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6 Steps to Take Now
If You Plan to Retire Soon

In order to retire comfortably with enough savings to have enough income for a comfortable retirement you must plan ahead. Ideally you have taken all these steps well ahead of time and this guide is just a refresher. However, if you plan on retiring soon (especially within the next 5 years), it is still not too late to assess your retirement readiness and take some steps to improve your retirement outlook.

Your Retirement Dream 

Most people look forward to the time when they can stop working and enjoy their “golden years”.

They envision having enough money not only to live in comfort, but ideally also to enjoy travel opportunities, spend time with children and grandchildren, and perhaps even leave a long-term legacy for charitable causes and beloved family members.

With proper planning and advice, almost everyone has a chance to meet these goals.  Unfortunately, for those who don’t, it is often because they didn’t know how to plan sufficiently or stick with their plan.

Whatever your age as you read this, and especially if you are planning on retiring soon, we suggest making time to review and prioritize the following six steps without delay.

Step 1
Assess Your Risk Tolerance

In order to construct and maintain a solid retirement plan, one of the first things to consider is an honest assessment of your tolerance for risk. Some investments are more risky than others. 

Risk is an intangible, however, and while academics substitute price volatility of an investment with its risk (because it is easy to measure risk quantitatively using this definition) others view risk as better defined by the probability of permanent capital loss on an investment.

Whatever your yardstick, different people have different risk tolerances based on factors such as their temperament, financial background, relative degree of wealth, and investment savvy.

For most people, having the right approach to mitigating excess risk for their given level of risk tolerance can include making sure that they have enough quality in their investments and diversification of investment assets so that they can still sleep well at night, even if the stock market declines, which it is certain to do from time to time during a long-term investment plan.

Here are a few questions to ask yourself:

  • What kind of investments and what level of loss might make you feel so uncomfortable that you might start to lose sleep?
  • Are you concerned about losing money in the short-term, even if temporary, or are you more worried about the long-term erosion of your purchasing power and trying to achieve some income and growth?
  • Have you saved and set aside an “emergency fund” to take care of unexpected events so that you can leave your long-term investments to work for you?
  • How much money could you lose without abandoning your investment plan out of fear?

Keep in mind, many people lack the time, expertise, or discipline to proactively evaluate their risk tolerance by themselves.  In these cases, consulting a good and knowledgeable financial professional such as Ridgewood Investment can go a long way towards helping you in this regard and potentially avoiding major problems down the road.

Step 2
Take Stock of Your Assets and Liabilities

Do you know your net worth? Do you own your home outright? Do you have any debt besides a mortgage? These are a few of the questions you’ll address when you take stock of your assets and liabilities (also referred to as your personal balance sheet or personal financial statement).  If you are not sure how to create one, a good advisor can guide you.

In a nutshell, your assets are the value of any investment accounts you have, plus any savings in bank accounts plus the value of your real estate and other real assets.  Your liabilities include all your debts and amounts owed, including mortgage debt, credit card debt, unpaid taxes, and other IOUs you may have.

Let’s break down your financial assets into three main categories: Retirement investment accounts and pensions; non-retirement investment accounts, collections and savings; and real estate, including your home, other properties, and any real-estate investment trusts (REITs) you may be invested in.

Determine the values of all your accounts and plans. These include Roth and traditional IRAs, 401-k accounts, 403-b accounts, and the expected value of your social security benefits and pension upon retirement.  Subtract any liabilities.  Pay attention to the mix of assets that are liquid, i.e. can be converted relatively quickly to cash versus illiquid assets that require much more time to produce spending power.

If you’d like to retire soon, your assets should obviously far outweigh your debts. In addition to financial assets, your health and income potential can also be considered an asset, albeit intangible, as well.  How much is enough?  It depends on your spending needs and how productive your investments can be in terms of generating income for you to live off of in retirement.

Step 3
Review Your Asset Allocation

You’ve looked at your risk tolerance and reviewed your assets. Now is the time to look at your asset allocation.  This is a fancy phrase that means the overall mix of what you are invested in and how much of your total is allocated into each category.

As in the case with risk tolerance, different people will be comfortable with a different investment mixes based on their varying goals, means, and constraints.

