In order to be successful in retirement start early and count it down carefully.
10 Years Out from Retirement
When you get within 10 years of your target retirement date, it's close enough to be real. You can actually imagine retirement AND you have earned income with which to work right now. One of the best things to do at the 10 year point is to start building your retirement income machine. Identify the sources of income you will be spending in retirement. And look at the way the income will be taxed. The key is to avoid the trap of having ALL retirement income from tax-deferred sources like IRAs and 401(k)s. If this is the only income, there are very few deductions or exemptions to offset it and it's all fully taxed as income. With a little planning, you can spread this income out to other sources with more favorable tax treatment, such as: TAX-FREE Investments Certain investments provide income that is not subject to federal income tax or state income tax. With tax-free income, every $100 of income generated is $100 you can spend. That beats tax deferred distributions from an IRA that are often subject to 30% tax, so every $100 you take out is $70 you can spend. TAXABLE Investments Traditional investment accounts receive dividends and interest payments and pay tax each year. Dividends are taxed at a lower rate than regular income. When you sell investments that have grown in value, you pay tax on the growth, or capital gain. The capital gain tax rate is also lower than regular income. And, you can take money from a taxable investment account at any time for any reason without restrictions. This category includes rental property, like farmland, that will create rental income in retirement. Rental income is taxed as earned income in the year in which it's received.
5 Years Out from Retirement
Now things start to get serious. People begin to believe they will really retire and often they accelerate savings and pay down debt in anticipation. A great strategy to use at the five year mark is date specific investing. This involves setting aside money for income in the first years of retirement; in case of a market correction, your income is not affected. An independent fiduciary advisor is a great resource to help set up investments for this phase of your plan.
1 Year Out from Retirement
Now things get real. You can see your Financial Freedom Day on the horizon. A great exercise during this year is to track your monthly expenses. Keep records on necessary living expenses - these will continue into retirement - and on work related and one-time expenses that will not be part of retirement. This process will confirm your retirement budget and help you clarify how much income you will really need when retirement comes. Also, during the last year, you should consult with your employer on all the retirement benefits they offer. Be sure to understand your options. If you are retiring before age 65, consult with your independent fiduciary advisor about health insurance options that make sense for you as you transition between retirement and Medicare health insurance.
If you want help with your own retirement countdown, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.