Tuesday, August 18, 2009

Planning Checklist for 1 To 3 Years before Retirement

Up to this point you have been progressively adding more and more detail to your retirement plan. You began in early career with simple asset accumulation strategies then added growing your financial intelligence to the picture during mid-career. In recent years you formalized the process with more concrete retirement plans. At this stage your retirement plan should be fairly complete. If it is not, then please review the previous sections of this article for any missing pieces.


Using a home building analogy you have laid the foundation, raised the walls, and capped it off with a roof. The structure should be more or less complete so the only tasks remaining at this stage are to paint and decorate as a final preparation for moving in. In other words, with just a couple of years to go it is time to put the finishing touches on your retirement plan.

 Color in the Dream: By now the "when", "where", "what" and "how much" of your retirement plan should be very detailed. Your budget should be based on real numbers rather than generalized assumptions. Your future lifestyle should be estimated, and your expected income from investments and retirement plan benefits should be known. If you don't have these in place then there is no time like the present. Retirement is right around the corner.

 Test Drive the Dream: If you are thinking of spending your retirement in Panama then schedule your next few vacations for different times of year in different locations throughout the country. Also, brush up on your Spanish lessons and begin building your network so that you are ready to go. Similarly, if you plan on retiring at home with only 50% of your current income try living on that budget now while you still have earned income to bail you out if it proves unworkable. If you plan on building a second career then begin laying the groundwork. In short, start test driving your dream today so that you can correct and adjust any incomplete plans and move toward your new future with confidence. Getting started now will smooth the transition.

Review Social Security and Pension Benefits: Rules can change and data can be entered incorrectly. Go through your benefits statements with a fine tooth comb to check for errors and correct as necessary. Make sure the benefits you were expecting to receive match the current rules.  

 Long-term Care Insurance: Examine the risks and benefits of long-term care insurance so that you can make an informed decision. Get cost estimates and learn the various alternatives when purchasing this insurance product.

Financial Planning: Are you going to take a lump sum payout or monthly payments? Are you going to leave your 401(k)s where they are or roll them over into an individual retirement account? Are you going to take Social Security as early as possible or delay for a bigger monthly benefit? What is your investment strategy? What will be your asset allocation during retirement? Are you going to purchase fixed annuities or accept the risks of fluctuating investments in hope of a higher return? You are entering the window where these decisions must be made.

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The right moves

Some of the other financial decisions you’ll be facing may be dictated by government rules about when and what you must withdraw from your tax-deferred retirement accounts. Others may be driven by your concerns about healthcare or your desire to leave money to your heirs. At the least, you’ll have to consider:
  1. Shift some investments from stocks to bonds or insured accounts to produce more income with fewer risks, in case of a sudden downturn in the financial markets.
  2. Roll over retirement assets into IRAs or annuities to preserve their tax-deferred status.
  3. Consider catching up on retirement contributions. Once you are over 50, you may qualify to make additional catch-up contributions to your retirement plan. 
    • Pre-Tax 401K Catch Up Limits
A catch up limit is just what it sounds like, the current 401k rules allow for plan participants that reach age 50 before the calendar year is over to make additional catch up contribution limits on a pre-tax basis as shown below:
                                                              i.      2004 - $3,000
                                                            ii.      2005 - $4,000
                                                          iii.      2006 - $5,000
                                                          iv.      2007 - $5,000
                                                            v.      2008 - $5,000
                                                          vi.      2009 - $5,500
                                                        vii.      2010 - $5,500 plus an index for inflation ($500 increments)
The "catch-up" contribution limits will continue to be indexed for inflation in 2010 and can increase in $500 increments.  In 2009, the catch-up limit increased to $5,500.
§         IRA (including Traditional IRAs and Roth IRAs)
In 2007, you can contribute up to $5,000 - which includes a catch-up limit of $1,000 - to a traditional or Roth IRA.  In 2008 and 2009, you can contribute up to $6,000, which also includes a catch-up limit of $1,000.
  1. Manage your income stream. Start planning how you'll convert your assets to a dependable income that can last your lifetime. Be sure to consider all sources of income, including Social Security.
  2. Find ways to reduce estate taxes and cover those that are unavoidable.

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