Basketball great Kareem Abdul-Jabbar said of his process of transitioning from playing in the NBA to his retirement: “The transition was difficult. It’s hard to stop something that you’ve enjoyed, and that has been very rewarding.” It’s difficult to imagine any career more successful and fulfilling than his, so it makes perfect sense that the transition from the highly charged environment of the court to the more sedate pace of retirement would be a particular challenge.
Though not many of us will ever know the particular experiences of a world-renowned athlete like Abdul-Jabbar, many individuals with significant assets have enjoyed successful careers that have also been gratifying and rewarding; they, too, face particular challenges in making a smooth transition into retirement. Your five-year “glide path” toward retirement can be a particularly significant time; this is when most are making the important financial, emotional, professional, and lifestyle changes that help to manage this major life transition.
Shoring up Your Base
In the last five years before retirement, it may be especially helpful to pay special attention to current spending and income levels in order to maximize the amount you are allocating to your various accounts earmarked for retirement income. You are likely at or near the peak of your earning potential at this time, which means that it’s the perfect time to make those last projections and put away as much as you can into tax-favored and taxable savings and investment accounts. One of the greatest threats to maintaining sufficient asset levels during retirement is when retirees are required to draw down their accounts during negative market conditions—creating a “double whammy” for account balances. Boosting account balances in the years just prior to retirement can add an element of “insurance” to your asset base.
Fine-Tune Your Retirement Budget
In these last few years of your active working life, make sure that you’ve developed a budget for your retirement that accurately reflects your desired lifestyle, priorities, and most importantly, goals. Is the travel fund where it needs to be? Are your charitable and philanthropic plans, if any, adequately accounted for? Have you made a realistic projection of healthcare costs, along with a solid funding plan? Now is the time to work with your financial advisor to make sure nothing important is missing and that your cash flow projections can withstand many different possible market outcomes.
Tax Efficiency and Drawdown Strategy
Your planning for retirement should include close attention to maximizing tax-deferral opportunities in your highest-earning years while also creating a tax-efficient drawdown strategy for when you’re retired. While the years leading up to retirement primarily focus on building assets, it’s not too early to start thinking about how you’ll manage withdrawals during retirement.
Effective drawdown strategies can help you minimize taxes and maintain a steady income stream. Forward-looking tax projections are particularly valuable for managing tax brackets year to year. By pulling from the appropriate accounts—such as taxable accounts, traditional IRAs, and Roth IRAs—at the right time, you can potentially reduce your overall tax liability and avoid unexpectedly pushing yourself into a higher tax bracket. For instance, spreading withdrawals across multiple accounts and planning Roth conversions during lower-income years can provide long-term tax benefits. While this strategy becomes most critical once you’re retired, it’s worth discussing with your advisor in advance.
Estate Planning
As you move into retirement, you’re also moving into the time of life where your hopes and intentions for your legacy are coming more into focus. Are your estate planning documents up to date, and do the terms reflect your current intentions for your family, your preferred charities, and other considerations? As estate tax laws continue to change, you should make it a point to consult with your estate planning experts to ensure that your plans are tax-efficient, both for you and for your heirs and other beneficiaries.
Reviewing Executive Benefits
For individuals with significant assets, particularly those who have spent their careers in executive or leadership roles, it’s critical to review deferred compensation elections and allocations during the years leading up to retirement. Ensure that your payout schedules align with your retirement income needs and tax strategy. Additionally, the vesting terms of any executive stock compensation, such as stock options or restricted stock units (RSUs), should be reviewed to be able to make informed decisions about exercising stock options or special provisions related to retirement. Proper planning can help you avoid surprises and maximize the value of these benefits as part of your retirement plan.
Asset Strategy
As you move from the accumulation phase toward the drawdown phase, reviewing your asset allocations is crucial. Many individuals may benefit from moving to a somewhat more risk-averse stance, though care should be given to maintain sufficient “growth” assets to allow for the needs of the second or even third decades of retirement. The Social Security Administration currently projects that a person retiring today at age 65 can expect to live another twenty years or more in retirement. Further, a third of those age 65 today can expect to reach age 90, and 14% will live to age 95. In other words, a healthy asset allocation for retirement should include some portion of assets with the potential to increase in value faster than inflation in order to preserve the retiree’s spending power for as long as it is needed. Consult closely with your financial advisor to ensure that both your short-term income needs and your longer-term asset needs are being met.
Your Retirement Mindset
While all the above financial considerations are critical, you should also take time during the years approaching retirement to consider the emotional transitions that lie ahead. Especially for those who have built significant careers, moving into retirement can require some mental and emotional adjustments. One of the most important of these is spending time reflecting on what you want your retirement lifestyle to look like. For many, it’s vital to think about what you’re retiring to, not just what you’re retiring from. In other words, having a sense of purpose for your retirement years is a core ingredient of enjoying a satisfying “second act.” Just because you’ve left behind the day-to-day demands of a career doesn’t mean you shouldn’t still have meaningful goals and priorities for your time and efforts. It is essential to integrate your important personal aspirations into your overall retirement blueprint; it should drive your spending, investing, and other planning strategies.
At WealthCrossing, we know that your approach to retirement is as unique as you are. We also understand that defining success is not primarily about money but about directing your resources to empower your best life. We’d love to hear more about your goals; please contact us.
