As retirement approaches—especially when your remaining working years drop into the single digits—it's time to evaluate your retirement readiness. Up until now, retirement planning may have been vague, with only broad ideas about what you might do and what things might cost. You've been saving for retirement most of your life, but you don't really know if it's enough.
As you near retirement age, it's crucial to go through a retirement checklist to determine where you stand. Here are four steps to help you get organized and prepared for retirement.
Step 1: Answer Key Retirement Planning Questions
Having a clear vision of your post work life gives you a goal that can drive your financial decisions. It shapes how long you need to save, how much you need to save, and how you'll spend what you've saved. Start by answering these retirement planning questions to set a strong foundation:
1. When Will You Retire?
Some people aim for a specific age, number of working years, or milestone before retiring. While there are no strict rules about when to stop working, age does dictate certain retirement related events:
Access to Retirement Accounts : You can access tax advantaged accounts like a 401(k) or traditional IRA without penalty starting at age 59½.
Social Security Benefits : You can claim benefits as early as age 62 (with reduced amounts) or delay until age 70 for maximum payouts.
Required Minimum Distributions (RMDs) : You must start taking RMDs from tax deferred accounts like 401(k)s at age 73 (for those born before 1960) or 75 (for those born in 1960 or later).
Consider:
What feels like the right age to stop working?
Do retirement benefits depend on years of service at your job?
Is early retirement your plan, or do you want to delay as long as possible?
How do your health and life expectancy factor in?
Does your family situation affect when you start retirement?
Even if you're unsure, an approximate timeline can help you set milestones. Discuss these questions with your partner as well.
2. Where Will You Live When You Retire?
Retirement is an opportunity to settle down or make a change. Personal and financial reasons will influence your options. Consider:
Staying in Your Current Home : If your mortgage is paid off, you may want to stay put. You could also rent out your home for additional income.
Downsizing : Moving to a smaller or less expensive home can save time, effort, and money.
Relocating for a Lower Cost of Living : Lower taxes, affordable housing, and public transportation can stretch your retirement dollars.
Moving for Lifestyle Reasons : Living near family, enjoying certain amenities, or being close to nature can enhance your retirement experience.
3. What Will You Do When You Retire?
Think about how you'll spend your time and what expenses or income may be involved:
How will you stay active and engaged?
What hobbies or passions do you want to pursue?
Will you join clubs, volunteer, or start a business?
Do you plan to travel or take on new projects?
4. What Debt Will You Carry Into Retirement?
Eliminating debt before retirement is a common goal, but it may not be necessary depending on your financial resources. Ask yourself:
Can you afford to have debt? For example, is your mortgage interest rate low enough to justify keeping it?
Do you want to carry debt into retirement? Even if you can afford it, debt may cause stress.
Do you have a plan to avoid accumulating debt in retirement? Build an emergency fund to handle unexpected expenses.
5. What Will Your Retirement Budget Be?
Create a retirement budget by reviewing your current income and expenses. Consider:
What work related costs (e.g., commuting, lunches) will decrease?
What discretionary spending (e.g., travel, entertainment) may increase?
How will moving (if planned) affect your expenses?
Will your income or expenses change significantly?
Step 2: Determine How Much to Save for Retirement
Once you have a retirement budget, you can better plan how to support it. Aligning your retirement vision with your savings is essential for gauging your readiness.
1. How Much Money Do You Need to Retire?
A general guideline is to save seven to eight times your annual income. Use your budget to estimate:
Projected Retirement Expenses : Anticipate how long your retirement will last.
Projected Savings and Income : Compare these to your expenses.
Retirement Income Calculator : Use tools to calculate how long your money might last.
2. Maximize Your Retirement Savings
If your savings fall short, use the time you have to get back on track:
Max Out Your 401(k) : Take full advantage of employer matching contributions.
Catch Up Contributions : After age 50, you can contribute extra to retirement accounts.
Open an IRA : Consider a traditional or Roth IRA for additional tax advantaged savings.
3. Invest for Retirement
Your investment strategy should align with your risk tolerance and retirement timeline:
Aggressive Approach : Focus on growth if retirement is far off.
Moderate Approach : Shift toward stability as you near retirement.
Balanced Portfolio : Maintain a mix of investments to outpace inflation and support withdrawals.
Step 3: Prepare Your Retirement Income Plan
Turn your savings and other income sources into a sustainable stream of income.
1. Evaluate Your Retirement Income Sources
Personal Retirement Accounts : Consolidate old 401(k)s into an IRA for easier access.
Social Security : Decide when to claim benefits based on your age and marital status.
Pensions : Choose between lump sum payouts or monthly payments.
Annuities : Consider immediate or deferred annuities for guaranteed income.
Life Insurance : Use cash value life insurance as a supplemental income source.
2. Choose a Withdrawal Strategy
Systematic Withdrawals : Use the 4% rule or adjust for inflation.
Required Minimum Distributions (RMDs) : Plan for RMDs starting at age 73 or 75.
Step 4: Protect Your Retirement Savings
Prepare for risks that could threaten your financial security.
1. Estimate Health Care Costs
Long Term Care : Plan for potential long term care needs.
Medicare : Sign up at age 65 and evaluate supplemental coverage.
2. Factor in Inflation
Adjust your budget for inflation (e.g., 4% annually).
Invest in inflation protected securities like TIPS or I bonds.
3. Manage Taxes
Understand how different income sources are taxed.
Consider Roth conversions if you're in a lower tax bracket now.
4. Prepare for Market Volatility
Keep cash reserves to cover short term expenses.
Stay emotionally prepared to avoid panic selling during market downturns.
5. Plan for Longevity
Account for a longer life expectancy in your withdrawal plan.
Maximize Social Security and pension income.
Consider annuities for lifetime income.
