Four Actions to Take if You’re Retiring Next Year

Retirement is a major transition point – as you go from saver to spender. 

It's common for people who are retiring to set their retirement date in either the springtime or the early summer. If you are one of those lucky folks who will retire soon, then "Congratulations!"

But, before you start planning your retirement party, take these four actions.

1. Don’t Leave Money on the Table

As part of your employment, you may be entitled to "matching" and/or "profit-sharing" contributions from your employer to your 401(k) or other retirement plan. Since you typically need to be actively employed on the date the payment occurs to receive these funds, make sure you understand these terms before setting your final work date. You don't want to miss out on "free" money!

For personal contributions, you may want to increase your contribution percentage to help you reach your annual maximum. Many employers cap the amount you can contribute to your plan from each paycheck. Since you may not be able to increase your contribution rate to 100% for your last couple of paychecks, you may need to increase your contribution percentage long before you retire to max out. It is also important to note that the Puerto Rico Internal Revenue Code allows you to contribute up to a maximum of $15,000 annually or $16,500 if you are 50 years or older.    

Your pension benefits are calculated based on your earnings history. Consequently, you will want to align your retirement date with the timing of your annual compensation adjustment, because retiring before that date could cause you to miss out on including another year of higher compensation in your pension calculation. 

Similarly, it's important to understand the timing and eligibility requirements for any bonus payments you may receive. Most people are required to be gainfully employed at the time the bonus is paid to receive it. If you do happen to leave before this date, you may be able to negotiate benefits as part of your retirement agreement.   

Unused vacation days are typically paid out as part of your final paycheck. This can be a problem when you have substantial time off, as the large lump sum could push you into a higher tax bracket. If you plan to retire near the end of the year, take vacation time when you projected to retire, which may enable to push a hunk of your remaining "vacation wages" into the next year and help minimize the ripple effect from a large, one-time payment.

2. Refresh Your Risk Profile

Retirement is a major turning point in your life. It's more than the transition from full-time work to either part-time or no work at all. It's also the transition from saver to spender, where you face the reality of spending down your retirement nest egg.

Also, your asset allocation may be more heavily weighted in stocks than you initially intended. Rebalancing your investments is a good idea during your working years. However, keeping things in balance is even more essential once you retire. Since you'll be drawing down your savings to finance your retirement, having too much of your portfolio in riskier assets like stocks leaves you vulnerable to a potential market downturn.

Before you rebalance, remember you may incur tax liabilities and/or transaction costs, and rebalancing does not assure a profit or protect against a loss.

3. Avoid Underpaying Your Taxes

When you're working, your employer automatically withholds taxes from your paycheck. In retirement, that may not be the case. Taxes are not always withheld on your retirement income. Instead, you may need to opt in to have taxes withheld from your Social Security benefits, pension benefits and your individual retirement account (IRA)/401(k) distributions. If you don't have taxes withheld, estimated tax payments will likely become a necessary part of your life.

Opting in to have taxes withheld from your retirement income will help you dodge penalties from late payment on taxes.

4. Talk With Your Spouse

It's worthwhile having a good idea of how you will spend your newfound free time in retirement. Many will give a "deer in the headlights look" when asked what an ideal day in retirement looks like both today and a year from now (after the initial retirement buzz disappears). They were unprepared to convert 40+ hours "in the office" into 40+ hours of meaningful activity. 

At the same time, they also lacked a plan for spending time with their spouse. After all, one or both of you have regularly worked for the past several decades. Retirement creates a brand-new dynamic that removes the element of scheduled separation.  Instead, you will be stuck (blissfully) with each other. How will you spend that time? Volunteering? Working around the home? Traveling abroad?

Creating a plan for staying busy that you and your spouse agree on will help ensure that your golden years are sweet, not bittersweet.

The Bottom Line

Taking the plunge into retirement is a monumental milestone. It's important that you're ready for it. Ask yourself and/or your adviser the following questions to help you evaluate your retirement readiness:

• Do I have a robust understanding of my employer's benefits plans?
• What will be the tax effects of withdrawing from my retirement accounts?

Navigating your retirement journey requires you and your adviser to have confident answers to these questions. If you need more clarity, seek better guidance that allows you to pursue your short and long-term financial goals.

At Popular, we are here to guide you in preparing for retirement. If you want to start or review your retirement strategy, contact Popular’s Retirement Center at:  educacionretiro@popular.com.

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The Retirement Center services may entail a cost. The information and general descriptions found in this article are designed to help you understand some of the factors you should generally consider when evaluating the appropriateness of any strategy or investment within your retirement plan. Any description included is only for informational and educational purposes and for your independent consideration; it is not to be regarded or viewed as advice or as a suggestion to take (or refrain from taking) any particular action. By providing this information, we assume that you can evaluate this information and the general descriptions found here to exercise your independent judgment. Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting or tax advice services. If legal, accounting, or tax advice services are required, you should seek the services of a competent professional. Insurance and investment products are not insured by the FDIC; they are not deposits or obligations of, nor are they guaranteed by Banco Popular, its subsidiaries and/or affiliates. Investment products may lose value. Some insurance products may lose their value.