Cut your risk. You'll still need to have your portfolio tilted toward stocks, but you may want to minimize your exposure. Now is also the time, if you haven't done so already, to lighten up on company stocks and stock options. Consult with a CPA or other tax pro before you sell so you understand the tax implications.
Find out what income you can expect. Retirement experts often refer to the "three-legged stool" of post-work income, which is typically made up of Social Security payments, pensions from employers and your own savings:
Review your annual Social Security benefit statement or contact Social Security at 800-772-1213 for an estimate of your anticipated monthly check.
Contact current and former employers to see if you have any pensions accrued and, if so, how much you can expect to receive.
Calculate your income from investments.
The latter can be a bit tricky. The longer your expected retirement, the lower your initial withdrawal rate should be. You might not be able to tap more than 3% to 4% of your investments in your first year without dramatically increasing the risk you'll run out of money. You can use T. Rowe Price's early retirement planning calculator to see what withdrawal rates are likely to be sustainable. Think about health-care and long-term care expenses. Medical costs are spiraling, and you may not have enough coverage:
Medicare, the government program that covers most health-care costs for seniors, doesn't kick in until age 65. (Even then, some significant expenses aren't covered, so you'll want to investigate private Medi-Gap polices; you'll find more information from AARP.)
The number of employers who extend health-care coverage to their retirees is rapidly diminishing, and many of those that do are increasing their former workers' premiums or co-pays. If your employer offers the coverage now, it may not in the future or it may cost more, so have a Plan B. (Fidelity estimates a couple who retires at age 65 with no employer-provided health insurance would need $175,000 to pay for their medical costs in retirement.)
Medicare doesn't cover most nursing-home expenses, which means you may want to consider buying long-term care insurance.
Create a tentative budget. Now that you have an idea of your expected lifestyle and income, you can start to put together a budget that reflects those elements. (You can use MSN Money's Early Retirement Planning Expense Calculator to get started.) You may well discover you'll need to work longer than you expected, or you could get some happy news and decide you want to accelerate your retirement plans. Before you do either, though:
Consider getting a second opinion. Should you apply for Social Security benefits early or opt for bigger payments later? Will you take a lump-sum pension or monthly checks? Will you need to tap your retirement funds when you quit work, and what's the best way to do so? You can, and should, educate yourself about these topics. (Books like Margaret Malaspina's "Cracking Your Retirement Nest Egg" can help). But planning for retirement is so complex, and the consequences of making a mistake so potentially severe, that it can be worth hiring an objective financial planner or tax pro to review your plan.
It is never to early to learn how to retire. Start today check with your employer to see if they offer any early retirement incentive programs. In the next installment I will cover retirement planning with 2 years to go before retirement.
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