5 Critical Financial Steps to Take Before You Retire

Key Takeaways

1. Top of the list for people who are approaching retirement is figuring out what role work will play, if any, later in life.
2. Social Security planning is a key component of the retirement income puzzle as you’re thinking about your portfolio and how it’s positioned and how much you can spend from it.
3. It’s valuable to identify your own retirement income style before you retire.
4. Preretirees should practice spending because actually beginning to spend from a portfolio can feel super uncomfortable for people who have thought of themselves as good savers.
5. The last step that people should take as they are approaching retirement is to actually start structuring their portfolio for retirement.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. The new book, “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement,” is filled with insights and tips for people getting close to entering retirement. The book’s author Christine Benz is here today with me to discuss some tangible key steps that preretirees should take to ensure a smooth transition into retirement. Christine is Morningstar’s director of personal finance and retirement planning. She’s also the host of The Long View podcast.

Thanks for being here today, Christine.

Christine Benz: Susan, it’s great to see you.

Step 1: Will You Be Working Past Retirement Age?

Dziubinski: Christine, you say sort of top of the list for people who are approaching retirement is figuring out what role work will play, if any, in later in life. Why should they be thinking about work in the context of retirement, which seems strange? And what should they be thinking about specifically?

Benz: Well, one thing that comes out loud and clear in the book is that several of the people I interviewed make the point that work is good for us because it oftentimes gives us a reason to get out of bed. It gives us relationships. It might give us a bit of physical activity. It might give us a sense of purpose that we’re still relevant, still making a difference. So it’s not for everyone this idea of kind of phasing into retirement, but for people who like what they do, I think, figuring or trying to figure out if there’s a component of your work that you can carry into later in life, some version of the work that you do, it seems that that’s a really valuable thing to consider. Certainly there are financial benefits of continuing to earn a paycheck and forestalling portfolio withdrawals, but I think that there are substantial nonfinancial benefits as well.

Step 2: Planning for Social Security in Retirement

Dziubinski: One of the earliest chapters in the book covers Social Security. Why is it important for people to be thinking about their Social Security plans before they actually retire, and what exactly should they be thinking about?

Benz: I see Social Security planning as a key component of the retirement income puzzle. As you’re thinking about your portfolio and how it’s positioned and how much you can spend from it, well, that’s directly influenced by whatever cash flows you’re getting from Social Security. I think, regardless of your life stage, it’s valuable to get in there and do some number crunching about your decision about Social Security filing, figuring out when you will file for Social Security.

I interviewed Mary Beth Franklin in the book about different profiles of individuals and how their claiming decisions might be different. We talked about single people, we talked about divorced people, we talked about married people with different ages and/or income levels, and we also talked about married couples with similar earnings profiles and similar ages. She provides guidance for people in terms of figuring out their filing dates.

I also often reference Mike Piper’s great tool, which is called Open Social Security, where you can plug in some of your own variables. But it’s really, I think, the first step in the retirement income process: figuring out how much you will be getting from Social Security.

Step 3: What Is Your Retirement Income Style?

Dziubinski: Now, in a related vein, you think it’s valuable to identify your own, what you call, retirement income style before you retire. What do you mean by retirement income style, and how should people go about determining what their style is?

Benz: Right. Wade Pfau and I talked about this kind of matrix that he’s created to help assess people’s attitudes toward retirement income. And Wade’s point is that we’re all wired a little bit differently in terms of what we want, and some of us are more comfortable with variability in terms of our portfolio cash flows. Others of us might really want to lock it down coming into retirement, in which case, some sort of a guaranteed income product might make sense. So I think the point is to think about how you’re wired, and Wade has a questionnaire that people can take to figure out where they fall in that grid. But I think it’s important to identify how you’re thinking about retirement income, what you want from retirement income, how much you want stability versus how comfortable you are with variability if it means that your portfolio might grow a little bit more.

Step 4: Preretirees Should Practice Spending Their Retirement Savings

Dziubinski: Now, you also think that preretirees should practice spending. So what do you mean by that, and how do you exactly go about doing it?

Benz: This came out in the conversation with Jamie Hopkins, who’s another retirement researcher, and he made the point that for people who are phasing into retirement that they should dabble in spending a little bit because we’ve found, I’ve found in my travels, that this whole business of actually beginning to spend from a portfolio can feel super uncomfortable for people who have thought of themselves as good savers. They’ve seen a one-way position from their paycheck into their savings account. Having the money go the other way might not feel that good.

Jamie’s point is start doing a little bit of preemptive spending from that portfolio. Take that big vacation if you can afford to do that. Just open up the purse strings a little bit in those years leading up to retirement. Get yourself warmed up before day one of retirement and you’re suddenly focused on having to pull from a portfolio that you’ve never touched before.

Step 5: Prepare Your Portfolio for Retirement

Dziubinski: Christine, you say the last step that people should take as they are approaching retirement is to actually start structuring their portfolio for retirement. What should they be doing actually before they retire?

Benz: The point is to not show up on day one of retirement with a portfolio that’s 90% stocks or something like that. You don’t want to wait until the very last minute to derisk because the climate might not be right for derisking. So the point is to look ahead. I talk in the book about my Bucket system, where you’d want to think about having anywhere from seven to 10 years worth of assets in safer securities, some combination of cash and high-quality bonds.

But the idea behind this preemptive derisking is that you are building yourself a bulwark so that if you have a bad sequence of returns, if bad market returns show up in the early years of your retirement, you’re not confronted with having to pull from a dwindling portion of your portfolio. You can leave it in place to recover and pull from the safer stuff. So I discussed that concept in the chapter that I contributed. Fritz Gilbert also discusses that as something that people should work on. He has this little calendar—it’s kind of a countdown clock for people in those years leading up to retirement. He makes the point that that’s a great time to take a look at derisking your portfolio. And the way market conditions are right now, too, I think with interest rates still up a bit, it is a good time to think about derisking as well because yields are much better.

Dziubinski: Christine, thanks for your time. You know, the book, it was so clever of you as a financial expert to decide to interview all of these other financial experts, and there’s really a wealth of good useful information in here for preretirees and retirees. Thank you for your time putting it together and your time today.

Benz: Thank you so much, Susan. It’s been a lot of fun talking to you.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch Christine Benz: 5 Things I Learned About Retirement Planning From My New Book for more from Christine Benz.