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Financial Planning for Those Within 10 Years of Retirement

Folks closing in on retirement need to take a detailed look at their readiness, with the help of their financial advisers.

People closing in on retirement need to take a detailed look at their readiness. Issues such as their retirement lifestyle and how they will withdraw funds from their retirement accounts are front and center. Here are some financial considerations for those within 10 years of retirement.

Looking at all retirement resources: This is the time to look at all potential retirement resources to determine sources of retirement income. These might include Social Security, a pension, IRAs, employer-sponsored retirement accounts, stock-based compensation from an employer, taxable accounts and interest in a business.

Preparing a retirement budget: This is the time frame when advisers should be working with clients to create a retirement spending budget. What will the desired retirement lifestyle cost? This may change over time, but it's important to have a reasonably well-thought-out starting point against which you can benchmark progress.

Many pre-retirees are in their peak earning years at this stage of their careers. It's important that they continue to maximize retirement savings. This includes maxing out contributions to a 401(k) and other workplace retirement plans, contributions to IRAs, funding HSA accounts if they use a high-deductible health plan and saving in taxable investment accounts as well.

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Even though these contributions do not have the years of compounding available to them as they did when savers are in their 20s or 30s, retirement savings in the years leading up to retirement can add up and can serve to boost retirement savings.

Withdrawals from retirement accounts: This is an area where getting good advice is critical, especially for savers with different potential sources of retirement income from both taxable and tax-deferred accounts. Having a withdrawal strategy that helps determine which accounts to tap and in which order can help make assets last a bit longer in many cases.

One aspect where this is crucial relates to taxes that may need to be paid on withdrawals from retirement accounts. Overall tax planning for retirement is important, withdrawals from retirement accounts, including required minimum distributions are a key component of a good retirement plan.

Claiming Social Security: When to claim Social Security benefits is another key retirement decision. There are a number of factors to consider, including whether a person plans to be working into their 60s, and whether they are married, single, widowed or divorced can also come into play. Their health situation and their thoughts on their potential longevity are factors as well.

Healthcare costs: Healthcare costs in retirement continue to increase and have become a major expense item for retirees. It’s important to take these costs into consideration in their retirement planning.

In their latest study, Fidelity Investments pegged the cost of healthcare in retirement for a hypothetical couple, both aged 65 and retiring in 2019, at $285,000. This is up from $280,000 in their 2018 study and up from $245,000 in their 2015 study. Even with the relatively small increase from 2018 to 2019, this is still a very significant cost in retirement and must be factored into any retirement readiness projections.

Those who are retiring early may have the added burden of needing to find coverage to bridge the gap between their employer’s coverage and Medicare eligibility at age 65. This coverage can sometimes be pricey, and this should be factored into any planning.

Doing a retirement projection: Financial advisers will want to take the factors discussed above and others that may be unique to a retirement saver’s situation into account and run a retirement projection. The goal here is to get an idea if sources of retirement income will be sufficient to support the desired retirement lifestyle.

Ideally this will be done early enough where the client can adjust if the answer is that they don’t appear to be on track. With 5 to 10 years left until they retire they still have some options. Perhaps this means they need to work a couple of years longer or perhaps they need to scale back their spending plans a bit.