8 Questions to Ask Your Financial Advisor Before Retiring
The five years before retirement don’t get much media ink, but there’s no doubt they should.
While market returns and regular contributions to 401k plans and IRAs are vital, the five-year-and-counting timeframe can be equally critical, especially if a retirement saver is short on funds for their golden years.
“The biggest mistake upcoming retirees make is thinking the transition into retirement will be easy,” says Dana Anspach, a certified financial planner and CEO of Sensible Money LLC. “Most people find it terrifying.”
Meanwhile, the biggest issue In retirement is that you’re solving a new math problem.
“Your assets must last an unknown length of time while earning an unknown rate of return and covering expenses that will increase at an unknown pace,” Anspach says. “The financial planning and investment approaches that helped you accumulate assets are not the same tools that will ensure your retirement is appropriately funded. Your investment approach must evolve to cover downside risks and incorporate stress testing, illustrating how you’ll fare if you retire into recessionary times.”
8 Big Retirement Questions for Your Financial Advisor
That’s a lot of ground to cover as your retirement day approaches, so getting your finances together in advance should be job one. Make that admittedly large task more likely with these key questions for your advisor – as long as you take the answers you get to heart.
1. How much money can I take out every month in retirement?
One of the first realizations for people nearing retirement is saving more for their desired spending in their post-working years. If that’s the case, you’ll want to know in advance how much income you can take every month as a retiree. That way, you still have a few years to close that income gap.
“Consequently, a good question to ask is whether you should adjust your investments to reduce risk, addressing the market volatility issue mentioned earlier,” says Chad Gammon, a financial planner and owner at Custom Fit Financial in Ely, Iowa. “Once you figure out the risk component, ask how much you can withdraw annually in retirement, which helps determine if your savings will support your spending needs.”
The answer to that question may prevent you from retiring too early. “People may be at the peak of their earning potential, and if they later realize they need to return to work, they might face a significant pay cut,” Gammon says.
2. Where is my retirement incoming coming from?
Another key question for retirees within five years of retirement is how to turn their savings into a reliable income stream.
“Many people focus on growing their nest egg but don’t have a strategy for drawing it down efficiently,” says Randall Yates, co-founder at VA Loan Network in Dallas, Tex. “Talk to your financial advisor about a balanced approach, like incorporating high-dividend stocks and annuities, and this can create a steady flow of income in retirement.”
3. How can I combat inflation in retirement?
Yates says he’s had retirees say they regret not considering inflation in their budgets and discovering their money didn’t go as far as anticipated.
History shows that prices keep increasing, and if your income doesn’t adjust, it can hurt your lifestyle,” he says. “Ask your advisor about inflation-protected investments or dividend-paying stocks that tend to grow payouts over time.”
4. How can I “de-risk” my portfolio as I draw closer to retirement day one?
Career professionals close to retirement need to de-risk their portfolios, especially if they are heavily weighted in stocks.
“A large downturn in the equity markets immediately preceding retirement can have devastating effects on an individual’s standard of living in retirement,” says Robert Johnson, professor of finance at Heider College of Business, Creighton University. “The exact time a person retires can have an enormous impact on the quality of their retirement if their assets are focused in the equity markets.”
Consider someone who retired at the end of 2008, right in the Great Recession.
“If they were invested in the S&P 500, they would have seen their assets fall by 37% in one year,” Johnson says.
That’s why the five years before retirement should be considered the retirement red zone, Johnson notes. “Just as a football team can’t afford to turn the ball over and fail to score points when inside the opponent’s 20-yard line, the retirement investor can’t afford a big downturn in the retirement red zone,” he says. “A bad sequence of portfolio returns immediately preceding retirement can be devastating.”
5. How should I handle income tax payments once I retire?
Taxes can be withheld directly from retirement account distributions, much like how they’re withheld from your paycheck while working.
“However, if you aren’t taking retirement account distributions yet and instead are living off of brokerage account assets, you may need to make quarterly estimated tax payments,” Anspach says. “If you’re selling investments and realizing capital gains, this can also increase your tax bill, and if you don’t pay enough throughout the year, you may be subject to underpayment penalty taxes.”
Work with a trusted tax professional and/or your financial advisor to get taxes right in retirement, she adds.
6. Should I take out more cash in my early retirement years?
For people who have been great savers, there is a tendency to be cautious about withdrawing too much early in retirement.
“This makes perfect sense, but if you are too careful, you may withdraw too little,” Anspach notes. “When I see people with regrets, this is often the biggest cause. They had the means to travel or move or remodel early in retirement, but they didn’t do it.”
Later in life, energy levels were lower, and pursuing those items was no longer feasible. “In my experience, the regrets are always around the things they didn’t do,” Anspach adds.
7. How do I handle distribution planning?
Income distribution planning is also a big deal as you retire – and it’s an art form.
“The order in which retirees withdraw from these accounts can significantly impact their tax liability and the longevity of their retirement assets,” says Justin Hayward, president at Haywood Wealth Management in Houston, Tex. “Advisors should help structure withdrawals to minimize taxes while maximizing income and investment growth.”
8. Am I retiring at the right time?
Maybe the most important question to ask a financial advisor before edging into retirement is if the timing is right.
“Some people operate under the assumption that they want to hang up their spurs the moment they turn 65 because that’s what they’ve been led to believe they should want,” says Taylor Tepper, banking and investing expert at Forbes Advisor. “Others might think they’d want to do nothing more than golf for the last 30 years of their lives.”
While those goals may be right for some, they’ll be wrong for others, Tepper says.
“Perhaps you can afford to retire before 65,” he notes. “Or maybe your job is less about the income as you’re already financially independent and more about providing purpose and meaning to your days. Maybe you don’t actually like to golf.”
By discussing and investigating all of these suppositions and possibilities with a financial advisor, you’ll have a good sense of your “real” financial goals. With those in mind, you and your wealth manager can create a plan to help you get there,” Tepper says.
“Remember, the three most important aspects of a happy retirement are money, health, and relationships,” he adds. “You need to consider all three when deciding what retirement means for you.”
The Takeaway on the Biggest Questions to Ask a Financial Advisor in Advance of Retirement.
“Retiring is one of the biggest financial decisions you make,” Anspach says. “Approach it with due diligence, run numbers, and develop an investment transition plan, and you’ll experience far less stress as you transition out of the workforce.”