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Transitioning into Retirement: Financial Strategies for the Final Stretch

Finance Mistakes Retirement

You’re nearly there! You’re nearing the age when you can finally stop working and enjoy some well-earned rest. But there are a few more steps you should take before officially retiring, which will ensure greater financial stability and peace of mind in your later years. 

In this article, we’ll dive into different tips for pre-retirement financial planning. Some of these will require research on your part, while others will involve taking stock of your finances and sources of income. It’s entirely possible to run out of money in retirement, a frightening situation we all want to avoid. Taking these steps and doing the necessary planning will help protect you from landing in this situation. 

Key Takeaways 

  • You should research and make a plan for when you intend to claim Social Security. Waiting a bit may raise your monthly benefit, so gauge how soon you’ll need to start receiving your benefit and whether it’s worth waiting. 
  • Make a budget and map out where you intend to get your income. Include things like personal investments, retirement accounts, and pensions.
  • Try to pay off your debt before retiring, but be smart about it. If paying off your mortgage will deplete your money to a risky level, it may be wiser to leave it be for now.  

Make a Budget 

A piece of financial advice you’ve probably been given since you started earning money (and probably ignored for a long time) is to make yourself a budget. When preparing for retirement, this tip becomes even more critical. Because your sources of income are about to change, it’s essential to understand how much money you need and whether your income will be able to cover it. 

The first step to making a budget is doing an overview of your sources of income. When do you plan on taking Social Security? How much money will you receive from your pension (if you’re lucky enough to have one)? And how much will you receive from retirement accounts you’ve hopefully been building? 

Once you know exactly how much you’ll receive each month, take stock of the essential purchases you’ll need to make. This includes things like rent, utilities, groceries, auto payments, outstanding debt you need to pay off, clothing, and transportation costs. After that, determine how much you spend on non-essential purchases. This can include things like travel and entertainment costs. 

Consider the ratio of essential to non-essential purchases you make. Hopefully, the ratio is skewed to the former. If it is, it may be important to start considering other sources of income you could get in retirement. Some retirees teach or take on a small part-time job to keep their income up. Others try investing or purchasing an annuity to turn their retirement savings into income. There is no one right option here. 

Spending guidelines

If you’re wondering how much money you need to save, one popular rule is that you should earn 80% of your pre-retirement income every year in retirement. Another rule you may have heard of is the 4% rule, which holds that you should be able to spend 4% of your savings each year after retiring and have enough money to last until you die. 

The 4% rule assumes you’re also going to take Social Security, and not all financial experts agree 4% is a safe amount. Most would probably agree, though, that you should try not to exceed $4%. 

Understand Social Security and Retirement Account Rules

You don’t want to end up in a situation where you earn less than you might have by not doing proper research. As you adjust where your income comes from, understand how the rules of government programs and retirement accounts will affect your income. 

Social Security Rules

Researching Social Security and its rules will help you maximize the money you earn each month. For example, the earliest age you can take Social Security is 62, but waiting a few extra years will earn you credits that can translate into a higher monthly payment. 

If you wait for your full retirement age (FRA) – 67 for those of us born after 1960 – you can earn a higher monthly payment, and if you wait even longer, you could earn even more. Once you’re 70, that’s the latest you should start taking Social Security because waiting any longer than that will not translate to a higher monthly payment. 

Social Security eligibility is dependent on you earning 40 credits. Credits are earned by working and paying Social Security taxes, with a maximum of four potential credits to be earned each year. In 2023, if you earn $6,560 in one year, you’ll earn four credits. 

However, your Social Security monthly payment is determined another way. The Social Security Administration (SSA) will consider your 35 highest years of earnings to decide your monthly payment amount. If you’ve worked enough years to earn 40 credits but worked less than 35 years, each year under 35 will count as a $0, lowering your overall average earnings and, subsequently, your Social Security payment. 

Retirement Accounts

An important thing to consider when planning your income stream from retirement accounts is how required minimum distributions (RMDs) will affect your budget. An RMD is the minimum amount of money you must withdraw from an employer-sponsored retirement plan, traditional IRA, SIMPLE IRA, or SEP plan. Roth IRAs don’t require RMDs at the moment. 

The age you must start taking RMDs changed to 73 in 2023. Following RMDs is necessary to avoid tax consequences, and the rules associated with them can vary depending on what kind of retirement plan you have. Research your account to see what requirements you’ll have to meet.

Eliminate Debt if Possible 

Most financial experts will advise you to eliminate all of your debt before retiring. This is because when you stop working, debt payments will eat up more of your monthly income. While we think getting rid of debt is a wise idea, it won’t be possible or a savvy financial move for everyone.   

Some retirees will try to pay off a mortgage, for example, very quickly before retiring. This can actually end up hurting you in the long run if you find yourself unable to pay for other expenses and end up taking out a loan. 

If you’re thinking of refinancing your home, doing it before retirement may be beneficial to you. Again, this won’t be the right decision for everyone, but it’s true that getting approved for a refinance after retirement is generally more complicated if your assets aren’t extensive. 

Speak to an Expert 

While thorough research may be sufficient for you to plan for your retirement, you may also want to consider speaking with a financial expert. If it’s within your budget and you’re particularly busy, a financial expert can help you get your budget and sources of income sorted out while helping you determine investments you want to make before stopping work. 

Brainstorm How You’ll Spend Your Time 

Now for a more fun tip. Once you stop working, you’ll have much more time to relax and pursue projects you’re personally passionate about. This could mean diving into creative work you previously didn’t have time for or picking up a part-time job as a teacher. 

Remember that retiring doesn’t mean that you have to stop working for the rest of your life. Many retirees take on extra work, which is one way of keeping busy while bolstering your monthly income. If you plan on traveling a lot in one year, consider how it will impact your budget and whether you need to stretch your income to better meet your needs. 

Understand how Medicare Works 

Once you’re 65, you can begin relying on Medicare for your health coverage. Without employer-sponsored health insurance, you’ll need to make sure you have access to health coverage if you’re planning to retire before 65. Some people rely on a partner to get their health insurance in those years. 

Think about how much you’ll have to pay each month in premiums and where you may have gaps in your coverage. If there are things your employer-sponsored health insurance will cover that Medicare won’t, you may want to take care of them before retiring. 

Be Excited 

You’ve worked hard and earned your retirement. It’s time to celebrate! You hopefully have time to explore a new path or pursue something you previously didn’t think you could. Get creative and think about how you spend the time you have left. 

The Bottom Line 

When planning for your transition into retirement, there are a number of things you’ll need to do to protect your financial stability. Some of these include making a thorough budget that clearly lays out where your money will come from and where it will go, researching the ins and outs of retirement accounts and Social Security, and understanding how your employer-sponsored health insurance compares to Medicare. 

Remember that Social Security payments will increase if you wait to take them later than the earliest possible age (62), but won’t increase any more after 70. 

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Personal Finance Expert
Eric Rosenberg is a personal finance expert. He received an MBA in Finance from the University of Denver in 2010. Since graduating he has been blogging about financial tips and tricks to help people understand money better. He is a debt master, insurance expert and currently writes for most of the top financial publications on the planet.

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