Preretirement Planning -- By Dion Money Management

[Jerry Croteau]

Preretirement Planning

As you get within a few years of retirement, there are several things you can do to help make sure that the transition into your “golden years” will be smooth and financially successful. Unfortunately too many people end up backing into retirement, preferring to daydream about long days on the golf course rather than taking a little time to prepare for those days of fairways and greens.

The biggest question you need to ask yourself is whether you are really saving enough to retire in comfort. With Americans living longer and longer, if you retire at 65, you may easily need to support yourself for another 20 years or more. That requires a significant commitment before you retire.

If you are not making the maximum contribution to your workplace retirement plan, please do it. But I’d suggest that you also open a separate IRA account, if you don’t already have one. Remember, after the age of 55 you can contribute up to $6,000 in 2008, instead of the usual $5,000. Make that maximum contribution, even if you have to tighten your belt a little now. You’ll receive the benefit later.

Consider whether you want to work on a part-time basis in retirement. AARP says that 70 percent of pre retirees plan to work after they retire. What is it you would like to do? Perhaps you want to do something that has always intrigued you but for which you have no training (let’s say you want to work as a nature guide in a national park). Now is the time to take the classes you need to be prepared when you retire. But remember, if you have not yet reached full retirement age (currently age 66 and 67 for those born after 1942), Social Security benefits are reduced by $1 for every $2 of earned household income over $12,960. If you have reached full retirement age, there is no reduction in benefit.

Next, sit down with your financial adviser and take a look at your portfolio. If you have not rebalanced your investments for some time, there’s a good chance you will want to think about it. As they near retirement, most people prefer to tilt their portfolio more heavily toward bonds and other income-producing investments while moving away from large exposure to stocks. As we get older, our taste for risk often goes down. After you retire and your income shifts dramatically, you may not have the stomach for the ups and downs of equities as much as you did when you were younger.

Now ask yourself where you want to live when you retire. Do you plan to downsize? Move to a new location? Or will you just stay put? Start thinking about these things now, in part, so you can be thoroughly familiar with the real estate market when the time comes. But also, let’s say you want to downsize into a two-bedroom condo in the area where you live now. The best place for you may be under construction now, and in five years you may regret you didn’t move before you retired.

There are also some things you should not do in the years leading up to your retirement. Do not take money out of your retirement plan before you retire, even in case of an emergency. Utilize home equity or any other source before withdrawing retirement funds early. You lose too much future security, and you pay stiff penalties.

Do not plan to rely solely on Social Security to support you in retirement. You will get something, of course, but for most people, Social Security only provides about one third of what they need. Similarly, don’t rely on your spouse’s retirement plan to support you. If one of you happens to die early, the other one could be stuck. And the period right after retirement does tend to see its fair share of divorce, which could leave you out in the cold. Each spouse needs a retirement plan that covers these contingencies.

Lastly , don’t forget to review your retirement plan regularly with your financial adviser. Things change, both in your life and among your retirement investments. It’s your job to make sure you adapt to those changes so that when you hit the links, all you really need to worry about is making that 12-foot putt on the 18th hole for par.

Dion Money Management’s portfolio strategists can help you make your important preretirement decisions. Please call one of our Portfolio Strategists at 800-432-7447, ext. 191 to learn about the benefits of a portfolio review and a consultation regarding your retirement accounts.

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