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What Goes on Your Retirement Readiness Checklist?

Christine Benz

Christine Benz: I'm Christine Benz for

Getting ready to retire can be exhilarating and worrisome at the same time. Joining me to share some key tasks that should be on your to-do list is Tim Steffen. He's director of financial planning for Baird's Private Wealth Management group.

Tim, thank you so much for being here.

Tim Steffen: Happy to be here.

Benz: You've created a list of some of the key steps that should be on pre-retirees' to-do lists. I'd like to go through some of them today. The first one--it's a big one--is "create a financial plan." Can you talk about what sorts of things should be under that heading?

Steffen: It's a comprehensive plan--there's a lot that goes into it--but I think for most people it's the key part of any kind of retirement plan. You're going to want to start off with some sort of a balance sheet and a cash flow statement, or a budget, of some sort. Those two pieces will then go together to see if the assets that you have will support the desires in the budget that you want to support during retirement. So, that's really the starting point of the financial plan.

And then the closer you get to retirement, the more detailed, the more thought and time you're going to put into that. The simple retirement projection you may have done when you were in your 20s or 30s is going to evolve into something much more advanced as you get a lot closer to retirement.

Benz: So there's a lot packed into that heading of creating a comprehensive financial plan. Withdrawal rates, for example, are a very hot topic among our users. Any other things that investors should make sure that they are investigating before they go ahead and retire?

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Steffen: When you are putting together the financial plan, as part of that balance sheet and budget you're going to do, you're going to look overall at the company benefits, for example, and all the other things that are available to you. So, maybe you're going to look at all the balances in your retirement savings accounts. If you've changed employers over the years, go back and make sure you haven't left any benefits behind. It sounds unusual, but that does happen from time to time.

So make sure you've got all those pieces together. And then look at what it takes to maximize some of those benefits. Pension distributions, for those folks who still have pensions, [there are] usually a lot of different options as to what you can do with those, whether it's single life or joint life, lump sum or annuity. On the Social Security side, there's a lot of planning that can be done. So, understand how to get the most out of the benefits that you are entitled to.

Benz: Social Security benefits planning is a huge area of interest for our users. What are some general tips that you can offer people on how to make sure that they are maximizing those benefits? Are there any tools you would recommend? I think most people know, if they've looked at this topic at all, that if they're healthy they should try to wait as long as they possibly can. Anything beyond that you can offer people?

Steffen: Well, a couple of things. First off, if you're going to continue to work, you don't want to take benefits before full retirement age. Taking benefits early while you continue to work, in many cases, will cause you to have to return some of those same benefits. So that's one of the rules of thumb.

The other thing is, as you said, the longer you can wait to start taking benefits, in all likelihood the better off you're going to be. The analyses we've run show that the breakeven age is about age 78 or so. So, in other words, if you think you're going to live beyond age 78, you're better off taking benefits later in life rather than earlier, just because the extra bonus they pay you for deferring to start your benefits will more than make up for the fact that you didn't have benefits in those early years.

Benz: So look at family longevity history maybe as a starting point?

Steffen: Exactly. Personal health as well.

As far as tools go, the Social Security Department has a great website with some pretty good tools that can help you look at the different alternatives. You can even go out there and get your own personalized statement of benefits, which they used to mail you every year and now you have to go online to request.

Benz: You have to sign up.

Steffen: Exactly.

Benz: You also mentioned that budgeting is an important component of this retirement planning, and a lot of things fall under that heading. You want to look at your fixed expenses and whether you can tinker there to try to lower that overhead. What kinds of categories would fall under that heading?

Steffan: In the fixed expenses, it's the things that are going to be pretty consistent from year-to-year, so the big one out there is the mortgage. A lot of the people I talk to would prefer to go into retirement without that debt hanging over their head. So to the extent you can pay off the mortgage before you get into retirement … a lot of folks time retirement to the date that mortgage is paid off.

Now with interest rates being a lot lower, it's maybe not as significant a thing as it used to be, but that's one of those that people like to not have hanging over their head when they get into retirement.

Benz: And downsizing, I suppose, should also be part of the thought process if you are in a very large home, maybe where you raised your children, and don't need such a big home anymore.

Steffan: You may not be able to actually pay off the mortgage, but maybe what you do is you sell the home and then downsize to one that's more manageable for during retirement, absolutely.

Benz: I want to talk about this issue of continuing to work. First let's talk about why, if you can work longer, that can be such a big benefit to the viability of your long-term retirement plan.

Steffan: The big reason that people are working later these days--and there was a study that just came out on it--is that retirement is now tied to Medicare. And if Medicare starts at age 65, that's when people are looking at retirement, because that employer-provided health insurance [is needed prior to Medicare]. So that seems to be the big driver for why people may be want to work later.

Of course working later, keeping that income coming in, means you can defer having to access some of your savings. And the longer you can let those savings continue to grow, the more will be available for you during retirement.

Benz: And also the Social Security benefit that you just talked about, the longer you can wait...

Steffan: Absolutely.

Benz: Let's talk about the portfolio planning processes as you get ready to retire. Obviously this is a huge and important topic. But what are some of the specific risk factors investors should have their eye on as they look at the viability of that portfolio?

Steffan: A lot of people head into retirement with concentrated positions of employer stock; that's a very common thing that we see with our clients. And when you've made that separation from the employer--and maybe even before then, really--that's the ideal time to start looking at at paring back that concentrated position so you go into retirement with a well-diversified portfolio.

The other thing is these rules of thumb out there about, as you get into retirement your portfolio becomes much more conservative and you shift out of equities and heavier into bonds. And while there may be some truth to that, the reality is, people spend a third of their lives in retirement, and that's not uncommon. So you still need to maintain that growth in the portfolio.

And so, you can't eliminate equities form your retirement portfolio. In fact for many of the folks we work with, it's still as much as 50% or 60% of their portfolios.

Benz: Even when they are retired.

Steffen: Even during retirement.

Benz: Does the current bond market outlook play a role there, too? Are just not assuming that bonds will return very much?

Steffen: That's the other issue. A lot of people would get into bonds during retirement because they want that consistent income that comes off of those, and we are just not seeing that these days, which has led people to look for other alternatives for income during retirement, and get into things that they probably otherwise wouldn't have gotten into. Some of them [may be] very good investments, but not appropriate in the percentages that people are looking to get into them. So, you've got to have an overall look at the portfolio. Asset allocation is still the driver on everything.

Benz: I want to back backup and follow-up on that employer stock question. What's the top end of employer stock that you would recommend that anyone hold either before retirement or during retirement?

Steffen: You know it's easier said than done. During retirement, personally, I say anywhere between 5% and 10% on any one position is probably about as high as you want to go. But every corporate executive I've worked with is always well over that. So, you try and manage that as best you can. As you get into retirement and you start to move away from that company, you really want to dial that back, and again shoot for that 5%; 5% really, personally, is my target. Everybody is going to have their own level on that. It really depends on what the rest of the portfolio is, too, and what other income sources you have and what kind of security you've got in the overall retirement plan.

Benz: Tim, obviously retirement readiness is a huge and important and complicated topic. We really appreciate you being here to share your insights.

Steffen: Thanks for the time.

Benz: Thanks for watching. I'm Christine Benz for