Retirement transition planning begins a decade before you retire. There are vital steps every future retiree should take during this period to ensure a transition into the retirement they envision.

At Pleasant Street Wealth Advisors, we believe retiring isn’t one step; it is a process. We help our clients to think it through, plan for it, and when the time comes, we find many of our clients experience the retirement transition smoothly without being overwhelmed.

In this blog, we will highlight the most important milestones and a rough timeline of when to tackle them. This blog is a supplement to our Retirement Red Zone Playbook if you have not read that I recommend you do.

Ten years out:

We start taking a high-level view of your retirement. Talking with clients about how they plan to spend their time and discussing it with spouses and family members to ensure expectations are aligned.

In 2020, those age 50 and older can contribute an additional $6,500 to 401ks, an additional $1,000 to IRAs and HSAs. These catch-up contributions do two things for our clients. First, they turbocharge retirement asset growth.

Second, they get clients to start taking a harder look at their budget and cash flows. We are always encouraging our clients to manage their debt carefully. If the household has unnecessary debt, this is the time to buckle down and plan to address it. The smaller your liabilities are, the more flexibility you will have in retirement.

According to the Department of Health and Human Services, 70% of people over age 65 will require long-term care. The earlier you purchase this type of insurance after the age of 50, the more cost-effective it is likely to be. We encourage clients to consider LTC coverage as they approach age 50, and as any dependents become independent, we advise clients to consider establishing Health Savings Accounts.

As soon as clients have a mutually agreed-upon retirement lifestyle plan with their spouse or loved ones, we encourage them to “try it out.” Meaning, take vacations and spend time doing the things you plan to do in retirement. If you plan to relocate, start vacationing in potential retirement destinations. We have found that by doing this, our clients continue to refine their plans and expectations, leading to more happiness and satisfaction when they eventually retire.

To Do: Ten Years Before Retirement

  1. Envision your retirement, and share it with your loved ones.
  2. Plan to make catch-up contributions.
  3. Consider evaluating Long-Term Care Insurance.
  4. If you still have excess cash flow, reduce debt.

Five years out:

At this point, it is appropriate to work out your retirement transition plan in more detail. If you do not work with a financial planner, this is the time to engage with one to address several technical aspects of your plan.

Since 1970, per capita, health care costs have risen nearly 500%, according to Kaiser Family Foundation. Medicare will cover some costs, but depending on your circumstances, you may want supplemental coverage. It is a best practice to make sure your retirement date lines up with medicare coverage. We also want to review medicare costs and plan how to fund those costs with Health Savings Funds, social security, or retirement account distributions.

During their working years, most people are overweight stocks. As you approach retirement, it is smart to reduce stock exposure and even build cash reserves. While you are working, you have many years to ride out bull markets. However, as the retirement date approaches, a bear market can throw a wrench in your retirement plans forcing you to make sacrifices. Experts suggest having a full year’s worth of expenses in cash is a best practice. If the market experiences a downturn, you will be protected and be in a position to benefit.

According to the Employee Benefit Research Institute (EBRI), on average, retirees spend 80% of what working households spend. However, studies show that more than half of retirees spend more in the first years of retirement pursuing long-delayed interests, relocating, and traveling. At the five year mark, we ask our clients to make a retirement budget, which we review with them and analyze actual income projections from social security, retirement distributions, and investment to ensure the budget is sustainable once they retire.

Again, we encourage our clients to be practicing their retirement lifestyle. Now that they have a retirement budget, we advise them to test it out when they are practicing being retired. Doing this allows us to continue refining and adjusting the plan to ensure we meet their goals.


To Do: Five Years Before Retirement

  1. Create a Health Care Plan.
  2. Begin Adjusting Asset Allocation.
  3. Create your first retirement budget.
  4. Practice the retirement lifestyle.

Three years out:

Now is the time to address some more significant retirement expenses. Moving them to pre-retirement will help keep you flexible in those first years of retirement.

We encourage our clients to make major retirement purchases while they are still employed. While it may seem counterintuitive, replacing or repairing long lifespan items such as houses or cars ahead of retirement reduces the spending increase in the first years of retirement. It is more of a cash flow consideration once you are in retirement on fixed resources.

Similarly, if our clients are planning to downsize or relocate, we will start working with professionals to facilitate those transactions before the actual retirement date. In the case of a relocation, we may want to explore a 1035 exchange on primary residences or other advanced tax strategies that may require additional planning and time to execute.

For clients who are looking to turn a hobby into a business or work part-time in retirement, we advise they explore any training or certifications they might need now. By doing this, you are getting any costs out of the way before being retired, and it provides the client more time to practice that lifestyle.

To Do: Three Years Before Retirement

  1. Consider major retirement purchases.
  2. Create downsize and relocation plans.
  3. For people planning to work or career change in retirement, explore training or certification programs.

Two years out:

Now is the time to start tackling specific tasks on a granular level.

By this point, you should have a good idea of your budget. Now we want to refine it further, breaking out essential vs. discretionary spending. With a clearly defined budget, your advisor can create your retirement income plan. It is time to review the income plan and tax efficiency. Two years before the retirement transition is a time to consider asset relocation, such as doing sequenced Roth Conversions in the early years of retirement. If there are cash flow shortfalls, this is the time to buckle down and figure out how you will close that gap, or do you need to push for retirement for a short period?

Two years from retirement is also the time to review your estate plan. There are not likely to be significant changes to your assets. We ask our clients to review beneficiaries, update wills, review power of attorney, and health care proxies.

To Do: Two Years Before Retirement

  1. Finalize your retirement budget.
  2. Review cash flow.
  3. Review income plan tax-efficiency.
  4. Review Estate Plan.

One year out:

The plan has been refined and reviewed, and you should be confident in your choices. At this time, we are focusing on creating a seamless retirement transition.

We advise our clients in retirement to have one to two years of expenses in cash-like investments such as CDs or short-term bond funds. By doing this, our clients are protected from a down market in the early years of retirement, throwing off the plan they have worked so hard to build.

In this last year of working, we want our clients to get organized. Meet with HR confirm any benefits such as pensions, or unused sick days, collect plan documents, centralize accounts. Keeping things organized will help ensure a smooth transition.

Pre-retirees with employer stock in their qualified plans may want to consider taking advantage of net unrealized appreciation planning to reduce taxes.

To Do: One Year Before Retirement

  1. Set Cash Reserves.
  2. Collect documents.
  3. Centralize accounts.
  4. Review Employer Stock.

1st year of retirement:

By now, you should be enjoying your life in retirement and the fruits of your labor. Throughout retirement, it is essential to keep an eye on your asset allocation and cash flows. The early years of retirement are the time to start executing on any asset relocation strategies you had planned.

To Do: First Year of Retirement

  1. Enjoy retirement!
  2. Execute asset reallocation plans.

As financial planners, we are advocates for approaching all major events systematically. This system works well for us and has helped many clients achieve their retirement dreams. We hope it can help you better understand the steps you should be taking as you prepare for your retirement.

Working through this plan with a professional can help emotionally, as a sounding board and devil’s advocate for plans. They can also guide with the more technical aspects of retirement planning, such as explaining health care planning and assisting with tax planning.

We would love to help you! 


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