Planning Reflection | September 15, 2023
Considering retirement often evokes feelings of excitement as well as uncertainty, especially at the end a long and rewarding career. If you are currently in the two to three years leading up to your retirement transition, careful planning can help you feel more confident as you approach this change. These years before retirement are a time to visualize and test-drive the upcoming chapter in your life. Switching the primary focus from work to new pursuits is a big leap for many, as is navigating the shift from a lifetime of saving to a new phase of spending. Whether it’s traveling, enjoying time with family and friends, or rediscovering passions, retirement is a chance to have even greater control over how you spend your most valued resource – your time.
Preparation is Key
There are several financial aspects to consider in the years leading up to retirement. The suggestions below are by no means exhaustive, but taking the time to understand these areas can shift the uncertainty you may face into confidence.
Income: When paychecks no longer come in regularly, understanding your new landscape of income and assets is an important first step. You may have built retirement savings over decades in your 401(k)s and investment portfolio, which will support your life moving forward. Perhaps you work for an employer that offers a pension system, such as CalSTRS or CalPERS in the public sector or Kaiser in the private sector. Additionally, Social Security is an important income source for most retirees.
Regardless of your retirement income mix, it is important to understand how the income sources interact with each other. For example, withdrawing from your 401(k) or IRA beyond a certain dollar amount might cause your tax rate to increase. Alternately, taking Social Security early while your spouse is still working may trigger a reduction in your monthly benefit. Retirement income is often more complicated than income during your working years and requires careful planning.
Expenses: A financially balanced retirement includes income and assets that match or exceed your planned level of spending. Will your day-to-day expenses in retirement be similar or different than your current life?
Take time to think about how your life in retirement will shape your expenses. You may envision a life without commuting costs, take-out lunches, or professional dues. However, your living expenses might actually increase in retirement as you enjoy additional travel or deal with higher healthcare costs. If you need to adjust your existing budget to align with your vision, now is a good time to start.
Savings: The years leading up to retirement often provide an opportunity to ramp up savings in preparation for your next chapter. Employees 50 years old and above can take advantage of the catch-up contributions of an additional $7,500 in 2023 in their 401(k)s. Beyond maxing out retirement accounts, it is also important to have a plan for additional savings to add to your flexibility in retirement.
Taxes: The last few high-income years before transitioning to retirement bring unique tax planning opportunities. For example, if charitable giving is important to you, combining several years of giving during your highest earning year into a Donor Advised Fund (DAF) or directly to a charity could provide valuable tax savings. Some employers offer the option of a deferred compensation plan, which can help smooth out taxes for those in their final earning years. Working with a trusted professional team makes it easier to spot and take advantage of these opportunities.
Debt: Without a guaranteed paycheck, it’s harder to secure financing such as mortgages or loans. Consider completing any transactions that would require a loan before retiring. If you have a home equity line of credit (HELOC), for example, renewing it before you retire lets you continue to have an option for cash liquidity.
From Working Years to Golden Years
As you approach retirement, thoughtful planning and a clear vision can empower you to embrace your next phase of life with confidence. At North Berkeley, we work with our clients to create a customized plan that takes into account your vision in retirement, your current and future assets, and other unique circumstances you may have. We act as accountability partners to ensure your savings goals are met. We work with benefit administrators to decipher complicated retirement and pension plans. We also work with other professionals in your life and on anything else you might need for a successful transition.
For many, the years leading up to retirement are a time of adjustment from the world of work to one of leisure and personal fulfillment. Carefully preparing can give you peace of mind, freeing your headspace for life’s more meaningful moments.
About Ariana Alisjahbana
Ariana Alisjahbana (“Alicia-bana”) is a Lead Advisor with North Berkeley Wealth. She provides clients with comprehensive financial planning and investment management.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.