your working years. This is especially true in your final year of work and your first year in retirement, when you could experience a significant drop in your income and tax rate.

Estate Planning

As you approach retirement, you should revisit your estate plan (or make one, if you do not already have a plan in place). Update your will and other estate planning documents to reflect changes such as relocation, divorce or marriage, or minor children who have become adults, if you have not already done so. You should also ensure the beneficiary information on your retirement accounts is current, as these assets pass outside of the probate process.

Finally, do not forget to plan for potential incapacity. Consider setting up some combination of a living will, advance directive, and medical or legal powers of attorney. These documents can ensure that your family knows and can carry out your wishes in a situation where you cannot communicate them. Many of us take our health for granted, but it can change quickly, especially in the later years of life.

Each of the areas I’ve touched on is complex, and explaining them in depth is beyond the scope of this article. If you want to read more, my colleagues and I cover many of these topics more fully in the book Looking Ahead: Life, Family, Wealth and Business After 55. But whether you self-educate, reach out to a professional or both, securing more information will help you to make informed and effective choices.

Financial planning is not a one-time, or even a periodic event. It is an ongoing process throughout your life, and especially moving into retirement. Your personal circumstances may change for the better, such as the birth of grandchildren or the opportunity to travel more widely. You may face major challenges, such as health complications or the loss of a spouse. Tax laws and the state of programs like Social Security are not set in stone. Even the best plan at age 55, 62 or 70 needs to allow for flexibility. Careful and continuous financial planning will allow you to fully enjoy your retirement, whatever the next chapter brings.

During his time with the firm, Anthony D. Criscuolo contributed several chapters to Palisades Hudson’s book Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 7, “Grandchildren”; Chapter 9, “Life Insurance”; and Chapter 15, “Investment Approaches And Philosophy.” He was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.