Retire Calendar

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Most of the retirement coverage you see has to do with creating a long-term plan for retirement, but what about when you're almost there? Specifically, transitioning from working, saving, and investing to retirement can seem like a daunting task -- but it doesn't need to be. We asked four of our contributors for some of the smartest pre-retirement moves readers can make, and here is what they had to say.

Jason Hall: Maybe one of the smartest moves pre-retirees can make is to start transitioning to their post-retirement spending a year or more before actually retiring.

Obviously, there are some things you won't be able to adjust, like dry cleaning and gas if you wear a suit and drive a lot for work, but there's little reason you can't go ahead and start cutting your non-work related expenses today.

Not only will this give you a chance to "reality check" your lifestyle expectations before your income falls in retirement, but it'll give you a chance to find that out before your income drops, and to start figuring out how you'll make ends meet if you can't make the cuts you were expecting.

At worst, you may end up working longer than you expected, but it's a lesson you'll be glad you learned before you retired. At best, you'll find out that you'll have more than enough to retire comfortably, with plenty to spare. 

Matt Frankel: As Jason said, one of the smartest things you can do is formulate a realistic budget and make sure you can actually survive on it before you retire. Once you've done that, your next step should be to figure out where that money is going to come from.

Make sure you know how much to expect from Social Security, which you can figure out relatively easily by registering on www.ssa.gov. Also bear in mind that your monthly benefits will be reduced from your full retirement amount by 6.7% for each year you retire early (5% beyond three years), but they can be increased by 8% for every year you choose to wait, up until age 70.

To illustrate this, let's say your SS benefit at full retirement age is expected to be $1,500 per month. Here's the impact early or late retirement can have:

If you retire at...

Your benefits will be reduced/increased by...

And, your monthly checks will be for...

62

-25%

$1,125

63

-20%

$1,200

64

-13.3%

$1,316

65

-6.7%

$1,400

66

N/A

$1,500

67

+8%

$1,620

68

+16%

$1,740

69

+24%

$1,860

70

+32%

$1,980

Also bear in mind that there are several strategies you and your spouse can use to maximize your benefits, such as the popular file-and-suspend strategy.

As a final piece of advice, once you figure out how much of your budget will come from Social Security, you should use some strategy when it comes to withdrawing the rest from your savings. Specifically, plan to tap your ordinary (taxable) brokerage accounts first, then your 401(k) or traditional IRA, and any funds you have in Roth accounts should be tapped last in order to maximize the benefits of that account type.

Adam Galas: One of the smartest things you can do to ensure a prosperous retirement is to transition your portfolio to a diversified, high-yield, dividend growth portfolio.

That's because the famous "4% drawdown rule" is based on the work of CPA William Bengen, who conducted a study in 1994 that, based on the market's historical returns and assuming an initial portfolio value of $1 million, found that a 60% stock and 40% intermediate government bond portfolio should allow one to withdraw 4% of your portfolio without even running out of money. That's because the increasing value of the stocks would replace the funds withdrawn each year.

In 2008, a study by Jack Gardner found that, between 1968 and 2007, the highest yielding stocks of the S&P 500 outperformed the overall index by 28% per year while returning 43% better risk-adjusted returns.

Mr. Bengen was so impressed with the results of this study that he revised his famous rule of thumb to a max safe 5% annual draw down -- if one's portfolio consisted of high-yield dividend growth stocks.

The difference between a 4% and 5% max safe draw down may not seem like much, but on a $1 million retirement portfolio, that amounts to an extra $10,000 per year, or $833 per month. That's the equivalent to a 68% increase in the average social security check, and it can greatly increase your standard of living during your golden years.

Selena Maranjian: As you approach and enter retirement, give some thought to buying a fixed immediate annuity, which offers you peace of mind by guaranteeing a set income for the rest of your life (assuming the insurance company remains solvent -- which is why you should only buy from top-rated companies).

Annuities come in a variety of forms -- immediate vs. deferred (paying you immediately vs. starting at some point when you're older), fixed vs. variable (certain payouts vs. payouts tied to the performance of the market, or part of the market), lifetime vs. fixed period (paying until death vs. paying for a certain span of time), and so on.

Immediate or deferred fixed annuities are well worth considering, while indexed annuities and variable annuities are more problematic, often charging steep fees and/or carrying rather restrictive terms.

An immediate fixed annuity can provide you with monthly checks to live off of for the rest of your life. As an example, $100,000 can buy a 65-year-old man about $566 per month, or $6,800 per year. A $300,000 purchase can generate about $20,000 annually. Combine that with Social Security (the average monthly benefit was recently $1,336, or $16,000 per year), and your financial future can start looking more secure.

Note that annuities can be structured in many ways, such as offering inflation protection (in exchange for lower benefits) and spousal benefits. Your payments will be higher if you're older when you buy or if interest rates rise.

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