The retirement countdown: Are you ready?

Key Points

  • Marcy Keckler, Vice President of Financial Advice Strategy at Ameriprise Financial, outlines some key steps to take as you plan for the years leading up to retirement.

  • While the majority of baby boomers have a plan in place to pay for essential and lifestyle expenses in retirement, 48% of working adults have not yet started this process.

  • The actions you take when you’re 10 years, 5 years or 1 year out from retirement can help ensure you’re prepared for life post-work.

One day you’re celebrating your work anniversary.  The next thing you know, you’re being toasted at your retirement party.

With each passing year, the hands on the retirement clock spin faster and faster. That’s why it is wise to set alarms — at 10 years, five years and one year out — to fine-tune investment strategies, buffer against market volatility and help ensure that life after retirement is more relaxing than taxing.

The majority of retired Boomers feel confident they’ll have enough money to last a lifetime, according to the recent Ameriprise Pay Yourself in Retirement1 study. That may be because 85% indicated they have a plan in place to pay for essential and lifestyle expenses. 

In contrast, while many of those still working have time to design their retirement income plans, nearly half haven’t started the process, according to the study.

A decade from retirement, you’re close enough to begin envisioning your post-work life yet flexible enough financially to reallocate your assets in ways that will optimize your retirement "paycheck." For example, having 90% of your savings in the tax-deferred bucket isn't wise for most investors.

"One of the problems we see is people putting all their money into the tax-deferred bucket — such as a 401(k) plan — and not taking advantage of other strategies that help spread out your tax obligations, such as a Roth IRA or Roth 401(k)," Keckler says. "If you limit yourself to a tax-deferred plan, when it's time to take distributions, generally there’s no capital gains, there’s no exemption, there's no exclusion — it's all fully taxed."

Your advisor can help you allocate your assets between tax-deferred, tax-free and taxable buckets in a way that makes the most sense for your needs and goals.

  • Tax-deferred: You pay no tax as your money grows in the account; generally, you will pay taxes on withdrawals of untaxed amounts. This bucket is where you'll find traditional IRAs, 2, 3 pension plans, 2 401(k) 2,4 plans and annuities.2
  • Tax-free: Investments and life insurance using after-tax dollars for tax-free growth. Income is generally not taxable if certain requirements are met. Items in this bucket include Roth IRAs, 2, 5 municipal bonds6 and cash value life insurance.5, 7
  • Taxable: In general, investments using after-tax dollars for taxable income, including capital gains when realized, interest received and dividends paid8. One advantage is liquidity, generally without restrictions.

"This is typically when people’s behavior changes," Keckler says. "All of a sudden, retirement is no longer a goal that's out past the horizon; it's right in front of you. People focus on paying down debt and boosting their savings."

According to Keckler:

  • 3 to 5 years away from retirement is the ideal time to implement a cash-flow strategy, such as investing in items with specific maturity dates
  • Retirement is a moving target, but properly diversifying and tax-diversifying your assets can help protect against certain investment risks
  • It's important to get your first several years of retirement covered, so even if the market goes down, you won't have to draw on your long-term assets

In the 12-month countdown to retirement, it’s a good idea to lessen the mystery of what your lifestyle will soon be like and gain clarity on your post-work living expenses. Keckler recommends running two sets of books — each with its own credit card and checking account — to quantify two types of expenses.

  1. The first is essential expenses that will continue in retirement.
  2. The second is lifestyle expenses that are typically one-offs.
"After doing that for a year, you should have a good idea of how much income you need to take care of the essential expenses while having some extra for lifestyle expenses that are going to pop up," she says.

Ask questions

Finally, Keckler highly recommends meeting with your company's HR representative and asking specific questions. If you have any type of pension or deferred compensation arrangement or stock options, explore your options for drawing income.

You'll also want to look at distribution choices for your 401(k) and what, if any, benefits you'll take with you when you retire, including health insurance. If you’re not yet 65 and Medicare-eligible, there’s going to be a gap in coverage that you’ll need to cover.

Key planning tips to discuss with your Ameriprise financial advisor

Here are additional financial planning moves to discuss with your advisor at key milestones during your countdown to retirement.

10 years out:

  1. Make a concerted effort to ramp up savings. Your window for "socking away" cash is beginning to narrow.
  2. If you have school-age kids, now's the time to put money away for college (or pay off education loans if they have already graduated).

5 years out:

  1. Continue fine-tuning your tax strategy.
  2. If you haven’t maximum-funded your retirement plan up to federal limits, begin doing so.
  3. Pay down unsecured debt such as credit cards.

1 year out:

  1. Give some thought to which income sources you want to draw on first, second and third.
  2. Determine whether you'd like to take or delay Social Security benefits.
  3. Work with your advisor to manage risk in your portfolio.

The Ameriprise Pay Yourself in Retirement study1 showed that those who have worked with a financial advisor are more confident and more comfortable with their retirement income. "Retirement isn't necessarily a do-it-yourself project," Keckler concludes. "Most people are going to retire once, but an experienced advisor has helped hundreds of people plan for their retirement."

"Most people are going to retire once, but an experienced advisor has helped hundreds of people plan for their retirement." - Marcy Keckler, Vice President of Financial Advice Strategy at Ameriprise Financial