Steps every executive should take before retirement

While you may have been planning and saving for retirement for decades, it’s important to run the numbers with your advisor ahead of time, to make sure you’re working with an estimate of how much you’re likely to spend once you retire. It should be as close to accurate as you can possibly make it. “Most people don’t have a realistic view of their cash flow needs in retirement and set spending goals that are too narrow,” says Permenter. “Living expenses don’t necessarily go down. That’s because people fill their free time with new adventures, like travel and new hobbies or activities.”

Events in later life can also radically change the retirement planning you’ve done so far. “A medical emergency or divorce can force you to recalibrate your plan in a significant way,” says Michael Shearer, a financial advisor with Merrill Lynch. He adds that understanding your likely spending needs and developing a financial road map before leaving work “gives you the opportunity to evaluate other scenarios if there’s a shortfall in your assets.” Analyzing your alternatives could help you decide whether to work longer, save more now or adjust your spending goals in retirement.

Your financial advisor can help you calculate your retirement cash flow needs and model various market and economic scenarios to test your spending goals against your assets, taking into consideration factors such as market performance, your tax liabilities, inflation and your expected health and longevity. Working with your financial advisor alongside your legal and/or tax advisor can help you make decisions that take your personal circumstances into account.

When you understand what you’re likely to need for living expenses, you’re in a better position to make smart decisions about how and when to tap your retirement assets. For example, say you have a traditional pension plan benefit. Do you want to maximize your pension benefit over your single lifetime, choose a joint and survivor benefit, or a guaranteed payout for a limited number of years, which would benefit your family if you were to die prematurely?

In lieu of a traditional pension, it has become more common for companies to offer a cash balance retirement plan. If you have such a plan, do you want to leave the assets in the plan or roll them into an IRA, which may provide a greater number of investment options, as well as the potential for greater flexibility to structure distributions, but may have higher investment fees or costs? (See “Roth 401(k)s: Tax-free income in retirement” below.)

To make the most of your deferred compensation’s potential, timing is critical. “You generally have to decide your distribution time frame when you elect to participate,” says Permenter. If, as you approach retirement, you find your original elections are no longer suitable, there may be an opportunity to make a change to defer receipt of the plan assets (by at least five years) or change the form of payment. For example, distributions made in a lump sum could result in a substantial income-tax obligation the year after you retire, as well as pushing you into a higher tax bracket, and may not align with your cash flow needs. It may be more tax-efficient to spread distributions over 10 or more years, provided you have other assets or income sources that will cover living expenses earlier in retirement.

Another potential plus to deferred compensation: Say you’re planning to retire to another state, and during your working years, you’ve lived in a state with high state income taxes, such as New York, Minnesota, New Jersey or California. If your prospective new home is in a state with lower or no state income taxes, consider structuring your distribution into 10 or more annual installments — that could result in your being taxed at the lower rate in your new state at the time the payments are received. On the other hand, a lump sum or shorter payment duration would mean you’d be taxed at the higher rate in the state where you worked up until the date of your retirement.  

A diversified portfolio is important at any age, but the margin for error narrows as you near retirement. Executives often hold concentrated positions in company stock that create outsized risks in their investment portfolios. Many people think they should wait until after retirement to sell their company stock, so they avoid a capital gains burden.

But that’s not always the best approach, notes Shearer. “That strategy works great if the stock price stays the same once you retire. But if the price falls, so does your net worth. And if the price rises, you may be facing large capital gains taxes in retirement. You might instead want to consider beginning to diversify shares of company stock ahead of time, while you’re still working.”

In addition, you might want to revisit your assumptions about your tolerance for risk. While taking a more conservative investing stance might seem logical in the years leading up to retirement, says Shearer, “now that required minimum distributions can occur later, individuals with ample assets and income streams outside of their retirement accounts may want to maintain their exposure to investments with greater growth potential.” 

After an exercise in cash flow modeling, executives frequently find they’ve amassed more assets than needed to support their lifestyle. “The discussion then transitions to legacy planning,” says Permenter. That conversation should include your philanthropic goals — along with the possibility of gifting to your family during your lifetime when you’re able to help guide them in being good financial stewards of the family wealth.

If you have plans for philanthropy, making gifts to charity before you retire can provide a potential tax deduction during your high-earning years. What’s more, you may want to step up plans for giving to children and grandchildren, so you can take advantage of today’s higher gift tax exemption, which will sunset in 2026 if the current law is not extended. At the same time, there are strategies you might consider to move assets out of your estate to minimize the future tax burden.

As you plan for this new phase of your life, your financial advisor – working with your legal and/or tax advisor – can be an invaluable resource, asking the questions that can help clarify your vision of retirement and walking you through some of the nuances and implications of your various options.

“You want to create as much flexibility and diversity in your retirement assets to try to optimize your tax situation and provide you with better growth potential,” says Permenter. “By working with your financial advisor and tax advisor as you’re accumulating wealth, you can make any needed adjustments to your plan. That will potentially allow you to feel more secure that the decisions you’ve made are keeping you on track to meet your goals.”