After working for years to provide for yourself and your family, you look forward to a comfortable and enjoyable retirement. For many people, retirement can appear to be a distant goal, a faint but growing light at the end of the work-life tunnel. But distances are deceiving, and the final years before you finally retire pass more quickly than you expect.
Most Americans believe they will have enough put aside to fund their post-work years, even despite the COVID crisis. However, no matter your confidence level, you cannot just be a passive retirement investor. Instead, the final decade before giving up work is a crucial time for getting your affairs in order.
Early planning using the eight steps below will help you live comfortably and stress-free after retiring.
1. Lay out your life
What does retirement mean to you? Will you move to Arizona and spend your days golfing in the sun? Are you planning to tour the world? Are you going to work with your favorite non-profit, or perhaps do freelance work? Naturally, each option has different financial requirements.
You cannot know whether your savings plan will work if you don’t understand what your life will be like after you stop working. Having a good vision about your daily life, as well as activities you want to do every year (e.g., traveling to see grandkids), will help you determine your future financial needs.
2. Figure out your needs
After you have decided on the kind of lifestyle you want to have after retiring, you can begin to budget accordingly. You don’t need a crystal ball that shows you what prices will be ten years down the road. Create a budget based on what you know now; you can always adjust it to take new events into account. Your budget then tells you if you are on track to meet your retirement goals.
You don’t need every line item detailed 100%. There are a few well-accepted approaches to setting a baseline budget, such as basing retirement expenses on 80% of your current expenses. Naturally, this is not a one-size-fits-all approach. After all, a 50-year-old with three kids in college and a 60-year-old whose kids are all on their own have vastly different expenses. Look carefully at your personal situation and see if this approach makes sense for you.
One expense you need to address carefully is health care. Unfortunately, too many people don’t consider where their health care will come from in retirement, even though this is a time when you will probably need it the most.
Despite the availability of Medicare and Medicaid, health care can be a significant retirement expense. Indeed, the average couple can expect to spend nearly $300,000 on health care in retirement, not including long-term care expenses like assisted-living facilities or nursing homes if needed.
When building your budget, don’t forget to factor in taxes. Remember that after age 72, you must take minimum distributions from qualified retirement accounts, and these distributions can move you into a higher bracket. So make sure you understand your income flow throughout retirement.
3. Flip your financial focus
If you are like most people, you have been focusing much of your finances on your family. Your most significant expenses are educational expenses for your children or support for adult children (who are staying longer with their parents following college). It is now time to think about shifting focus to yourself.
You have far less time to ensure a comfortable retirement than your children have to deal with issues like student loans. You don’t need to abandon your children, but you need to provide for yourself as well.
4. Seek stability
The decade before retirement is not the best time for big life changes. They are generally costly and can create new debt when you need to be saving. New houses, new cars, and other large purchases may be exciting, but consider their effect on your retirement timeline before moving ahead.
There are some changes you cannot avoid. Health problems, natural disasters, and even personal issues like divorce are generally out of your hands. But controlling those changes you have power over is crucial.
5. Dispatch debt
Debt and retirement are not typically a desirable combination. This is true even of low-interest debt like a mortgage. And when you are on a fixed income, you definitely don’t want to have debt with varying interest rates (think adjustable-rate mortgage).
There may be situations where debt is acceptable in retirement. For example, a reverse mortgage may be a good decision depending on your situation. But, as a general rule, debt reduction should be a strong priority for your final years before retirement.
6. Strengthen savings
Obviously, you need to build up your savings leading into retirement, but it is not always clear how much you need. Take advantage of opportunities like catch-up payments on 401(k) contributions (an extra $6500 a year at present) and IRAs as much as possible. And don’t forget to use your projected budget as a basis for how much you want to have by the date you retire.
7. Insulate investments
As you near retirement, you should become more conservative with your investment portfolio to protect your projected income flow. Rebalancing your retirement plan to favor fixed-income assets helps you avoid significant swings in income due to market volatility.
Financial planners use a range of guidelines for how you should split your portfolio. A common standard today is to subtract your age from 120 and place that amount in higher-income assets like stocks or even cryptocurrency like Bitcoin. The remainder should stay in fixed-income investments.
So, if you are 60, 60% of your portfolio should be in higher-income vehicles and 40% in fixed-income assets. Applying these rules allows you to continue to grow your portfolio in good times while protecting a basic income level against market swings.
8. Finally, predict the unpredictable
Even the best-laid plans can suffer in the face of significant unexpected events. And it doesn’t always have to be something as drastic as a pandemic. Instead, it may be something as simple as an unplanned change in your retirement date.
Make sure to build buffers that help you weather these changes with ease. One time-tested rule of thumb is having six months of living expenses in liquid assets (some now recommend a year). And, even though it is uncomfortable, make sure your estate plan covers unanticipated situations like the untimely passing of you or your spouse.
The more you plan in advance, the more you will be able to enjoy that retirement you worked so hard to earn.