Dos and Don'ts for Your Final Working Year Before Retiring

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Getty ImagesWith the clock ticking on your career, you need to make headway on your retirement plans.
Some 4 million baby boomers are expected to retire in the next year. If you're one of them, you need to make sure you're on solid ground before exiting the workforce. Otherwise, you could find yourself without a job and without enough monthly income to cover your expenses. Retiring has the potential to affect everything from your social life to your insurance coverage, so pre-retirees should take some time to evaluate both their current situation and future goals before clocking out for the final time.

Here's what financial experts say you should do (and not do) during the year before you retire.

Do: Review Your Expected Budget and Cash Flow

The first thing pre-retirees should do is estimate what their expenses will be in retirement.

"[My] single biggest tip is to put together an itemized monthly budget," says Michael Milarski, partner with Signature Financial Planning in Pittsburgh.

Pre-retirees often make the mistake of focusing solely on the bottom line of their 401(k) or IRA statement, he says. But what may be more important than the total balance is the monthly cash flow you can expect to pull from those accounts. Milarski recommends adding up all your monthly expenses -- with travel plus major and future expenses included -- and having a financial adviser run "Monte Carlo simulations" to determine how long you can sustain that budget before your money runs out.

"Pre-retirees also need to take a hard look at where their sources of income will be coming from," says Steven Elwell, vice president of Schroeder, Braxton & Vogt in Amherst, New York. In addition to Social Security and pensions, those heading toward retirement need to decide when and how to start pulling money from 401(k)s, IRAs and other retirement accounts.

Larry Rosenthal, president of Rosenthal Wealth Management Group in Manassas, Virginia, says poor management of private retirement accounts can be a costly mistake. "I see [seniors] sometimes withdrawing too much money and paying excessive taxes to stick [money] in a checking account," he says. While those with Roth IRAs can make tax-free withdrawals, money from a traditional IRA is taxable and withdrawals before age 59½ often trigger a 10 percent early withdrawal penalty. Beyond having to pay taxes on money they don't plan to use immediately, retirees could find that unneeded withdrawals bump them into a higher tax bracket.

Don't: Forget About Health Insurance and Life Insurance

Reviewing insurance policies is another must-do for pre-retirees. Medicare doesn't start until age 65, which means early retirees could find themselves without coverage and without access to their employer's health plan.

"Create a plan to avoid a lapse in medical coverage," Milarski says. "[Early retirees] need some sort of coverage as a bridge from retirement to Medicare."

As for life insurance, Rosenthal says it's not so much a question of finding new coverage as it is seeing whether you can reduce your monthly expenses. "Ask what happens with your whole life insurance [policy] if you stop payments," he advises. Depending on the policy, some companies may allow premiums be taken from the cash value, which can free up much-needed money in a retiree's monthly budget.

Do: Refinance Now Rather Than Later

If you think refinancing your home mortgage is a wise financial move, Rosenthal says you should pursue it while you are still are earning income. "Refinancing becomes harder after retirement," he says. Creditors may be hesitant to provide loans to those who don't have any earned income and are living on retirement funds.

Along the same lines, consider whether you want to make any major purchases in the near future, such as a car or RV. In most cases it'll be easier to buy these items now rather than obtain financing after you've left the workforce.

Don't: File for Social Security Too Early

One of the biggest decisions you need to make as you approach retirement is when to take Social Security. "I see far too many seniors starting Society Security too early," Elwell says.

While you can sign up for Social Security any time after age 62, your monthly benefits will increase for each month you wait up until age 70. "Delaying your Social Security can be one of the smartest financial strategies for healthy people," he says. "Proper planning for a married couple could yield tens of thousands, if not hundreds of thousands, of dollars more over a normal lifetime."

Smart use of funds from your retirement accounts can be one way to comfortably postpone the start of Social Security benefits. "Work on initiating a plan to start monthly withdrawals from retirement funds," Milarski says. He recommends consulting with a financial professional to determine the right amount to withdraw, noting an annual withdrawal of no more than 5 percent of the fund balance is usually ideal.

Do: Find a Social Outlet in Advance

Before you leave the workforce, decide whether you need to find a new social outlet. Rosenthal says, "Ask the question: Am I getting most of my social interaction in the workplace or outside the workplace?

If the workplace is your main source of friendship, you may have a rocky transition to retirement, where long hours at home can lead to boredom or marital tension.

"I recommend pre-retirees think about the things they enjoy doing and find their passion once they retire," Elwell says. "It's one thing to be financially prepared for retirement but another to be mentally prepared."

Elwell says his happiest clients are the ones who have found meaningful activities to fill their time. To find your happy place, consider whether you might want to travel, pick up a new hobby, work part time or volunteer for a favorite charity after you finally say goodbye to the daily grind.
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