It's common for people who are retiring to set their
retirement date in either the springtime or the early
summer. If you happen to be one of those lucky folks
who are going to retire this year, let me be one of the
first to say, "Congratulations!"
But before you start planning your retirement party,
make sure you do these four things if you're retiring in
1. Don't Leave Money on the Table.
As part of your employment, you may be entitled to
"matching" and/or "profit-sharing" contributions from
your employer to your 401(k) or other retirement plan.
Since you typically need to be actively employed on
the date the payment occurs to receive these funds,
make sure you understand these terms prior to setting
your final work date. You don't want to miss out on
For personal contributions, you may want to increase
your contribution percentage to help you reach your
annual maximum. Many employers cap the amount
you can contribute to your plan from each paycheck.
Since you may not be able to increase your
contribution rate to 100% for your last couple of
paychecks, you may need to instead increase your
contribution percentage long before you retire to max
Your pension benefits are calculated based upon your
earnings history. Consequently, you will want to align
your retirement date with the timing of your annual
compensation adjustment, because retiring before that
date could cause you to miss out on including another
year of higher compensation in your pension
On a similar note, it's important to understand the
timing and eligibility requirements for any bonus
payments you may receive. Most people are required
to be gainfully employed at the time the bonus is paid
in order to receive it. If you do happen to leave before
this date, you may be able to negotiate benefits as part
of your retirement agreement.
Unused vacation days are typically paid out as part of
your final paycheck. This can be a problem when you
have an exceptionally large amount of time off, as the
large lump sum could push you into a higher tax
bracket. If you are planning to retire near the end of the
year, take vacation time when you planned to retire,
which may enable you to push a hunk of your
remaining "vacation wages" into the next year and help
minimize the ripple effect from a large, one-time
2. Refresh Your Risk Profile
Retirement is a major turning point in your life. It's not
just the transition from full-time work to either part-time
or no work at all. It's also the transition from saver to
spender, where you face the reality of spending down
your retirement nest egg.
Given the run-up in the markets since 2009, your asset
allocation may be more heavily weighted in stocks than
you initially intended. Rebalancing your investments is
a good idea during your working years, but it's even
more critical to keep things in balance once you retire.
Since you'll be drawing down your savings to finance
your retirement, having too much of your portfolio in
riskier assets like stocks leaves you vulnerable to a
potential market downturn.
Before you rebalance, keep in mind that you may incur
tax liabilities and/or transaction costs, and rebalancing
does not assure a profit or protect against a loss.
3. Avoid Underpaying Your Taxes.
When you're working, your employer automatically
withholds taxes from your paycheck unless you opt out
to reduce (or increase) this amount. In retirement, the
opposite is true. By default, taxes are not withheld on
your retirement income. Instead, you must opt in to
have taxes withheld from your Social Security benefits,
pension benefits and IRA/401(k) distributions. If you
don't have taxes withheld, estimated tax payments
(federal and state) will likely become a necessary part
of your life.
Imagine you and your spouse are planning on having
$150K in retirement income ($50K of Social Security
benefits, $25K of pension benefits and $75K of
traditional IRA distributions). For federal taxes, you'll
need to pay about $5,500 every quarter ($22K
annually) in estimated tax payments. Failing to do so
will leave you with approximately $500 in
Opting in to have taxes withheld from your retirement
income will help you dodge penalties from late
payment on taxes and avoid the uncomfortable feeling
of writing large checks to the IRS.
4. Talk with Your Spouse.
It's worthwhile to have a good idea of how you're going
to spend your newfound free time in retirement. I've
met with many clients who gave me a "deer in the
headlights look" when I asked them what an ideal day
in retirement looks like both today and a year from now
(after the initial retirement buzz disappears). They
were unprepared for the prospect of converting 40+
hours "in the office" into 40+ hours of meaningful
At the same time, they also lacked a plan for spending
time with their spouse. After all, one or both of you
have regularly worked for the past several decades.
Retirement creates a brand new dynamic that removes
the element of scheduled separation. Instead, you're
going to be stuck (blissfully, I hope) with each other.
How will you spend that time? Volunteering? Working
around the home? Traveling abroad?
Creating a plan for staying busy that both you and your
spouse agree on will help ensure that your golden
years are sweet, not bittersweet.
The Bottom Line
Taking the plunge into retirement is a monumental
milestone. It's important that you're ready for it. Ask
yourself and/or your adviser the following questions to
help you evaluate your retirement readiness:
Do I have a robust understanding of my employer's
What effective (non-marginal) tax rate should I use
when setting up withholding on my retirement income
Navigating your retirement journey requires that you
and/or your adviser have confident answers to these
questions. If you lack clarity, I encourage you to seek
better guidance that ensures you are on track with your
financial plan and the pursuit of your long-term goals.
Copyright © 2017 The Kiplinger Washington Editors. All rights reserved.
Distributed by Financial Media Exchange.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.