Most people are aware that they should start saving for retirement at a young age. However, that is generally all the preparation that young people make for their future retirement, which can be decades down the road.
Once retirement is right in front of you, there are a whole host of preparations that you should be making. There’s no longer time to make long-term investments to build up your nest egg, but there is time to map out your path for the next phase of your life. Here are some of the things you should be taking a look at if you’re about to take the big step into retirement.
Plan Out Your Social Security Filing Strategy
When you started saving for retirement when you were young, you may have thought of Social Security as something that will take care of itself once you retire. To some degree, this is true, as you can’t control what the government will decide regarding Social Security payments. However, there are still many actions you can take that will greatly impact the total value of Social Security benefits you will receive over your lifetime.
For example, even though “full retirement age” for most Americans is now 67, you can begin drawing Social Security as early as age 62 or as late as age 70. Every year that you can delay beginning benefits, your payout may rise by as much as 8% per year. Deciding when to claim for your spouse, if applicable, can also play a role, as can your life expectancy. You may want to consult with a tax or financial advisor to help you develop an appropriate Social Security filing strategy to maximize your benefits.
Evaluate the Tax Consequences of Your Retirement Plans
If you’ve already saved up a sizable amount in your retirement plans, congratulations! You’ve already got a leg up when it comes to your retirement. If your savings are all in a Roth IRA, you’re in an even better position. Although you didn’t get to enjoy any tax deductions when you made your Roth contributions, now that you’ll be retiring, you’ll be able to take tax-free withdrawals.
If all of your retirement money is tied up into plans such as traditional IRAs and 401(k) plans, you’ll have to plan on losing some of what you’ve saved to taxes. For example, if you’ve saved the much-touted $1 million in your taxable retirement plans, remember that this doesn’t mean you’ll have $1 million to use in your retirement. Depending on your withdrawal strategy and your tax bracket, you might lose 10%, 20% or even more of that amount to taxes.
Organize All of Your Documents
Although you may have 30-plus years of retirement ahead of you, there are no promises or certainties when it comes to life expectancy. If you or your spouse were to pass suddenly, the survivor would have to deal with not only grief and stress but also lots of paperwork. At such a troubling time, you can provide tremendous peace of mind by keeping all of your financial documentation clear and organized. Everything from computer passwords to bank account numbers and evidence of all of your financial assets and liabilities, from credit cards and life insurance to bank accounts and property deeds, should be clearly cataloged and itemized.
Tweak Your Investment Allocation
When you enter retirement, your investment funds may need to sustain you for decades to come. Because of this, most financial advisors recommend that retirees still maintain at least a portion of their portfolios in equities. However, you’re also entering a phase of your life where you won’t have consistent income from a job. For this reason, you’ll generally need to dial down the risk of your portfolio as you enter retirement. In many cases, you’ll also want to shift from a primarily growth-oriented portfolio to one that generates income, through the addition of assets such as bonds, CDs or preferred stocks. As getting your asset allocation right as you head into retirement is so important, you’ll likely want to consult with a financial advisor to get a blend that matches your investment objectives and risk tolerance.
Consider Relocating or Downsizing
Even if you don’t have a lot of money squirreled away in a retirement account, if you’re like two-thirds of Americans, you likely have a huge asset right under your nose: your house. If you’ve paid off your mortgage, or are even anywhere close, you likely have a large amount of equity in your home, making it a huge untapped asset.
This doesn’t mean you should sell your house and live off the money since you’ll still need a place to live. However, if you do have a large amount of equity in your home, you can make your retirement funds last longer by relocating or downsizing. If you sell your home and move to a cheaper area, your money will stretch further. If you stay in the same area but downsize your home, you’ll have extra money to put in the bank and there will be ancillary benefits as well, such as smaller heating bills.
Analyze Your Healthcare Options
Once you reach age 65, you may qualify for Medicare. However, this is not your only option when it comes to insurance, and you may need supplemental insurance to cover additional costs. Whether you seek out private insurance or maintain a part-time job that still pays medical benefits, there are many options for insurance after you retire. If you’re about to cross over into retirement, it’s a great time to sit down with an insurance expert and review the entire range of options that may be available to you. According to Fidelity, the average 65-year-old American couple can expect to pay $295,000 in medical expenses in retirement, and those out-of-pocket healthcare costs typically eat up 15% of the average retired couple’s budget. Planning ahead before you retire can help ensure that you’ve got everything in place when you need it in retirement.
Develop a Debt Payoff Strategy
Debt is a killer, especially for those on a fixed income in retirement. If you’ve got outstanding debt, especially credit card debt, you’ll likely want to work on paying that down as much as possible right before you retire. Once you’ve retired, you’ll likely be on a relatively fixed income, which may be a combination of retirement plan withdrawals, pension payouts and Social Security benefits. When you’re not drawing a regular paycheck, it can be harder to set aside money for debt repayment. And with credit card interest rates often in the high double-digits, you’ll be running to stand still right when you should be enjoying the fruits of your labor. So, before you cross over into retirement, work on developing a strategy to get rid of your high-interest debt, perhaps by putting in a few extra hours per week or getting a side gig. It will make living off a fixed income in retirement that much easier.
Plan Your Estate
As you enter retirement, you may very well have 30 or more years to enjoy your savings. However, at some point, your assets will pass to your heirs. Since the length of your retirement is unknown, it pays to get your estate in order right at the outset. Consult with your lawyer to draft a will, a trust or any other estate documents that you may need to make a smooth transfer to your heirs. You may find that it makes more sense from an estate planning perspective to begin making transfers while you are still alive, but this is a determination best made in consultation with a lawyer.
Join a Social Community
Once you retire, you’re likely going to find that you have lots of extra time. Sure, your first few months may be spent traveling the world, visiting old friends or just getting out more, but over time, many retirees find that they have gaps in their daily schedule. Especially if you’re the type of person that is restless or easily bored, you’ll want to fill up that time with some type of meaningful activity. Whether it’s joining a social community, your local school board or an outdoor adventure club, keeping yourself busy is not only good for your mental health but your financial health as well. If you find yourself sitting at home with nothing to do, you might end up filling that void with online shopping or other wasteful spending. Idle time can be a threat to your retirement budget, so try to fill that time with more productive — and on-budget — activities.
Plan a Vacation
Finally, the fun stuff! Although you’ll have to carefully budget to make it through retirement, that doesn’t mean you can’t have any fun. One of the things that retirees most look forward to is having more time to travel, so make sure to incorporate that into your budget. Once you’ve set aside enough funding, enjoy yourself! If you plan suitable vacations that fit into your retirement budget, you should feel no guilt about getting out and enjoying yourself, whether that means a cruise around the world or simply some short road trips to spend more time with family. If you plan a vacation for soon after your retirement date, you’ll be able to enjoy that well-earned trip while you are still young, and you’ll get in the habit of setting aside an appropriate amount for vacations as often as you can afford.