A Few Years Before

A Few Years Before

Published On: April 12, 2021

Written by: Ben Atwater and Matt Malick

Many mass affluent families rely on employer-based retirement plans for the bulk of their savings.  This makes sense.  After all, you “pay yourself first” with payroll deductions to a workplace retirement plan (401(k), 403(b), etc.), your company often matches these contributions and some companies even throw in significant profit-sharing contributions.  If you invest aggressively and do not tamper with these funds, they grow significantly over decades of work. 

Due to this reliance on employer-based plans and not having other meaningful money to invest, some people do not seek out a financial advisor until right before retirement.  But the years leading up to retirement are key to your long-term financial success.  We need to take these years as seriously as any in our financial life.

For example, it might be prudent to consider a less aggressive asset allocation.  The last thing you need five years before retirement is a market crash.  Often, this new allocation is the right one to take you throughout your retirement, especially if a portion of the allocation is in safe and liquid investments that can fund your retirement during periods when the market struggles. 

The five or ten years before retirement are likely your peak earning years, so this period is of incredible importance as you balance your spending, saving and begin refining long-term goals for your retirement and your legacy.  These peak earning years can be the perfect time to plan your charitable giving for decades to come. 

If you are fortunate enough to work at a company that offers a pension plan, this is the time to begin evaluating your preference for a lump sum distribution versus an annuity distribution.  And if you have stock options and restricted stock, this can be a key time to think through a path to diversifying your holdings and managing the tax consequences. 

Assuming you have had a fortunate financial life, you will likely be considering the merit of retiring your remaining debt.  For example, does it make sense to carry a mortgage into retirement? 

And should you continue to carry those life insurance policies whose premiums are escalating every year?  Do you really need them, or could the premiums be better invested elsewhere? 

It is also a perfect time to take stock of any major home projects you would like to undertake or large purchases you want to make.  Clients often consider a pool, a vacation home or a dream car during these years.  Beyond material purchases, you might also be contemplating experiences in retirement, including how much you can expend on travel.

You might be wrapping up paying for your children’s educations and evaluating how to handle graduate school.  Or maybe you are already considering college savings for your grandchildren?   

This is the time to assess your best options around private health insurance if you retire before 65 and navigating Medicare if you retire at 65 or later.  You will want to think through the pros and cons of long-term care coverage and asset protection in the event you endure a prolonged stay in a nursing facility. 

Not only should you think about healthcare, but it is time to understand how to maximize your Social Security. 

If your portfolio is overweight tax-deferred retirement accounts, like IRAs, you will need to think about the tax consequences of your withdrawals, including strategies for how to avoid large and unplanned withdrawals. 

For savers who have not engaged a financial advisor because most of their funds are in workplace retirement plans, setting your course with an advisor five to ten years before retirement is a terrific investment.  We work with some clients on an hourly basis to create one-time financial plans that gauge overall retirement preparedness.

For a higher level of advice, a more detailed and a time-tested relationship with an advisor, those over 59 and ½ can also entertain the idea of an in-service rollover of their workplace retirement plan.  An in-service rollover allows a current employee to move all or some of the assets in their employer-sponsored retirement plan into an IRA without taking the money as a taxable distribution.  Not all plans allow for this, but many do.  Employees can check with their employer to see if their plan permits one. 

Before embarking on such a strategy, it is important to consider the quality of the retirement plan’s investment options, the added cost of a financial advisor, the complexity of your overall financial picture and the benefit of having an ongoing relationship with an advisor to identify concerns and address them in the years leading up to retirement. 

As retirement approaches, you likely have more areas to address than you know and more questions than answers.  We are here to help. 

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