What to Do With Your IRA if You're 1 Year Away From Retirement

If you have an IRA retirement plan and you're retiring in one year, there are a few important steps to take in order to make your transition to retirement as smooth as possible. Here are some examples of tasks to complete before you leave your job, which include deciding on a withdrawal strategy, building an emergency fund, and speaking with a financial advisor if you need help.

Finalize your target asset allocation

One of the most important steps to take with your IRA before retirement is reviewing your asset allocation. That means seeing how much of your retirement fund is in stocks, bonds, and cash. If your portfolio is aggressive, now is the time to shift it to be more conservative. Financial experts recommend that the closer you get to retirement, the more conservative your asset allocation should become. This is designed to protect you because experiencing a market downturn and retirement can make it challenging to preserve your wealth for the long haul.

Set aside at least one year of expenses in cash

Another important step to prepare for retirement is to set aside at least one year of expenses in cash. Some financial experts recommend keeping 18 to 24 months of living expenses in cash as an emergency fund. The purpose of having an emergency fund is to ensure you have money to draw from in case there's a market downturn and you don't want to sell your investments at a low point.

Decide on a withdrawal strategy and rate

There are many different types of withdrawal strategies. If you're not sure which is best for you, you can always set up a time to speak with a financial planner. They can give you advice on the best withdrawal rate for you that can help you enjoy your lifestyle, while also preserving your nest egg for the future. Many people default to the 4% rule, which involves withdrawing 4% of your portfolio during your first year of retirement and then adjusting based on inflation after that. Of course, the best withdrawal rate for you will depend on the amount of money you have invested, your current expenses, and several other factors.

Understand how traditional IRA withdrawals will be taxed

If you have a Roth IRA, you can withdraw your money tax-free in retirement as long as you meet certain qualifications. However, if you have a traditional IRA, your distributions are taxable when you withdraw them. It's important to understand how much your withdrawals will affect your tax rate. For example, if you withdraw enough money to put yourself into a higher tax bracket, you might have a larger bill at tax time.

Consider whether a Roth conversion makes sense now

If you have a traditional IRA, one strategy is to convert it into a Roth IRA before you retire. When you do this, you will have to pay taxes on the amount you convert. However, the benefit is that you can withdraw your money tax-free during retirement once it's been in your Roth IRA account for five years.

Some people do this early in retirement when they have a lower income before Social Security kicks in. However, if you need the money right away, this may not be the best option for you because of the five-year rule. Again, consulting with a financial planner can help you determine whether this step would be beneficial for you now and in the future.

Practice living on your retirement income

During your last year of work, it's helpful to practice living on your retirement income. Many people have a lower income in retirement than they do during their working years. If you can practice for a year living on a more limited income, managing your expenses, and sticking to a budget, it can help you ease into the transition of your retirement years.

Your last year of work is about shifting your priorities

Ultimately, your last year of work is about shifting your priorities. That means potentially shifting your assets toward a more conservative approach. It also means practicing living on your retirement income and taking the time to plan your withdrawal strategy. When you're working, your priorities are often tied to meeting milestones and earning promotions. However, when you're retired, your focus is typically on maximizing enjoyment while ensuring your nest egg grows and lasts for many years to come.

Bottom line

If you're one year from retirement, this is likely your last opportunity to solidify your retirement goals and ensure you're on track to enjoy your golden years the way you want to. Using your time wisely to make concrete plans, including how much income you'll need to live on and the withdrawal strategy you want to use when you retire, can help you set yourself up for financial success.