Nearing Retirement? 5 Must-Do Steps

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Are you within a few years of retirement? It's time to get your financial house in order. Here are five must-do items to take care of now.

Take a look at all of your company benefits. Your 401(k) might be your biggest benefit, but there may be others. Can you continue medical or other insurance? Are there other benefits that you can continue at reduced group rates? In the case of your 401(k), you need to determine if you want to leave it with your soon-to-be-former employer, roll it into an IRA, or take a distribution. The last choice will likely result in a hefty tax bill, so this is generally not a good idea for most folks. Do you have company stock options that you haven't exercised? Check the rules here. Speaking of company stock, there are special rules called net unrealized appreciation to consider when dealing with company stock held in your 401(k).

Take a look at any pensions from current or former employers. Depending upon the rules of the plan, you may have several decisions to make with regard to your pension benefit if you are covered by one. Do you take the benefit immediately upon retirement, or wait? This will depend upon the plan rules and your need for the money. In some plans the benefit may be greater if you wait until age 65. Additionally, some plans allow you the choice of taking an annuitized lifetime benefit (a monthly check) or taking a lump-sum payout. This decision should be made in the context of your overall financial situation and your ability to effectively manage a lump sum. Also, as this lump sum would be taxable, it is generally advisable for you to roll it over into a tax-deferred account such as an IRA. Lastly, if you have earned a pension benefit from a former employer, be sure to contact your old company to get all of the details and to make sure they have your current address and contact information.

Determine your Social Security benefits. The main decision is when to start taking your benefit. While you can start at age 62, there is a significant reduction versus waiting until your full retirement age. Further, if you wait until after full retirement age your benefit increase until age 70. If you are married the planning should involve both spouses' benefits. There are a number of sophisticated strategies surrounding couples and whose benefits to take when so planning can payoff for you here.

Take stock of all of your retirement financial resources. Many pre-retirees suffer from financial clutter. They have several old retirement plans from previous employers in IRAs or still in an account in the old plan. Their spouse has several old retirement plans. They each have a 401(k) with their current employer. There might be IRAs, a variable annuity, taxable investments, stocks, bonds, mutual funds, etc. There is a lot of financial "stuff" but it isn't organized into a coherent portfolio. It is vital that you take the steps to consolidate accounts and to get a handle on what you have and how and where it is invested.

Determine how much you will need from all sources to support your retirement lifestyle and compare this with your projected retirement income. While this might seem intuitive you'd be surprised how many pre-retirees within a few years of retirement haven't done this. Specifically look at your Social Security, any pension payments, any part-time income from work, consulting, etc. Compare these with the amount that you project that you will need to support your lifestyle on a monthly basis to determine how much you need to take from your various investment accounts, both taxable and tax-deferred (IRAs, etc.). If this gap amounts to more than 4 percent of your nest egg (as a quick rule of thumb) you may need to reassess your lifestyle needs or possibly plan on working a bit longer.

This is a very cursory "checklist" for pre-retirees within a few years or less of retirement. This might be a good point to engage the services of a fee-only financial advisor if you've never done a financial plan, or if your plan is out of date. Retirement can be a great stage of life, but proper planning is required to help ensure your success.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.

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