Principles of Retirement Planning/Transition To Retirement

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TRANSITION TO RETIREMENT

Develop a Budget for Post-Retirement Income and Expenses

Determine Specific Retirement Income Gap

Review Role in Investment Decision Making

Plan for Other Company Compensation Benefits

Develop a Budget for Post-Retirement Income and Expenses

If you are nearing retirement, you need to review your current situation and make a realistic inventory of your income sources and expense needs at retirement. Retirement income can come for four broad sources:

* Company pension or retirement plans

* Employee savings plans and IRAs

* Social Security Benefits

* Personal savings and earnings

Reviewing these sources within a few years of retirement is important for two reasons. First, you can develop a specific projection of your total retirement income. Second, you can begin to determine your level of involvement in the management of your funds after retirement.

Your retirement needs fall into several categories of expenses:

Fixed expenses. Such as housing, debt service, insurance premiums, and taxes.

Recurring basic living costs. Which are subject to some control, such as expenses for food and utilities.

Discretionary expenses. Which are incurred voluntarily and include items such as gifts, travel and recreation.

As you prepare your projected budget, focus on your fixed and basic living expenses and challenge the amounts as you project your needs into retirement. Many costs during your employment years have a habit of becoming fixed or recurring. It's a good idea to review each expense in order to eliminate or reduce costs whenever possible. This budget review should be completed before your actual retirement -- otherwise, too many expenses will become "fixed".

Projected Retirement Budget

Sources:

* Company pension or retirement plans

* Employee savings plans and IRAs

* Social Security benefits

* Other savings and earnings

Expenses:

* Fixed: Mortgage payment, debt service

* Basic living expenses: Food, clothing

* Discretionary: Travel, gifts to family

Determine Specific Retirement Income Gap

At lease five years before your retirement, you should again complete the process of calculating whether you have a retirement income gap. However, the focus at this point is on fine-tuning and understanding what your retirement funds will provide rather than how you can significantly affect the accumulation of funds. Several strategies or alternatives should be examined:

* If you have a projected shortfall, you need to look at the impact of delaying your retirement for one or two years.

* Request a specific projection of your Social Security benefits and determine if altering the timing of these benefits can help close your retirement shortfall.

* If your retirement calculations indicate that you may excess funds, at least during some years, you should begin to develop a plan for investing those funds.

Review Role in Investment Decision Making

An understanding of investing is important throughout the retirement planning process. However, your role with respect to investment choices will increase in retirement. First, and perhaps most important, you must become at least somewhat knowledgeable about investing and investment alternatives. You should at least begin to learn about various types of investments, even if you don't intend to make the final decisions about specific investments.

You must also strike a balance between the desire to focus your investment plan on the immediate years after retirement and the need to plan for your entire retirement period which could span many years. You should review your retirement portfolio mix to ensure that funds will be available at retirement with the least possible risk of loss. In retirement, avoiding risk is crucial because you cannot simply save and make up for a loss. However, you must also define the time frame over which you are trying to avoid loss. Again, retirement is a period of time not a point in time. The key issue is to determine when you will need your funds and then make your investments accordingly.

Plan for Other Company Compensation Benefits

As you near retirement, you should also consider the consequences of receiving and other forms of company benefits, such as stock options, deferred compensation, or restricted stock. You should plan for the income tax consequences of bunching these payments into the year of retirement and determine if spreading the payments over several years can result in a reduced tax liability. In addition, you will need to invest these funds. Your resulting investment decisions can affect how you approach any adjustment to your overall investment mix.

Review Estate Planning Needs

Many people who are approaching retirement have not reviewed their estate planning needs for many years. Making the transition to retirement provides an excellent opportunity to review and revise your estate plans. This review includes an analysis of your planning documents (such as wills, trusts and powers of attorney) to determine if they still adequately carry out your wishes.

In addition, the estate planning review should focus on whether the beneficiary you have designated to receive your retirement and life insurance benefits is still appropriate.

Finally, you may want to consider alternative ways to transfer property from your generation to your children or grandchildren. Determining your retirement income sources and needs can provide the foundation for determining when and if it is possible to transfer property to family members or other third parties.

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