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Nearing Retirement

It's time to take a careful look.

As you get closer to retirement, it becomes even more important to be realistic about your savings strategy and goals. By taking a close look now, you can make changes to help you stay on track for the long term. Then when you reach retirement, you'll be ready to enjoy it.

Use the following checklist, and read on for more insights on how to prepare for the next phase.

Review your monthly income and expenses to see where you stand.

Now's the time to take a close look at your income and expenses and develop a realistic retirement budget.

What you'll spend in retirement depends on several things. For instance, where will you live? Will you have a mortgage or pay rent? How much will medical insurance and health care cost? Answering these questions will help you create your budget.

Here's a simple way to get started:

First: Start by adding up your anticipated monthly expenses. Be sure to factor in taxes and extras such as long-term health care and financial responsibilities to children or elderly parents.

Then: Separate these expenses into two groups: essential (housing, taxes, food, clothes, utilities, transportation, health care, and insurance) and discretionary (travel, gifts, and high-end entertainment).

Next: Tally up all sources of income other than your portfolio, such as Social Security, pensions, salary, or real estate.

Finally: Subtract your anticipated expenses from your anticipated income to see how realistic your budget is.

If you're coming up short, you can ramp up your retirement savings plan and find ways to save more.

Create a retirement income plan to be sure you're financially ready.

As mentioned above, your income in retirement will most likely come from several sources, including your portfolio. So how big does your portfolio need to be?

After factoring in taxes, inflation, and a realistic rate of return, the Schwab Center for Financial Research has developed a simple formula. It suggests that you aim for a portfolio 25 times larger than the amount you plan to spend in the first year of retirement, less the income you expect from other sources.

Here's how that might look:

Calculating your retirement needs
Total first-year spending goal (including taxes) $40,000
Less Social Security ($15,000)
First-year withdrawal $25,000 x 25
Retirement portfolio target $625,000

Set aside cash to cushion against bear markets.

If you create an adequate cash cushion, you won't be forced to sell your longer-term investments at the wrong time to generate cash. To make sure you're prepared to weather a bear market, it's wise to do the following:

Set aside enough cash to cover your expenses for at least 12 months in a liquid savings account.

Keep an additional two to four years' living expenses as part of your fixed income allocation if you can. Consider ultra-short-term or short-term investments, longer-term CDs, or a deferred fixed annuity.

Decide what to do with any 401(k) balances and pensions.

If you still have assets in a 401(k) or other employer-sponsored plan from a former employer, consider whether you might benefit from consolidating them into a Rollover IRA for greater flexibility and easier management. A Rollover IRA can provide access to a wider variety of investment choices than most employer-sponsored plans provide, including mutual funds, stocks, bonds, and CDs. It also allows you to maintain the benefit of tax-deferred growth potential. Having all your retirement assets in one place makes it easier to monitor investment performance, rebalance as necessary, and plan for your income needs. When the time comes to take required minimum distributions, it will generally be easier to calculate them.

Whether a Rollover IRA is the right choice for you depends on your personal situation. You should consider all of your available options, which may include the following: keeping assets in your former employer's plan, rolling over assets to a new employer's plan, or taking a cash distribution (taxes and possible withdrawal penalties may apply). Before you make a decision, be sure to understand the benefits and limitations of each option and consider factors such as differences in investment-related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances. For more information, go to

Think about when to start taking your Social Security benefits.

You have three options for when to take Social Security. You can:

  • Take it as early as age 62;
  • Wait until what the IRS designates as your "full retirement age" (between 65 and 67, depending on when you were born); or
  • Wait as late as age 70.

If you take it early or late, you have to weigh a number of factors, including certain penalties and credits that can affect the amount of your Social Security check.

Important considerations.

If you begin taking benefits before your full retirement age, your monthly check will be reduced by as much as 25%. That reduction is permanent for as long as you collect Social Security. The plus side, however, is that you'll receive checks for a longer period of time.

If you take Social Security before your full retirement age and you're still working, your benefits will be reduced by $1 for every $2 you earn above the annual limit ($15,720 for 2016). In the year you reach your full retirement age, $1 in benefits will be deducted for every $3 you earn above a higher limit ($41,880 in 2016). Starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn.

If you postpone taking Social Security past your full retirement age, your benefits go up by 8% for every year you delay until age 70. You'll get bigger checks—but for a shorter period of time. Past age 70, there's no added advantage to waiting.

Unsure about when you should begin taking Social Security payments? The Social Security Administration has several tools that can help you decide what makes the most sense for you. In general, if you are in good health, it's best to wait as long as you can (up to age 70) to start collecting benefits.

Social Security and taxes.

Your Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). As your MAGI increases above a certain threshold (from earning a paycheck, for instance), more of your benefit is subject to income tax, up to a maximum of 85% of your benefit (see below). For details about taxation of your benefits, see IRS Publication 915.

For more information on Social Security, including your annual Social Security statement, go to Get the facts before you make your decision.

Get information on supplemental health insurance options.

Medical insurance is a must at every stage of life. At age 65 you'll be eligible for Medicare, but you still have to factor in the cost of a supplemental health insurance policy and prescription drug coverage. You have the following options:

  • Medigap policies are standardized policies offered by private insurance companies. The policies must follow federal and state laws and be clearly identified as "Medicare Supplemental Insurance." However, costs can vary, so it's a good idea to carefully compare plans.
  • Medicare prescription drug coverage is insurance that covers both brand-name and generic prescription drugs at participating pharmacies in your area. This coverage is in addition to your Medigap policy, and it can help protect you against unexpected drug costs. Once again, there are a number of plans to choose from, so it's wise to comparison shop.

You can find out more about these plans and much more pertaining to healthcare at

Develop an estate plan.

It's wise for everyone to begin the estate planning process as early as possible. An estate plan is important for a number of reasons, including that:

  • It helps to ensure that your money and other assets go to the people you choose. If you don't have a plan, state laws will determine your beneficiaries.
  • It specifies who will care for your minor children if you become unable to.
  • It may be able to minimize estate taxes and other transfer taxes.
  • It can help you avoid the costs, publicity, and delays of probate and the legal process used to value your estate, settle any debts, pay taxes, and transfer assets to your heirs.
  • It helps to ensure that you and your affairs are taken care of in the manner you wish if you become incapacitated.

An estate plan can also be crucial to family harmony. By handling your estate plan now, you can help avoid surprises later.


The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner, or investment manager.

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