10 Key Decisions to Make as You Journey into Retirement

We all dream of finishing our journey to retirement in great shape. Not missing a trick and building maximum value into our nest egg should be at the top of our minds if we want to transition in the best possible financial situation.

Key Findings

In this blog article you’ll find:

• Why have a retirement plan?
• How much do you need to save for retirement?
• How much does a typical retirement cost?
• What are the steps to take in preparing for retirement?
• What are the key decisions you need to make before retiring?
• How can you make the most of your retirement nest egg?
• How can you prepare for taxes in retirement?
• What is the best way to go about preparing?

Planning for a successful retirement involves much more than just deciding when to stop working and dusting off the deck chairs. Because you’re transitioning into a phase of your life that could last another 20 to 35 years, the decisions you make before then—typically between ages 60 and 70—will affect your quality of life for the rest of your life.

You may be free to make any decision you want, but you are never free from the consequences. While it’s true that many decisions will come down to common sense, the stakes are sky high and most of these decisions are interconnected.

As one decision affects the next, all decisions are closely correlated to your tax situation – so it pays to understand how it all ties together.

How Much Do I Need to Save for Retirement?

Ultimately, planning for retirement is a numbers game. You’ll find many experts nowadays recommending you should save at least $1 million for retirement. But that doesn’t take your individual goals, needs, expenses, or spending habits into account. The funds you’ll need for retirement are personal to you and could be higher than or less than $1 million. And because you don’t know the exact number of days you have, your longevity adds another variable to consider.

What Does a Typical Retirement Cost?

According to the Bureau of Labor Statistics, in 2023 the average retiree spent approximately $66,000 per year. Assuming a 25-year retirement, the total spent comes to $1.65 million.    A significant portion of that is related to healthcare. According to Fidelity Investments, the average 65-year-old couple can anticipate spending around $300,000 for medical expenses over the rest of their lives, excluding possible long-term care costs for retirees who require assisted living services or in-home healthcare.

How Should I Prepare to Meet These Retirement Costs?

To help you successfully transition into this next phase of your life, we think it’s a great idea to get professional retirement planning help sooner rather than later. You certainly don’t want to make any key decisions without real solid knowledge, thought, and planning, because these decisions are significant, complex, and connected. And while complexity can be frustrating, it also comes with a great opportunity for you to partner with a professional for a huge impact.

What 10 Key Decisions Do I Need to Make?

Here are 10 decisions to consider if you want to transition into retirement in the best possible shape:

1. Decide to Make Final Catch-up Contributions to your Retirement Accounts.

As you age, your financial obligations change, and maxing out your accounts while maintaining the lifestyle to which you’re accustomed may be easier now than it was earlier on in your career.

If you aren’t maxing out your retirement accounts (including making catch-up contributions), you’d be wise to re-examine how much you’re contributing, and use your final working years to put as much as you can into your retirement accounts.

Your retired self will want to hug your present self for doing so!

2. Consider a Roth Conversion.

Roth accounts are the most tax-advantaged retirement accounts available and an essential part of a diversified retirement plan.  Your 60s are a great time to complete a Backdoor or Mega Backdoor Roth conversion, so long as you’re prepared for the tax implications – since the process involves converting pre-tax dollars to after-tax dollars, you’ll need to pay income tax on the amount you roll over.  A financial planner can help you plan for the conversion in the most tax-efficient way.

3. Estimate Your Retirement Income Needs.

Time waits for no one. With retirement in sight, now is the time to get serious about your income needs.  It’s fairly simple to calculate your net worth, but it’s not so simple to translate that into annual income in retirement. A financial planner can run projections for you based on different withdrawal strategies so you can see which one generates enough income to fund your ideal lifestyle throughout your golden years.

At WestStar, we generally recommend having enough retirement savings to replace 80% of your pre-retirement income. That may seem high, but your expenses may be higher than you think, especially when you consider the cost of healthcare. Poorly-timed down markets and the uncertainty of Social Security could also increase your need for a larger nest egg.

4. Decide When and How to Retire.

When you stop working, you’ll need to either begin Social Security, draw on your retirement savings or both – unless you have an alternative method to generate income.

The math behind this is simple. The longer you wait before you retire, start your Social Security benefits, and tap into your savings, the higher your eventual retirement income will be. For example, if you retire at age 62, your retirement income could be only half the amount it would be if you retire at age 70. That’s a great incentive to keep working!

That may not be possible for some people, but working part time and earning enough to cover living expenses could be an option, allowing your Social Security benefits and savings the time to continue to grow.

5. Decide When to Enroll in Medicare.

Initial Medicare enrollment begins three months before you turn 65 and ends three months after the month in which you turn 65. Medicare Part B costs $174.70 each month in 2024, and costs will increase if your income reaches certain levels. From there, you can select a Medicare Advantage plan or a Medicare Supplemental plan, each with their own specific premiums, copays and deductibles.

6. Decide When to Begin Claiming Social Security.

You may begin claiming Social Security at any time between ages 62 and 70. Receiving Social Security before you reach full retirement age results in a reduced benefit for life, while delaying payments increases your payout permanently.

If you claim at 62 (in 2024), you may expect your benefit to be roughly 30% less than if you waited to claim until your full retirement age of 67. In contrast, if you delay claiming past full retirement age, you will receive 8% in additional income for each year you wait.

Up to 85% of your Social Security may be taxable if your individual income is above $34,000 a year. If your income is between $25,000 and $34,000, up to 50% may be taxable.

7. Decide When and How to Take Your Defined Benefit Pension.

If you have a defined benefit pension, it’s likely that you’ll be allowed to take it either as a lump sum that you can roll over into an IRA, or as monthly income. If you’re married, you’ll have to decide whether to take a joint or single payout; the joint payout is less, but the single payout would mean your pension dies when you do. Defined benefit pensions are taxable at your household marginal tax rate.

8. Decide When to Take Retirement Distributions.

The SECURE 2.0 Act further delayed the point at which you must take distributions from your traditional retirement accounts. Here’s the rule: if you turn 73 after Jan. 1, 2023, you will be required to take RMDs at age 73. If you turn 75 after Jan. 1, 2033, you must take RMDs by age 75. These retirement benefits are taxable at your individual marginal rate.

9. Decide how to Invest Retirement Savings.

It’s essential that you decide how to invest your retirement savings to meet your retirement needs. While you may continue to invest in the same way you have been while working, considering that you need to replace the income that you no longer have, you may consider a different approach. Many individuals find their risk tolerance is reduced in retirement.

10. Determine Distribution Strategies.

If you’re like many people, you’ll want to make sure that you can maintain your standard of living throughout retirement. The underlying goal of all your decisions is to create a sustainable income to cover your expenses for the rest of your retirement, regardless of how long that lasts. You must take into account your projected expenses and income, which will determine the decisions you’ll need to make between ages 62 and 75.

How Taxes Fit In.

Having spent decades saving for this moment, you and your spouse likely have assets in a variety of different accounts, and they may be subject to different types of taxation.  You would need an intentional plan to avoid taxes taking a big bite out of your distribution strategy.

WestStar Advisors provide retirement income planning strategies, help you decide the best time to take benefits, and show you how to stay within tax brackets. This may mean working in concert with your tax advisor to deliver integrated advice.

If you have questions about your specific circumstances, or want to talk about developing a financial plan to address your retirement goals and aspirations effectively, please get in touch.

We welcome the opportunity to chat with you and wish you every success in the future.

Sam Gullette & Erik Alexander