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Ready to retire? Here's a pre-flight checklist

3 questions to help you determine if you're on the right track.

  • By Anne Tergesen

The Wall Street Journal - 12/08/2017

You're getting close to retirement. You may have even decided where you want to live and what you want to do with your time. But do you have a financial plan to make it work?

Here are three questions to consider before leaving a regular paycheck behind.

1. Have I saved enough?

With some simple math, it's possible to assess retirement readiness without resorting to online calculators that produce "dramatically different results," says Wade Pfau, a professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa.

The first step is to go to the Social Security website (https://www.ssa.gov/myaccount/) to get an estimate of how much income you will receive. This tells you what your monthly payout is likely to be if you claim benefits at 62, 70 and full retirement age, which is 66 for those born between 1943 and 1954. (The benefit will be lower if you claim before full retirement age and higher if you claim after.)

Also, ask current and past employers for an estimate of any pension you are eligible to receive. If you suspect you may have left a pension behind at a previous employer that's defunct or changed its name, free help is available from sources including the Labor Department and the Pension Benefit Guaranty Corp.

Then figure out your retirement spending needs, including taxes and premiums for Medicare Parts B and D, which cover doctor visits and prescription drugs, respectively.

If you aren't sure what you might spend, use the 80% rule. It assumes that retirees can get by on about 80% of what they earned while working because they no longer need to commute or save for retirement and frequently wind up in a lower tax bracket. Using the rule, a couple with a $100,000 annual income would need a retirement income of $80,000.

The next step is to deduct from that $80,000 your expected Social Security and pension benefits, plus guaranteed income from any annuities you have. If you are entitled to $35,000 a year in Social Security but nothing from a pension or annuity, for example, you would need savings to supply the remaining $45,000.

Mr. Pfau suggests dividing that $45,000 by 4%, which represents the 4% "safe" inflation-adjusted withdrawal rate that historically has ensured U.S. retirees a high probability of never running out of money. The result, $1.125 million, is the amount you will need. (With stocks at records and bond yields low, M. Pfau says it may be safer to use a 3% withdrawal rate.)

2. When should I claim Social Security?

You can claim benefits starting at 62. But because the payout rises about 5% to 8% for each year in which you delay until 70, those who claim early frequently reduce their lifetime benefits, says William Meyer, chief executive of SocialSecuritySolutions.com, which identifies claiming strategies likely to yield the highest amount over a beneficiary's life span.

For couples, the claiming decision can be especially complicated due to spousal and survivor benefits. For instance, an individual who is currently 64 or older and first claims Social Security at his full retirement age can elect to receive a benefit based on a spouse's earnings record first and switch at some future date to his own benefit, which will have grown larger thanks to his delay in collecting it.

Online tools can help you figure out how to make the most of your options. Skip the free ones in favor of ones that charge for customized advice.

3. Do I have a plan for drawing down my assets?

When spending retirement savings, the conventional wisdom calls for draining taxable brokerage accounts first, to give the money in tax-deferred 401(k)s and individual retirement accounts more time to grow, and leaving tax-free Roth IRAs or Roth 401(k)s for last.

A better approach, Mr. Pfau says, is to tap multiple accounts simultaneously to minimize taxes. To make it work, you will need either a Roth account or a taxable brokerage account with assets such as certificates of deposit or recently purchased bonds that won't trigger a capital-gains tax when sold.

The idea is to use tax-free withdrawals from these accounts to supplement taxable withdrawals from traditional IRAs and 401(k)s in order to stay within a lower tax bracket, says Mr. Meyer. Retirees with significant balances in traditional IRAs or 401(k)s may also benefit from deferring Social Security - until age 70 if possible - and living on their traditional IRAs and 401(k)s initially. The goal is to reduce the size of those accounts so that when required distributions begin at age 70, the retiree can remain within a lower tax bracket and escape the surcharges on Medicare premiums that kick in above $85,000 for individuals and $170,000 for couples. By waiting to claim Social Security, some retirees can reap another tax benefit. The formula that determines how much of an individual's Social Security is taxable counts traditional IRA and 401(k) distributions more heavily than Social Security income. So, by reducing required minimum distributions from these accounts, retirees may also reduce or eliminate taxes on their Social Security benefits.

Retirees in their 60s who expect their tax bracket to be the same or higher in the future may benefit from deferring Social Security to 70 and living on a taxable brokerage account. If the brokerage account can be liquidated without triggering much in the way of capital gains, the retiree will find himself in a low tax bracket. To take advantage of that low rate, he can convert money from a traditional IRA or 401(k) to a Roth IRA - and pay income tax to allow the money to grow tax-free. The key, Mr. Meyer said, is to keep the conversions at a level that won't push you into a higher tax bracket.

Copyright 2017 Dow Jones & Company, Inc. All Rights Reserved.

The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

Dow Jones & Company, Inc. and Fidelity Investments are independent entities and not legally affiliated.

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