By Mitch Fryling

Retirement planning doesn't have to be complicated, but it does take a bit of planning. Much like a pilot completing a preflight checklist before takeoff, you should work through a set of tasks to ensure a safe takeoff for your retirement. Here, I will be sharing some of the basic tasks that you should consider at a few key milestones. The five years before your retirement will go a long way in setting your correct course. Ideally, you will check off each of these boxes before taking flight into retirement.

Five Years Before Retirement

It's amazing how quickly time will fly by as you approach your big day. At this point you will want to put together a road map that will carry you to and through your retirement. Sure, things will change, but these foundational tasks will position you well. Your main objective will be to put together a retirement income plan. While this may sound daunting, it's important to go through the process in steps. In this contribution, I'll highlight the basics.

Your first task requires you to figure out where you currently stand financially. This starts with creating a retirement budget. Start the process by tracking your expenses over several months -- this can be done in an Excel file or in a monthly budget sheet found for free online. In either case you will want to break your expenses into two categories: basic and discretionary. Basic will cover your fixed expenses, think food, shelter and transportation. Your discretionary expenses will cover everything else. The final task is to project the estimated retirement spending. This can be challenging, especially when you're projecting future medical costs. Be conservative with your numbers; once again we'll dig deeper into the process later and I'll help you think through the numbers.

Next, review your different sources of fixed income. Start with Social Security, pensions, and annuity income that you and those in your household will receive in retirement. This is simply a baseline. You will add investment accounts like taxable, tax-deferred and tax-free accounts later. At this point you should be able to calculate the gap between what you need to withdraw and what you have available in income. This gap will help you determine how much you will need to take from your investment portfolio to meet your spending needs. Generally, you will want this gap to be less than 4%, anything above 4% may put your retirement plan at risk.

This is also a great time to consider maximizing your retirement plan contributions. Think about where you should be placing those extra contributions and what the best source of contribution is: pretax or after-tax. While the tax break is nice now, ideally you will have a healthy proportion of your retirement savings in after-tax accounts to provide flexibility to plan.

Your 5-year checklist:

    Create your own retirement-income plan.

    Take inventory of your expenses and review your sources of income.

    Consider maxing out your retirement plans, including catch-up provision.

    Consider what your retirement lifestyle will look like.

    Run through several retirement calculators or partner with a qualified financial planner.

    Create a plan to eliminate debt before retirement or build your emergency fund.

    Read one book on retirement planning.

    Three Years before Retirement

    At this point you should feel pretty good about what you've accomplished. But this is where you will really want to take a closer look at the numbers. While you've looked at the big picture, it's time to bring out the calculator. You can either run through the numbers using a free online calculator or you can partner with a qualified retirement income planner. In either case, leveraging technology will allow you to calculate a number of "what if" scenarios to ensure that you're on track. Don't neglect the impact of taxes and inflation when running through the scenarios.

    This is also a good time to take your retirement for a test flight. Consider taking a sabbatical or a few weeks off to live your dream retirement. While granted this is a short sample, it does give you a small sense of what retirement life feels like and whether your hobbies or activities will be sustainable. This is also a good time to take a closer look at your healthcare. While most of us don't like to think about it, healthcare is our biggest retirement expense and it's difficult to plan and budget. As part of your calculations, run through a couple of scenarios and determine whether it makes sense to self-insure or purchase a long-term care insurance policy. It's better to run the numbers in your early 50s when premiums can be more reasonable, and you have more time to incorporate your decision into your plan.

    Your 3-year checklist:

      Think through your post career hobbies and activities.

      Consider "test driving" your retirement lifestyle.

      Review your investment portfolio: Is the asset allocation appropriate based on required returns?

      Review your risk management plan: How will you pay for current and future medical expenses? Take time to learn the basics of Medicare.

      Run through various "what-if" scenarios: When will you take Social Security? How could higher medical expenses impact your plan? What about lower investment returns?

      Create a retirement income timeline to show when your different sources of income will begin. You can do the same for expenses to help you understand your cash flow.

      One Year before Retirement

      You're almost at the finish line. Now is a good time to start thinking about how you're going to withdraw funds from your portfolio. There are three primary ways to spend down your investment portfolio:

      • Constant spending with inflation adjustment
      • Flooring, and
      • Bucketing

      All three of these approaches have their strengths and weaknesses but depending on your specific situation one will fit your needs best. The constant spending with inflation, better known as the 4% rule, has been one of the most popular strategies due to its simplicity. Under this approach, you can spend approximately 4% per year adjusted annually for inflation without running out of money. While its execution is simple, it doesn't account for market fluctuations, poor market returns, and your personal spending needs.

      The flooring approach looks to cover your basic expenses through guaranteed types of investments. This can include annuities, laddered Treasury Inflation Protected Securities (TIPS) and CDs. The objective is to lock in your basic expenses through guaranteed income sources. Additional assets can be invested more aggressively to meet your discretionary goals such as travel or home renovations. This can be a great approach for conservative investors; however, it does limit the upside potential and therefore, spending flexibility.

      The bucketing approach sets up separate investment buckets. These buckets consist of low risk investments to cover near-term expenses, moderate risk investments for intermediate expenses, and a high-risk bucket for long-term expenses. The goal is to have safe investments like cash and CDs to cover your near-term spending needs and more aggressive investment such as stocks to cover longer-term needs. This approach leads to a balanced and diversified portfolio but with the behavioral benefits of knowing that you have cash on hand to cover any short-term blips in the market.

      This is also a great time to consider consolidating your various accounts into one or two financial institutions. This not only helps simplify your retirement strategy, but it can also reduce investment costs. I would also suggest reviewing your estate planning documents, such as your will, power of attorney for property and personal care, and any trust documents, if applicable. Ensure that all of your beneficiaries are up to date and that accounts are titled appropriately. This is also a good time to review whether setting up home equity line of credit (HELOC) as an additional emergency fund makes sense.

      Your 1-year checklist:

        Consider consolidating accounts to make things simple.

        Review your retirement withdrawal options; withdrawal order does matter.

        Review HELOC options.

        Review your estate plan.

        Ensure that you have adequate cash reserves.

        These are the big rocks. Remember, there is no such thing as a perfect plan. No matter how comprehensively you may plan, you will experience twist and turns as you move through retirement. Start with a solid plan that reflects your vision for retirement, refine it and make adjustments as you move along to have a secure and worry-free life in your golden years.

        It's time to live your dream retirement. You've earned it.

        About the author: Mitch Fryling, MA, CFP®, CIMA, RMASM , is a senior financial adviser at Capital One Investing, where he assist high net worth clients to and through retirement. He is also a member of the Estate Planning Council of Delaware and the Philadelphia Financial Planning Association.