For past generations, planning for retirement was a relatively simple process. When someone reached retirement age, he or she threw a party, turned the job over to someone else and went home to live on his or her company pension. Retirement planning nowadays is a radically different proposition that involves asset allocation, retirement plan rollovers, transfers and distributions, and a series of life choices. There are several tough decisions that most people must make when they stop working. The most difficult of these choices includes:
TUTORIAL: Retirement Planning
When to Retire
Those who are willing to work a few more years can usually enjoy a considerably better standard of living than those who retire early. But deciding when to retire can also be complicated by the possibility of layoff, early retirement incentive packages, personal health and other factors. (For related reading, see The Benefits Of Retiring During A Recession.)
When to Begin Drawing Social Security
Like retirement itself, knowing when to begin collecting Social Security can befuddle even financially sophisticated retirees. There are pros and cons to early, normal and late payouts, and the right choice for a given person is dependent upon many things, such as whether the person intends to retire, whether the benefits will be invested for a period of time or spent immediately and the level of retirement savings that has been accumulated.
Where to Live
Some retirees are content to stay put after they stop working, while others travel the world or move to someplace warm. There are many factors to consider when choosing where to live during retirement, such as climate, real estate values, proximity to family and income taxes (some states are much better to live in than others when it comes to taxation of pension and retirement income).
Whether to Keep Working in Some Capacity
Not everyone who quits their job is ready to stop working altogether. Some people need to find another full-time job after retirement in order to support themselves, while others may work part-time to either supplement their income or connect with a hobby or other interest.
Whether to Sell the House
Even retirees who wish to keep living in the same city may want to find an abode that doesn't have three flights of stairs that must be climbed several times a day. Others may tire of keeping up their current residences or may need to tap into the tax-free equity that has accumulated over the years. But real estate values also enter into the equation. Those who cannot sell their homes at a profit may want to think twice about taking a loss at this point in their lives.
When to Begin Taking Retirement Plan Distributions
Most people don't begin taking distributions from their IRAs or company plans until after they stop working, but the timing of these distributions can be contingent upon a number of factors, such as the timing and amount of Social Security benefits and investment performance. Those whose portfolios have shrunk substantially may want to delay taking distributions if at all possible, in order to give their assets some time to rebound. (For more see, 5 Penalty-Free IRA Withdrawals.)
How to Manage Your Investment Portfolio
This issue alone can play a substantial role in several of the other decisions listed above. If your portfolio has grown steadily over the years, then your retirement alternatives will be much more pleasant to choose from. But retirees must periodically evaluate their risk tolerance and time horizons, both of which are most likely diminishing at this point in their lives.
How to Budget
Retirees who are unable to live within their means often find themselves headed back out into the work force. In order to avoid this, a careful assessment must be made of future income versus current expenses. A budget program or website can be a useful tool for those who have not used a budget previously. (For more, see The Best Budgeting Software For 2011.)
The Bottom Line
These are some of the choices that must be dealt with when you're ready to retire. Other issues, such as transformation of personal identity and use of leisure time will further complicate the picture. Most retirees would be wise to seek both personal and financial counseling in order to successfully navigate the last major transition in their lives. For more information on preparing for retirement, consult your HR representative or financial advisor.