6 Things to Consider While Preparing for Retirement

03.25.22 | Personal Finance


Thoughtful planning may help avoid unnecessary surprises and make your transition into retirement less stressful. Whether you’ve been planning for decades or only a few months, here are some essential items.

Spending Plan

A budget or “spending plan” is critical when planning for retirement. It is vital to understand your current expenses to estimate how they could change in retirement. Spending in retirement varies from your working years, but it also changes throughout retirement.

The chart below is a simple way to determine your spendable income. After accounting for current savings, taxes, and mortgage (assuming mortgage will be paid off by retirement), the Johnson family lives on $80,000 per year. A good rule of thumb is to use 75% – 100% of current spendable income ($60,000 – $80,000 in this example) as a starting point for building out your retirement budget.

Johnson Family Cash Flow


 $                          150,000
401(k) savings  $                            20,000
IRA savings  $                              7,000
Federal tax  $                            13,500
State tax  $                              6,000
FICA tax  $                            11,500
Mortgage  $                            12,000
Spendable Income  $                            80,000


Income Plan

After spending, you must next determine your sources of income.  The sources available will vary by individual but most often includes a mix of cash savings, 401(k), IRA/Roth IRA, brokerage, Social Security, and/or pension. Depending on your retirement age, you may not be eligible for your Social Security or pension benefits, so it’s essential to map out how much other income you will receive and how much you will need to supplement your investments. Start by determining the first five years of retirement and where income will come from. This will give you a good understanding of your base fixed income and what supplemental income your investments might produce.


As you build out your income plan, remember the impact of taxes. It is likely your income will be taxed in a variety of ways. For example, anywhere from 0% – 85% of your Social Security benefits will be taxable. Withdrawals from IRAs are taxable at ordinary income rates, whereas distributions from Roth IRAs may be tax-free. For some households, Roth conversions (converting assets from a Traditional lRA to a Roth IRA) may provide an opportunity to reduce your tax liabilities long-term. This strategy doesn’t make sense for everyone but should be considered part of the planning process. More on Roth conversions at a future time.


Another significant consideration is health care and the associated costs. Depending on your retirement age, you may or may not be eligible for Medicare (those age 65 and older). Medicare, however, does not cover everything and a supplemental policy is necessary to cover gaps in coverage. If you retire before age 65, an individual policy or electing COBRA from your previous employer will be needed.

Portfolio Risk Matters

As you approach retirement, it is wise to review your investment portfolio and confirm it is aligned with your retirement income plan and comfort level with risk. The years leading up to, and the first few years of retirement are when you are subject to the highest level of sequence of return risk: the risk resulting from the order in which investment returns occur. Put another way; it’s the risk of bad markets early in retirement compounded by distributions from your account. When accumulating, you essentially dollar cost average as you invest through the market’s ups and downs (i.e., you average out the cost of the shares you buy as markets go up and down). In retirement, it can be the opposite – dollar cost ravaging. Significant declines in your portfolio paired with distributions can affect the longevity of your portfolio and the income it could otherwise produce. Ensuring your portfolio is well-aligned with a retirement income plan, and your comfort in handling the market’s ups and downs will help lead to better outcomes.

Build Cash

One way to help reduce the potential for bad behaviors associated with investing is by having a healthy level of cash. In general, 12-24 months’ worth of expenses in cash or cash-like instruments might be appropriate. This helps provide income for the first year or two in retirement and provides flexibility for other strategies like Roth conversions. Having a few years’ worths of expenses in cash before retiring also provides a psychological benefit, easing the emotional transition.



Plan for a More Confident Financial Future

The items above are just a few key considerations as you transition into retirement. Creating a plan that maximizes your resources, works under various market and economic conditions, and is well understood by all involved is the key to success. At Midwest Capital Advisors, we bring a variety of perspectives to help you map your path to and through retirement. Contact us to get started planning for your retirement. At Midwest Capital Advisors, we understand the nuances of the transition into retirement. Contact us to start planning for your retirement: https://midwestcap.com/contact/

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