One Smart Retirement Move to Make This Week: A Fast Savings Readiness Check

As retirement gets closer, it can be tempting to zero in on your savings total. But an account balance by itself does not show whether that money will be enough to sustain the retirement you want.

A more useful weekly money task is a quick retirement readiness review that goes beyond your savings and helps flag possible problems before you stop working.

Begin With the Key Question

The first step is to estimate your expected spending and compare it with the income you think you will receive, said Ed Peagler, a financial advisor and founder of E.P. Wayne Financial Group.

He suggested turning annual spending into a monthly figure so it is easier to match against monthly retirement income.

Gregory DuPont, an attorney, certified financial planner (CFP) and founder of Advocate Wealth Solutions, said to also examine the following:

• Balances in each account, divided by tax type: pretax, Roth and taxable

• Your Social Security statement

• Pension details

• Your Medicare schedule

The objective is not necessarily to have every dollar backed by guaranteed income, but to determine whether the overall plan produces enough cash flow.

Figure Out How Much of That Income Is Taxable

Retirement income on paper is not always income you can actually spend. DuPont said real income is what matters most in retirement, since taxable income determines your tax bracket, whether you hit an IRMAA threshold and face higher Medicare premiums, and how much of your Social Security is taxed.

Taxes can shift sharply once paychecks stop, Social Security starts and required minimum distributions, or RMDs, eventually begin. That is why pre-retirees should look closely at when their retirement income will arrive and where it will come from.

Sorting savings into pretax, Roth and taxable accounts can help identify which money will be taxed. It is also important to factor in Social Security taxation and Medicare IRMAA surcharges.

Zachary Sahar, a certified public accountant (CPA) and managing director at Capital Tax, advised people within a few years of retirement to test several years, not just one, because taxable income can vary a great deal over the course of retirement.

That kind of stress test can also show whether a Roth conversion makes sense. For example, someone retiring at 65 may have a number of years before RMDs begin, creating a stretch when taxable income could be unusually low.

Test the Plan Before You Rely on It

After the basic numbers add up, Peagler said to change the assumptions. Build in weaker market conditions and softer investment returns, and be aggressive about inflation and projected spending. That reveals whether a retirement plan has enough margin for error or only works under perfect conditions.

If the answer is no, finding that out before retirement leaves more room to act, whether that means saving more, working longer, trimming planned spending or changing investments.

Keep Reviewing It Regularly

Retirement readiness is not something you calculate once and then ignore.

DuPont said to revisit the check every year and whenever there is a tax law change, the death of a spouse or a major one-time income event.

Be sure to refresh Social Security estimates, account balances, spending assumptions and retirement timing. As retirement approaches, the projections can become more detailed.

If the numbers show a shortfall, spotting it early gives retirees time to make changes.