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No. 1: Plan the transition
As life transitions go, retirement ranks way up there among the most challenging, both financially and emotionally.
Many decisions carry financial and life-planning implications: Should you sell the house and downsize? Will you have enough money to pursue travel plans and hobbies? How do you want to spend your time?
"Set goals," says Leslie Tayne, an attorney in New York. "Plan out what you want your retirement to be like to determine if you have the funds to make it happen."
After a lifetime of work, you may have mixed emotions about retirement -- looking forward to not working but nervous about leaving your work identity behind.
Because retirement can be so stressful, Jeff Vollmer, a financial adviser with Hyde Park Wealth Management in Cincinnati, advises clients to begin planning 5 years in advance. If that isn't possible, a one-year time frame can work if you are focused and decisive.
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No. 2: Time Social Security
The decision about when to take Social Security is tricky, especially for couples. There can be a major benefit to delaying benefits at least until full retirement age -- between 65 and 67, depending on your year of birth. But some retirees who are forced to retire earlier than planned may need to take it as early as 62.
"Know your Social Security benefit at key ages, such as your full retirement age and at age 70, and consider whether it makes sense to wait and receive the much higher benefit available at age 70," says Paul T. Murray, president of PTM Wealth Management in Chalfont, Pennsylvania. The Social Security Administration's website offers calculators that help with the decision-making process and show the impact of retiring at various ages on your monthly benefit.
If you're married and at full retirement age, you may have the option to file and suspend -- apply for benefits, and then ask that payments be suspended so that your spouse can receive a spousal benefit while you earn additional retirement credits up to age 70 -- but that strategy was discontinued this year.
You must apply for Social Security benefits 3 months in advance of when you want to begin receiving them, says Tayne.
No. 3: Plan Medicare and supplements
After Social Security, enrolling in Medicare is one of the biggest decisions facing retirees, says Murray. Medicare is complex, and enrollment dates differ depending on which part of Medicare you are enrolling in. Here's an overview.
Medicare Part A covers hospitalization; as long as you've worked and paid Medicare taxes long enough, that coverage is free. Medicare Part B covers medically necessary services such as lab tests and doctor visits. If you are already signed up for Social Security or Railroad Retirement Board benefits before you turn 65, you will automatically begin receiving Part A and Part B at that time. If not, sign up for both 3 months before your 65th birthday.
Medicare Part C refers to Medicare Advantage plans, under which you receive health care services through a health maintenance organization or preferred provider organization. Medicare Part D is the prescription drug benefit program. The initial enrollment period for both programs begins in the 3 months before you turn 65, including the month you turn 65, and ends 3 months later. There are exceptions to these dates, which are outlined in the Centers for Medicare and Medicaid Services' tip sheet, Understanding Medicare Part C and D Enrollment Periods.
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No. 4: Create a post-retirement budget
Many people believe their post-retirement expenses will be significantly lower than their pre-retirement expenses, but that isn't usually the case, says Vollmer. For example, while you won't have to dress up for work, you will likely be traveling more. And while you probably won't go out to lunch with former colleagues or clients, you may go out to dinner more often.
By taking a close look at your current and expected future expenses, you can be better prepared to match your spending with your post-retirement income. "Determine how much you will need for general expenses -- mortgage, utilities, food -- as well as medical expenses and insurance," says Tayne.
Keep detailed track of what you spend before retirement because that will give you an idea of the expenses that aren't likely to change in retirement, such as food, car repairs and home maintenance. Also, remember to have money set aside for bigger expenses that come up infrequently, such as the replacement of a roof or major appliances.
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No. 5: Pay down all debt if possible
Debt payments, whether from credit cards, a mortgage, a car loan or a child's student loan, can burden a post-retirement budget, leaving less room for the kinds of activities that you want to enjoy in retirement. If you still have debt during the year before retirement, pay down as much as you possibly can -- at least the debt outside of a mortgage, says Larry Luxenberg, partner with Lexington Avenue Capital Management in New City, New York.
Entering retirement mortgage-free is ideal if that's possible, says Vollmer. "Absolutely pay off your mortgage if you are in a position to do so," he says.
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No. 6: Dial back investment risk
The recent financial crisis showed that the risk of a major downward movement of the market just before retirement is all too real, says Jeffrey Sica, founder, president and chief investment officer of Sica Wealth Management in Morristown, New Jersey. Surrendering 15%, 20% or even 25% of the value of your retirement portfolio in the year before you retire can torpedo the best-laid retirement plans. It can result in having to postpone retirement or cutting back on the post-retirement lifestyle.
That's why it makes sense to revisit asset allocation in your company retirement plan, says Murray. "Become more conservative in your company retirement plan," he says. "You don't want a major market decline to set you back financially."
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No. 7: Update legal docs and policies
Retirement is an opportune time to review major legal documents and insurance policies and consider adding or subtracting coverage. "Update or prepare legal documents for estate planning or retirement years such as wills, advance directives including health care proxies and power of attorney, and review beneficiaries on retirement plans and insurance," says Tayne.
Make sure those documents are kept in a secure place and that your heirs are aware of their location in case something happens to you. Keep an updated list of passwords for online banking, investment accounts, email and other accounts where your spouse or children can find it in case of an emergency.
If you don't already have a long-term care insurance policy, this may be the time to explore adding one, as nursing home and home care expenses aren't covered by Medicare, adds Murray.
No. 8: Design your portfolio for income
As you count down to retirement, you will move from accumulating funds to withdrawing funds on which to live. Designing a post-retirement investment portfolio that can provide enough income while appropriately managing risk is a major challenge, especially as life spans are increasing. This requires a balance of growth assets such as stocks and more conservative assets, such as bonds and cash.
Vollmer stress-tests client portfolios to ensure that, to the greatest degree possible, they can last throughout a long retirement and avoid major losses in the event of a sudden or prolonged market downturn. "We look at various scenarios and run simulations so that market events don't derail client goals and plans," he says.
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