The five years leading up to retirement are often the time when pre-retirees really focus on their retirement planning. They want to be sure they have things in order and haven’t overlooked anything.
Here are nine things pre-retirees should be doing within five years of retirement.
#1: Develop a Retirement Budget
This is the time to look seriously at how you will live in retirement:
- Will you stay in your current house or city?
- Will you downsize or move to a lower-cost area of the country?
- What types of activities will you engage in?
These are among the questions you should ask yourself when formulating a retirement budget.
More so, it is critical you have a solid spending plan in place prior to retiring.
#2: Review Your Social Security
This is the time to review your Social Security benefits. If you haven’t already done so, get a Social Security statement online and consider getting a new one annually. Social Security has stopped mailing them out, but it is easy to go online and get one.
If you haven’t already been reviewing your statements, take some time to do so now. Have all of your years of earnings been reflected? If not, it is important to contact Social Security to get this fixed.
A key part of retirement planning is deciding when to take your Social Security benefit. While you can claim your benefit as early as age 62, this will result in a permanently reduced benefit. The difference for waiting until your full retirement age (66 for those born prior to 1955) is about 25%. The difference in waiting until age 70 versus taking the benefit at age 66 is 8% per year.
If you are married, additional planning involving your spouse will be required.
#3: Gather All Retirement Resources
This is the time to get your arms around all retirement resources that will be available to you. In addition to Social Security, here are some common accounts and sources of retirement income:
- An employer pension
- Defined contribution retirement accounts such as 401(k), 403(b) and 457 plans.
- Deferred compensation
- IRA accounts including traditional, Roth and inherited
- Investments held in a taxable account
- Grants of company stock, options or restricted shares
- Interest in a business
There could be other accounts or streams of income but these are some of the more common ones.
Another income stream could of course be income from working in retirement, and if this is part of the picture for you this should be considered as well.
It is important to get your arms around all potential sources of retirement income so you know where you stand.
#4: Do a Retirement Financial Projection
It’s important to do a retirement projection that takes your various resources and translates those into a retirement income stream. While retirement projections are not set in stone, they can give you a good idea of how much income your financial resources can provide.
Once this is done, compare the amount of income you can reasonably expect to receive to finance your desired retirement lifestyle. If your cash inflows are greater than necessary, that’s fantastic. If not, you still have a few years to figure out how to close any gaps.
You have two main choices here:
- Look at paring expenses.
- Work a bit longer.
#5: Stress Test Your Projection
It’s not enough just to do a retirement financial projection; you also need to stress test it. By this we mean think of all that could go wrong and try to determine the impact these things might have on the quality of your retirement.
These might include the impact of higher-than-anticipated inflation or a major drop in the stock market. What happens if you are laid off from your job or become seriously ill before you are ready to retire?
#6: Maximize Your Retirement Savings
For many of you the years leading up to retirement will be your top earning years. While you don’t have the same gift of time as your Millennial or Gen X children, it is still important to salt away as much as possible in any workplace retirement plan available to you. These dollars will still add up.
Additionally, if you have access to one, consider funding a health savings account (HSA). Ideally you can pay any out-of-pocket medical costs from other sources and let this balance grow tax free to be available to cover medical costs, including Medicare, in retirement.
#7: Plan for Medical Care
Be sure to have your strategy in place for covering the costs of health care in retirement. Know the rules for Medicare including when to apply. If you will be working past age 65, know if your employer’s coverage will be primary.
Above all be sure to include the cost of medical care in your financial projections. Fidelity has projected that an average couple aged 65 will spend $245,000 for medical care over the course of their retirement.
#8: Plan Your Withdrawal Strategy
It is important to begin planning your withdrawal strategy prior to retirement. If you have a variety of account types such as taxable, tax-deferred and perhaps others, it is critical to have a plan for which accounts you will tap and in what order.
This plan should be reviewed annually once you reach retirement and will likely be adjusted a bit each year depending upon any changes in your situation.
Taxes can play a critical role in your retirement and proper planning can really make a difference in terms of the amount of spendable income generated. Various types of accounts carry different tax implications when you take distributions.
#9: Seek Professional Help if Needed
This is a time when many pre-retirees reach out to a professional financial planner to review their situation and provide guidance. Whether or not you decide to do this is up to you and will depend on your situation and your comfort level with doing your own financial planning.
If you do go this route, consider hiring a fee-only financial advisor who does not earn compensation from the sale of financial products.
The years leading up to retirement should be used to refine your planning and to ensure you are on track to a smooth and happy retirement. This is the time to hone your spending plan and to confirm your financial resources will support your desired lifestyle. This is also the time to tweak your plans and make any adjustments that are needed.