How to Organize Your Finances for Retirement

Getting your finances organized is one of the first steps to take when you are approaching retirement. Having a clear financial picture can help ease the transition into retirement because, at the very least, you’ll know what accounts you will be drawing from, where they are being managed, how your investments can continue to generate income for you and what tax liabilities they may impose.

It requires discipline and clarity to keep your finances organized before and during retirement.

Identify Retirement Accounts

If you are like most of your contemporaries, you have held two or three or more positions at different companies over the course of your career. As a result, you likely have several 401(k) accounts to consider as well as a SEP, Simple IRA, 403(b) account, deferred compensation plan and/or a pension. (For more, see: Will Your Retirement Income Be Enough?)

It’s important to make a list of your accounts and, if you are married, a separate list for each spouse. It also helps to make an additional list with any non-taxable accounts like a Roth IRA or designated Roth.

A benefit of making a comprehensive list is to identify any opportunities to combine certain accounts to help you get organized, improve your investment plan and potentially reduce expenses. You cannot combine your accounts with your spouse’s, so keep the accounts separate when doing this exercise.

Consolidate Retirement Accounts

People often grapple with what to do with their 401(k) and IRA accounts and other employer-sponsored retirement benefits when they’re nearing retirement. It really depends on the situation. But a decent argument can be made to roll those assets over to a consolidated investment portfolio that can continue to build wealth after you stop working. It can be easier to manage your investment approach and cash management needs with fewer accounts.

In addition, many retirement plans have limited investment options and high fees, so rolling that money into a single account can help you incorporate your preferred investment options while saving money in account fees.

Organzine Other Accounts and Assets

In addition to collecting information about your retirement accounts, you need to organize your other savings, investment accounts and stocks or bonds that are owned separately from your retirement accounts.

It is important at this stage to identify one of these accounts as your emergency reserves fund. Having cash on hand when you need it in retirement is arguably more important than it is during your accumulation phase of life because you are living on a more fixed income (even if it is a high monthly payout).

The next step is to account for other major assets like your home, vehicles, vacation properties, investment properties and collectibles that have tangible value. In doing so, you can get an accurate picture of your total asset value. You will also want to list any liabilities that you are responsible for. This includes mortgage balances, loans or credit card debt you may have.

By subtracting your liabilities from your assets, you will arrive at your net worth. While this may seem elementary, it is surprising to see how many people have not executed a net worth statement since they purchased their home, if at all. Calculating your net worth statement should be an annual exercise. (For more, see: Five Sources of Income for Your Retirement.)

Consider Your Investment Strategy

This is a good time to consider your overall investment strategy. Keep in mind that you may be looking at another 30 or more years on earth after you close the door on one chapter of your life. As demonstrated by historical evidence, the market is a fairly reliable place for money to grow over time, and many people make the mistake of getting too conservative too early by investing too much of their portfolio in bonds.

On the other hand, investing everything in the market doesn't make sense. It is important to keep a cash reserve for upcoming living expenses and emergencies. It is advisable to have two to three years available in a mix of cash and other safe investment options such as high quality, short-term bonds. This can only be known by accounting for your known retirement expenses and assessing reasonable projected unknown expenses to determine the strategy for drawing down, spending and investing that is right for you.

Have a Withdrawal Plan

The importance of having a plan for how you draw income from your various accounts during retirement cannot be overstated. Not all income sources should be used at the same time and some, even if they could, shouldn't be used too early because the tax implications can be costly.

It is not a cut and dry process, as taking from one pot could cost you more than withdrawing from a different one. In fact, a study by Vanguard states that an effective withdrawal strategy can add up to 1.1% of annualized value without taking more risk. Withdrawing money to responsibly fund your retirement years takes discipline and some knowledge that may not be obvious to a lot of retirees.

Before you finalize your retirement spend-down plan it is critical to consider all of the moving parts including Social Security, taxable retirement accounts, non-taxable retirement accounts and required minimum distributions, which start at age 70.5. Having a clear picture of what income will come from which account, and when, will help you to determine if there are gaps that should be filled by liquidating investments, selling property or finding other avenues to fund your lifestyle and needs in retirement.

Achieve Financial Clarity

Having a firm grasp on the financial logistics for retirement serves one higher purpose: it creates peace of mind so that you can enjoy your time rather than spending it dwelling on the financial unknowns that might be around the bend. More than anything else, financial planning is about building a sense of well-being for your whole life, not just focusing on your finances.

Clarity in your financial life can evoke independence, confidence and contentedness in other aspects of your life. (For more from this author, see: Advanced Planning for a Quality Retirement.)