More on Implementing the Plan: PHASE 3 of the AGILE Retirement Journey - Rodgers & Associates
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More on Implementing the Plan: PHASE 3 of the AGILE Retirement Journey

The year before and the first year in retirement are typically pivotal in one’s retirement journey. We call these two years the “I” phase of an A·G·I·L·E retirement. “I” stands for “implement the plan.” This is the phase when we help clients transition from working for a living to becoming finan­cially independent. Employment past this phase becomes optional.

One of the critical issues in this phase is to prepare mentally for the transition. We recommend devel­oping a plan for how you will spend your time during the first year. Planning a couple of trips or house projects is a good start. Most people need something to look forward to in order to remain in good spirits. Visual­izing life after work is an essential part of the planning, and the “I” phase is when we want clients to have a clear picture of the first year.

We also ask clients about their social connec­tions during this phase. Human beings need human inter­action. We often develop strong social ties to colleagues at work, and retiring could mean losing part of our social network. People in this situation should develop friend­ships outside of work with others who have similar interests.

Transi­tioning from work-life, with its deadlines and timetables, to retired life, with few if any deadlines, can create a different kind of stress. We recommend clients set some of their own deadlines. Planned trips and house projects are a good segue to a more relaxed schedule where days are not organized around meeting agendas and task lists. Clients are encouraged to have goals and keep track of things they want to accom­plish. At the same time, we do not advise planning out every waking minute of that first year. This should be more about enjoying the journey.

Another critical issue during the “I” phase is the devel­opment of a new retirement paycheck. Paychecks become a regular part of our lives from the time we enter the workforce. We build our financial lives—paying bills, planning vacations, covering household expenses—around the arrival of the paycheck. What happens when the paycheck stops and retirement begins? 

We want to have this planned out in detail for clients so that they know precisely how their living expenses will be covered in retirement. Every client’s retirement paycheck is unique. An employer pension could have timing issues to consider. Timing the start of Social Security benefits can be compli­cated, and timing issues that impact Social Security will need to be evaluated carefully. Even personal savings can present timing issues when withdrawing funds from retirement accounts.  

We approach these timing decisions from the stand­point of controlling investment risk and income taxes. While all personal invest­ments contain some level of risk, Social Security is government backed. We begin by analyzing the optimal time to start drawing Social Security benefits for each client to help maximize the benefit. This monthly benefit is an essential component of a retirement paycheck because of its stability and annual cost-of-living adjustment.

A similar process is followed for the client with an employer pension. Private company pensions are usually government insured up to a certain level. A taxing authority typically backs public pensions. We believe this makes employer pensions another stable part of a retirement paycheck. We want to analyze the options for drawing the benefit to maximize it over the client’s lifetime. An important consid­er­ation is spousal coverage: including a spouse reduces the monthly pension income.

The final component of the retirement paycheck comes from investment income. Our tax analysis will provide guidance on where income should be taken—after-tax accounts, IRA or 401(k), or Roth IRA. The new three-legged stool strategy balances savings over these three types of accounts to provide the flexi­bility needed to minimize taxes.  

Health insurance is another critical issue to address during the “I” phase. Those who are making the transition before the age of 65 will need to evaluate the various options for insurance coverage before becoming eligible for Medicare. We work with our clients to help them determine the best choice from among private insurance options and the government market­place. Continuing employer coverage through COBRA may be another solution.

Those who are eligible for Medicare coverage will also have choices to make. They will need to decide between tradi­tional Medicare and Medicare Advantage plans. Medicare does not cover every­thing. Many people who select Medicare need supple­mental insurance to fill the gaps in coverage. We help clients think through the critical issues surrounding the coverage they need. This will be an ongoing process because Medicare plans change annually. The options need to be reviewed each year as costs and coverages vary.

The “I” phase of an A·G·I·L·E retirement is a crucial time to fine-tune your transition into financial indepen­dence. Some of the decisions could be irrev­o­cable, lifelong choices. With proper guidance, both finan­cially and emotionally, this phase will ideally involve checking off the remaining boxes to arrive at retirement.

Insights:

  • Prepare mentally for the transition to financial indepen­dence.
  • Plan for your retirement paycheck to help ensure living expenses will be covered when the employer paycheck ends.  
  • Medicare does not cover every­thing. Supple­mental insurance may be needed to cover the gaps.