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Making the Transition: A Pre-Retirement Checklist

Although many recent retirees report that they are living the lifestyle that they had hoped in retirement, over half look back on the years before leaving the workplace and wish they had done more to prepare, according to a study by Fidelity Investments.1 Here is a checklist prepared by Fidelity Investments that should help those approaching retirement.

Five Years From Retirement: Set the Stage

  • Define your lifestyle. Determine what you want from retirement. Will you continue to work, and live your current lifestyle? Or do you dream of traveling the world?
  • Choose your target date. At what age would you like to retire? Are you working toward an early retirement?
  • Assess the risks. Before you can put a realistic retirement plan in place, it is important to understand the five financial risks that can impact your retirement: 1) the probability of longer lifespan that requires savings to last longer; 2) inflation's impact on future purchasing power of today's dollars; 3) an overly conservative asset allocation that may put you at risk for not being able to out pace inflation; 4) a withdrawal rate that depletes assets too quickly, and 5) rising health care expenses. Then, consider which risks you may be most susceptible to.
  • Size your gap. Determine potential gaps in your savings strategy by estimating your income and expenses according to the number of years you expect to live off your savings. Fidelity estimates that retirees will need 80-100 percent of their pre-retirement income to live comfortably2.
  • Catch up on savings. Increase your savings by investing the maximum into your 401k before leaving the workplace. Through the 2001 Economic Growth and Tax Relief and Reconciliation Act, eligible workers ages 50 and older have the opportunity to contribute an additional $4,000 to their workplace retirement plan in 2005 beyond the $14,000 annual limit, if their plan allows. IRAs provide similar catch-up opportunities to save more outside your 401k, as well, with the opportunity for older workers to contribute an additional $500 in 2005.

Three - Five Years from Retirement: Gather Information

  • Learn the process. Start to familiarize yourself with the general process of transitioning into retirement. Acquaint yourself with the key components of a successful retirement income plan (e.g., budget, asset allocation strategy, withdrawal strategy) and what makes them successful. Know what actions need to be taken, and what resources are available to provide support and guidance. Your employer can be a valuable resource for this information; be sure to seek out any income planning guides and retirement planning seminars offered.
  • Review your benefits. Understand which benefits you will continue to receive in retirement from your employer, and familiarize yourself with how they will work. Consult with your employer to get answers to any outstanding questions. Be sure to factor in your spouse's benefits as well, where applicable.
  • Assess future health care needs. Get to know Medicare and how any employer-sponsored health benefits will work with Medicare in retirement. Maximize savings specifically intended to meet future health care costs. Fidelity estimates that a couple retiring in 2004 at age 65 with no employer-provided health care coverage would need $175,0003 in savings to fund out-of-pocket medical expenses in retirement. If you will need health care coverage between your retirement date and when you are eligible for Medicare (generally age 65), find out the cost of coverage under COBRA and various individual or association programs, if you qualify.
  • Understand Social Security. Work with the U.S. Social Security Administration (www.ssa.gov) to familiarize yourself with how Social Security works, the benefits due to you, and the steps you need to take to activate your payments upon retirement. Determine your optimal age to begin taking payments; you may want to consider delaying the age at which you collect in order to increase your monthly payment. If you decide to retire prior to age 62, you should contact the Social Security Administration to order a revised statement with the new retirement date to determine any changes in your payment.

One - Three Years from Retirement: Assemble Your Plan

  • Learn the details. Work with your employer to clarify the details of your benefits and the decisions that you need to make, including your payout options. Keep in mind that some decisions are irrevocable, and cannot be changed once you have retired.
  • Create a budget. Map out a detailed plan of your estimated expenses in retirement. They will determine your lifestyle. Be sure to factor in inflation. You may find that the lifestyle you want will cost more than you expect. You may need to consider working part-time in retirement, reducing expenses, or postponing your retirement date to meet your goals.
  • Develop your income stream. Create an income strategy to cover your expenses in retirement. Know what your Social Security payments and pension and survivor benefits will be. Determine how much you need to withdraw from your investment portfolio annually, using as conservative a rate as possible, particularly in the early years of retirement. Withdrawal rates above 4 percent begin to increase the likelihood that retirees will deplete their assets prematurely.4 Assess when you can withdraw money from your retirement accounts without penalty (most individuals can withdraw from tax-deferred savings plans without penalty at age 59½). You may also want to consider whether an annuity may make sense to supplement your income.
  • Revisit your asset allocation. Check the asset allocation of all savings and investment accounts you expect to use to generate retirement income. Workers nearing retirement who are still investing in a 401k or IRA may want to consider maintaining a diversified portfolio with a mix of investments. A balanced portfolio that includes a significant portion of equities can help promote potential future growth, and protect against inflation, rising health care costs and longer life spans.5 A lifecycle fund can also make age-appropriate investing easier by using a pre-determined asset allocation strategy that becomes more conservative as the fund's target retirement date approaches.
  • Consider long-term care. Think about funding long-term care insurance, if you haven't done so already. Consider that there is a 50 percent chance that today's 65 year-old couples could live well past the age of 90.6 Rising health care costs, coupled with inadequate health care coverage, can have a devastating impact on your retirement income plan.

One Year or Less from Retirement: Activate Your Plan

  • Consolidate and automate. Given that pre-retirees expect to juggle more than nine sources of income in retirement7, it is important to start consolidating the accounts you will use to generate your income. Automate as many financial transactions as possible, through options such as automatic deposit of your Social Security check and retirement account payouts into your bank account, as well as automatic bill payment of items such as insurance premiums. Seek out services that allow you to view all accounts from one central source. This will allow you to gain more control and will simplify your life in retirement.
  • Get Uncle Sam and others on board. Contact the U.S. Social Security Administration to obtain the necessary paperwork to file for your payments and start the income flow. Work with your employer to finalize all retirement account payout options and make arrangements for payments to begin according to your income plan.
  • Create your retirement "paycheck." Finalize your withdrawal strategy and how much income will be drawn down from assets each month to cover your expenses. Determine which sources you will withdraw from first for retirement income. For most individuals entering retirement, it is best to withdraw from taxable accounts first and keep tax-deferred accounts growing. Online tools and in-person consultants can help you build a tax-advantaged plan.
  • Activate your health care coverage. Work with your employer to transition from your current plan into any retiree health benefits provided. Activate supplemental coverage you will need until you qualify for Medicare, as necessary. Work with The Centers for Medicare & Medicaid Services (CMS) (www.medicare.gov) to activate your Medicare coverage as soon as you are eligible.
  • Make the transition...out of the workplace and into the next phase in your life, knowing that you've planned ahead and taken the crucial steps needed to ensure retirement readiness.


1. The Fidelity Investments Retirement Transition Study was conducted by Richard Day Research, Inc. (RDR) in November and December 2004 among 749 pre-retirees within one year of retirement and 755 retirees within three years of retirement who work for or have retired from an employer with more than 5,000 employees and hold a DC or DB plan from that employer.
2. "Lifetime Income Planning." Dolan and Harlow, Fidelity Management and Research Company, 2004.
3. Based on a couple retiring at age 65 in 2004 from Fidelity's 2003 report: "Retiree Health Care Accounts: The Next Step Toward a Workable Solution."
4. "Lifetime Income Planning." Dolan and Harlow, Fidelity Management and Research Company, 2004.
5. Ibid.
6. Ibid.
7. Retirement Income Survey by Richard Day Research for Fidelity, June 2004.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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