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All-in-One Retirement Checklist by Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research December 5, 2006
Reprinted from the November 16, 2006 issue of Schwab Investing Insights®, a monthly publication for Schwab clients.
The retirement of your dreams doesn't just happen; it takes planning and hard work. But it doesn't have to be overly complicated or fretful either. That's why we created this easy-to-use checklist, to help you focus on the key decisions you need to make at each stage in the process. Here are the critical milestones along the road to the retirement of your dreams, and what you need to consider as each approaches:
Now
Create a savings and investment plan. The sooner you start, the better. Decide on an appropriate portfolio asset allocation you can live with over the long haul, no matter what the market does in the short term. Set reasonable investment return expectations and allow room for some year-to-year volatility in your long-term planning and projections—don't assume a constant annual rate of return from year to year.
Save as much as possible. If you're in your twenties, for example, try to set a savings floor of at least 10-15% of your pre-tax income. That percentage goes much higher the longer you wait to start saving. Take advantage of available employer plans, especially if there's a matching contribution. Put extra savings into a deductible traditional IRA or Roth IRA, if you're eligible. If you can save even more after that, put the excess into your taxable brokerage account. See "How Much Should You Save for Retirement? Play the Percentages" on schwab.com/marketinsight for more.
Don't stop thinking about tomorrow. Living below your means now has a twofold benefit—you're saving more toward a smaller retirement portfolio goal, since you won't have to support a more extravagant lifestyle later on. On the other hand, spending every last dime now carries a double whammy—you become addicted to a lifestyle you won't be able to support in retirement.
Revisit your retirement plan annually. Don't just monitor your portfolio's investment performance—also monitor your ability and willingness to save.
Ten years to go
Start thinking in detail about when, where, what and how much—when you want to retire, where you would like to live, and what you want to do. The answers to these questions will help you to figure out how much all of it will cost. Assume you'll want to at least maintain your pre-retirement lifestyle, then shoot for a portfolio that's roughly 25 times bigger than your estimated first-year spending minus other sources of income. See the example below and check out "Retirement Spending: The 4% Solution" on schwab.com/marketinsight. If you're thinking of moving, be sure to consider such things as local taxes, housing and living costs, health care resources, part-time employment and/or volunteer opportunities, and other community amenities, such as recreational facilities and social clubs.
Share your retirement dreams with your spouse—you may be dreaming of fly-fishing right next to your retirement home in the mountains every morning while your significant other is thinking about a downtown, high-rise luxury condo.
Reduce your borrowing. Pay down all high-cost, non-deductible debt. Consider whether it makes sense to accelerate your mortgage payoff.
Think about long-term care insurance. If it makes sense for you, don't wait too long to lock in lower premiums.
Increase your savings. As your salary increases, so should your retirement contributions. Max out on tax-advantaged retirement accounts and take advantage of catch-up provisions. If you can, consider saving more in taxable accounts.
Five years to go
Continue to refine the "when, where, what and how much" of your retirement plan. Create a retirement cash flow budget. Determining how much cash your portfolio will generate in retirement income can help you determine how much cash you will need from other sources.
Investigate retirement health care insurance options. Medicare won't cover everything. Check out supplemental insurance early.
Revisit your asset allocation and start thinking about a portfolio withdrawal strategy that incorporates all income sources and won't deplete your portfolio prematurely. For help with which investments to sell in retirement, from which accounts—taxable or tax-deferred—and when, see "Generating Cash Flow from Your Retirement Portfolio" on schwab.com/marketinsight.
If you're not on track, be realistic about your options—you can save more now, postpone retirement and/or spend less or work part-time in retirement.
Two years to go
Fine-tune your retirement budget. List sources of income and expenses in as much detail as possible. Separate expenses into two categories—discretionary and non-discretionary.
Review your asset allocation and further refine your withdrawal strategy. Managing your portfolio for sustainable cash flow during your lifetime can be complex. Sit down with your investment and tax professionals if you need help.
Create a "short list" of desired retirement locations and then plan a tour. Check out the retirement location of your dreams in both summer and winter.
Last 12 months
Finalize your cash flow budget and your strategy for how you will take cash out of your portfolio.
Get up-to-date quotes for health insurance and find out how it works with Medicare (including prescription drug coverage).
Review any existing insurance policies, including life, property, casualty and liability insurance, to be sure you're not paying too much for the wrong kind of coverage.
Check up on your Social Security benefits. You should plan on filing for Social Security three months before you expect to receive your first check (you'll need to sign up for Medicare three months before your 65th birthday if you're not already receiving Social Security by then). See "When Should You Take Social Security Benefits?" below.
Give notice to your employer at the appropriate time. Ask about what you need to do to trigger any benefits you're entitled to, including arrangements for direct rollover of your retirement account balances to your IRA.
Consider consolidating accounts to help simplify your financial life going forward.
In retirement
Review your budget annually and combine your cash flow planning with your portfolio rebalancing. It's a good idea to set aside the cash you'll need for the next 12 months by removing it from your portfolio. In addition to interest and dividends, you could generate any additional cash you'll need as you rebalance by selling those asset classes that have appreciated the most (or depreciated the least, as the case may be). Keep at least another two to four years of withdrawals in short or ultra-short fixed income investments as part of your portfolio allocation.
As age 70½ approaches, don't forget you'll need to start taking required minimum distributions from your traditional IRA. You have until April 1 of the following year to start, but that means taking two distributions in the first year.
Continue to monitor your investment performance and, in addition to rebalancing annually, think about periodically shifting your strategic asset allocation as time goes by. For example, you might start out with a moderate allocation of 60% stocks, 35% bonds and 5% cash in your sixties, shift to a moderately conservative allocation (40/50/10) during your seventies, and then shift to a conservative allocation for your eighties and beyond (20/50/30).
Be sure to stay well diversified within each asset class as well—that means reducing exposure to any single investment, such as the stock of your ex-employer.
Periodically review all the categories of your insurance coverage.
Be sure your estate and gifting plan, account titling and beneficiary designations are up to date.
Finally, don't forget to enjoy the best time of your life. You've earned it! Check off your milestones as you reach them, and talk to a Schwab consultant for help along the way.
When Should You Take Social Security Benefits?
Even though you can start as early as age 62, consider waiting as long as you can, if you're healthy. The benefit keeps rising up to age 70, beyond which it makes no sense to wait.
Important Disclosures This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinion are subject to change without notice. The Schwab Center for Investment Research® is a division of Charles Schwab & Co., Inc. All charts and research have been compiled from publicly available, proprietary and/or licensed data. Past results are not indicative of future performance. Diversification and asset allocation do not eliminate the risk of investment losses.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.
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