As retirement approaches, you’ll want to have a clear understanding of what your financial needs are and if there’s room for improvement.
While preparing for retirement takes decades, the moves you make during your final decade in the workforce can have a critical impact on how ready you’ll be when the day arrives.
As you approach retirement, you’ll likely have a much better sense of what retired life will look like, when it will happen and what your financial needs will be. Here are six essential money moves to consider making when you’re about 10 years away from retirement.
Planning the Transition to Retirement
As retirement approaches, you’ll want to have a clear understanding of what your financial needs are and if there’s room for improvement.
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As you near retirement, you should have a good idea of what you spend today and what you may need to spend during retirement. When planning for your expenses, it’s important to account for unknowns, like your lifespan and costs related to health care and long-term care. It is also important to factor in your gifting goals, such as financially supporting an adult child’s wedding, helping a loved one buy a home, helping pay for a grandchild’s education or making other financial gifts. Having a sense of your planned and potential spending, as well as intended gifts, can help you anticipate your income needs in retirement.
These could be your retirement savings or pension, investments and Social Security payments. You may also be weighing the idea of a part-time job or earning rental income from a property you own, which could result in a higher tax bracket during retirement. Always consider the tax impact of each income source, as it could alter other components of your retirement income plan.
Your Morgan Stanley Financial Advisor and Tax Advisor can work together to help you review your investment portfolio and other potential income sources, and create a withdrawal strategy that considers any associated tax implications.
It isn’t always necessary to think about paying down debt as you approach retirement, but you may want to give special attention to any debt that carries a high interest rate. With help from your Morgan Stanley Financial Advisor, review any debt obligations you may have and how your sources of income and investment portfolio can help support and address it.
It is good practice to have the appropriate amount of risk in your investment portfolio relative to your financial goals at every stage of life. When you’re close to retirement, your portfolio could be the largest it has ever been. As such, it might be beneficial to slightly lower your risk–not because the market isn’t a suitable place to potentially increase your wealth, but because market downturns can cause more damage to your finances when they occur around retirement, a dynamic known to retirement income strategists as “sequence of returns risk.”
Your Morgan Stanley Financial Advisor can help you consider several options to help lower risk in your portfolio, including reducing the amount of growth-oriented assets in favor of bonds or cash. This could also be a good time to consider other assets that you may not have utilized before, such as lifetime income annuities, which can act as insurance against sequence risk and longevity risk. By taking these steps, you can help protect the nest egg you’ve built up against the whims of the market.
To help you plan, you may also want to work with your Financial Advisor to perform “stress tests” on your portfolio to see how it might fare across a range of potential scenarios, including a spike in market volatility, earlier-than-expected retirement or unforeseen medical expenses.
Tax efficiency can play a large role in retirement planning because it may potentially allow you to maximize your income and portfolio returns. Two approaches that can help make your money last throughout your retirement are:
Certain forms of insurance can help you avoid dipping too deeply into your retirement savings to cover unexpected or prolonged medical costs. For example, if you have not already purchased long-term care insurance, which can help cover the costs of nursing or in-home care should you need it, the decade before retirement is a good time to start thinking about it.
Life insurance is another category that bears considering. If your coverage had previously been intended to replace your salary in the event of your untimely death, you may be more interested now in considering how it can be used as a vehicle to pass assets and wealth to your dependents. Thinking in terms of estate planning in the context of life insurance may be appropriate at this stage.
As your timeline for retirement shortens, it’s important to have regular check-ins with your Financial Advisor as your financial needs come into clearer focus. Keep in mind that you should aim for flexibility at this stage, as you may end up retiring earlier or later than expected, depending on your family needs or unforeseeable circumstances.
Your Morgan Stanley Financial Advisor can work with you to create a retirement financial plan that helps ensure your savings last throughout your retirement while considering income and spending needs, tax-efficient strategies, withdrawal considerations, gifting goals and potential healthcare costs.
Disclosures:
This material has been prepared for informational only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC (“Morgan Stanley”) recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
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