I recently had a conversation with someone that was tired of their work and wanted to retire. I’ll call her “pre-retire”.

What did pre-retire want? Pre-retire was taking with me because she wanted to know if it was possible to retire. “Of course,” I said. “Anyone can retire.” That wasn’t the answer she was looking for. She wanted to ensure she could continue to live at her current lifestyle. Well, this makes the answer more difficult.

Question 1. Why are you retiring and what will you do in retirement? She was tired. Her body was sore. And, she was looking to free up time to do less physical intensive work in the community and on the golf course. I discovered she wasn’t necessarily trying to get away from work, but the physical pounding on her body. After retirement, I was assured she would continue to be engaged in family, society ands community. She is retiring to something, not from something.

Are you retiring to something? Consider what activities you will retire to.  

Question 2. Do the numbers work? After determining Pre-retiree was emotionally ready for retirement, is it necessary to determine if retirement is objectively possible given a desired lifestyle and current financial situation. In this case, she had accumulated enough resources in individual retirement accounts, after-tax brokerage accounts, her 401k, and a small annuity she had purchased many years ago that it was possible to retire at her current lifestyle. She also was expecting to begin social security at age 70 and begin receiving a small pension in retirement. These other sources of income reduce the demand on her portfolio.

This was received well and Pre-retiree’s attitude changed for the better immediately. Well, maybe I won’t retire right now, but perhaps within the next 12 months,” she said. “My body feels better already!”

Do the numbers support your lifestyle? If not, you can save more or change your lifestyle.

Question 3. Do you need to clean up your financial situation?  She has a couple of loose ends she felt she needed to clean up. Pay off the Heloc, sell one of her homes, pay off the primary mortgage, pay off the car, etc…

While these are not necessary, I’ve found many people wish to eliminate their debt at or near retirement. The feeling changes when you make mortgage and car payments while you are not actively brining in a pay check. You can argue it doesn’t matter, but my experience shows the “feelings” exist. Consolidating accounts, real estate, and some sort of downsizing goes a long ways towards simplifying your life.

Do you have financial clean-up to do? 

Question 4. Where are you retiring to? I mentioned Pre-retire was selling one of her homes. In her case, she was moving into what is currently one of her rental properties. Years ago she had purchases a home in expectation of eventual retirement. So, now that the time is coming she can downsize and move. I helped her estimate her moving costs, factor in her loss of rental income, and helped her begin thinking about life in a new state.

Believe me, once you are somewhere else your whole attitude and thinking changes. Trips to see family will change. Vacations and get-aways are different.

Where are you retiring to? What will life be like there? What things will change?

Question 5. Prepare your portfolio to support your retirement. While Pre-retiree was accumulating she portfolio, she socked money away into several accounts.  She didn’t have an advisor help her with the most tax-efficient investment strategy. But, she got to where she needed to get. Now, she is in a position to turn her portfolio into something that can support a retirement income stream. And over the next several years we will have opportunities to reduce her tax liability and increase her nest a bit more.

Ensuring her investments are well diversified and located in the proper account for tax purposes will add to her bottom line. Ensuring investments in the after tax account are tax efficient is a must to reduce taxes.  Ensuring tax inefficient investments are in her IRA eases the tax burden on the portfolio. Reconsidering the need for an annuity could save on unnecessary recurring fees.

The important years after retirement and before collecting social security may provide her with a few years in a low tax bracket. This can be an opportunity for Roth conversions. Roth conversions will reduce her total lifetime tax in two ways; paying income tax during low-tax years and reduce future RMDs when she may expect to be in a higher bracket after social security begins.

Additionally, she’ll want to ensure her monthly needs are met in a tax-efficient manner. And, that her portfolio is adjusted appropriately given her possible new tolerance and capacity for risk.

Conventional wisdom says you need to reduce risk in a portfolio when you get older.  However, Pre-retiree understands she may have 30 or more years of retirement and she could be expected to take some risk so she doesn’t unnecessarily spend down her portfolio. Or, have the markets take it down.

Is your portfolio ready to support your retirement needs in a way that maximizes risk-adjusted returns and minimizes taxes?

This is just a short list of a many things I spoke with Pre-retiree about as I helped her with her decision. We will be meeting again to discuss several other issues I raised; estate planning, insurance, etc… I hope this helps you on your life journey. The sooner you begin, the better off you’ll be. Hire a professional to get you going.

A side note, Pre-retiree didn’t ask these questions to her current broker. He doesn’t do these things. He isn’t a fiduciary.

Consider: Where do you want to be in retirement? With whom do you want to be? And, what will you be doing?

Be good, Dan