At the most basic level, your assets can be categorized into four broad groupings: Stocks, bonds, cash-equivalents and real estate. Typical questions you’ll evaluate here are:

  • Do I have the right percentage in stocks versus bonds?
  • Do I carry too much or too little in cash?
  • Have I diversified my portfolio into real estate?
  • Should I have a small percentage in less common assets such as gold, art, or timber?
  • Will my current mix withstand market declines and provide for foreseeable spending needs?
  • What risks do I need insurance for? This can include life, property, and health, and long-term care insurance.

Another important consideration is that asset allocation can and indeed often should be based on a dynamic and flexible approach - changing in response to both age and circumstances.

For example, a young person in their 20s or 30s just beginning to assemble a retirement portfolio may invest in stocks much more heavily that a person who is about to retire and start drawing upon their portfolio for income to live on.

Once again a competent financial advisor can be invaluable in assisting you to review these considerations with a trained and objective eye to help you determine an optimal asset-allocation plan for your specific situation.

Step 4
Confirm What You Expect From Social Security
and Pension Benefits

In addition to your own savings in tax-deferred and non tax-deferred accounts, you’ll want to check on the amounts you will likely receive from company pensions and social security. Fortunately, for both of these, it is generally easy to obtain an accurate estimate.

The Federal Social Security Administration provides estimates to workers every year. These estimates are usually based on your “normal” retirement age. You can also opt for somewhat reduced monthly social security benefits by opting to take your benefits a few years early.  Although, the monthly benefit may be somewhat lower, the payments start much earlier and so for many people, it often makes sense to start their benefits early, especially so since a dollar today is worth more than a dollar years from now.

Although uncommon, those who have a private pension benefit in addition to their social security benefit are fortunate.   In this case, you’ll especially want to determine if you qualify for an immediate pension or one that will be deferred.

Step 5
Understand Your Health Care Needs and Costs

As many know, health care costs are a significant expense in and through your retirement years.  Fortunately, medicare and supplemental gap coverage can fill much of this need in retirement.

So, what are the typical costs involved? One estimate suggests that a 65-year-old couple will require $250,000 for medical expenses in their golden years. Another evaluation indicated that over two-thirds of seniors figure they’d only need $100,000 or less. And this does not include the cost of long-term residential care, if required.

A discussion of strategies, including Health Savings Accounts and health and long-term care coverage are beyond the scope of this article.  However, we will be covering this topic in far more detail in future articles and guides for those who subscribe to your updates at ridgewoodinvestments.com/insights.

Step 6
Review Your Tax Situation

Taxes are something that cannot be avoided. However, with proper planning, taxes can be managed, reduced, and sometimes even eliminated by selecting the proper investment strategies and placing those strategies in the best corresponding types of accounts. 

For many people, when they retire they can expect that their incomes and marginal tax rates may go down. This could mean that you will fall into a lower income tax bracket than during your working years. Keep in mind, however, that future tax rates are unpredictable, especially if your retirement is more than a few years away.

In order to reduce taxes, consider using a Roth IRA or Roth 401K which can be an excellent vehicle for growing your retirement money and avoiding taxes on the growth of those assets.

In a Roth, all your withdrawals in most cases are free of taxes whenever you do need to start taking income from your investments.

Another thing to consider is your bond allocation. Many folks invest in municipal bonds because their dividends are free of most taxes. Just make sure you own them in a non-retirement account. Keep taxable bonds in your IRA and 401K where you won’t have to pay taxes every year allowing these bonds to compound free of taxes - perhaps for many years

Join our family of 200+ clients who trust Ridgewood.

One step can bring you a lifetime of benefits.

  • Increase your wealth without working harder
  • Protect those you love
  • Get your financial life organized
  • Free up your time
  • Take less risk and reach goals faster

Ridgewood Investments: Your Retirement Specialist

As you can see, there are many considerations to plan and opportunities to optimize as you approach retirement.

If you could use some guidance or maybe just a second opinion, consider reaching out to an advisor like Ridgewood Investments to help with your assessment of your “retirement readiness” and bring you the peace of mind that can come from putting your house in order.

About the Author: Kaushal “Ken” Majmudar, CFA

High Net Worth Financial Advisor New Jersey

Ken is the founder of Ridgewood Investments and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing.

Past results don't guarantee future performance. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Rebalancing involves selling some investments in order to buy others. Investors should keep in mind that selling investments in a taxable account could result in a tax liability. Diversification does not guarantee a profit or protect against investment loss.