You’re not retiring yet, but you can see it on the horizon. You’re starting to dream about the things you’ll do when you’re no longer working. As you enter the last phase of your full-time career, it’s an ideal time to make sure your retirement plans are in order and support the dreams you have for this next chapter in your life. Let’s look at what you should be doing now to enjoy the retirement you want later.
Define retirement
Articles about how much income you’ll need when you retire bypass the most important question: What does retirement mean for you?
Traveling the world, for example, requires a lot more income than going fishing every morning. Place matters, too: Will you stay in your existing home or downsize? Will you move to an area with a different cost of living?
After retirement, do you plan to work part-time? Perhaps you’ll turn a hobby into income?
Answering these questions will help you ensure you’re planning for the retirement you want. Work with a CERTIFIED FINANCIAL PLANNER™ professional to calculate the numbers that match your dreams.
Manage your expenses
There are usually three major expenses in retirement. You can take steps now to control all three.
1. Housing
Even if your mortgage is paid off and you plan to stay in your home, you’ll still be paying for things like property taxes. If you plan to sell your home and move to a place that’s cheaper, your monthly expenses might change but won’t completely disappear. Now is the time to start thinking about where and how you’d like to live in retirement, and then understand what that means for your finances.
2. Healthcare
Will you be able to continue using your current healthcare plan in retirement? If so, what will it cost? Will you retire at 65 or older, when you’re eligible for Medicare? If not, how will you insure yourself until age 65?
3. Debt
Ideally, you’d pay off your mortgage and any other debt before retirement. Retiring debt-free lowers your financial anxiety level significantly. If that isn’t possible, have a plan to pay off debt as early in your retirement as you can.
Understand your income
Where will your income come from in retirement? For many, the list includes:
- Social Security
- Pension
- Retirement accounts, such as a 401(k), 403(b), IRA or Roth IRA
- Part-time income from a job, hobby, small business, etc.
You can file for Social Security benefits between ages 62-70; the earlier you file the less you’ll get each month. Filing at 62 rather than at 66 and two months, which Social Security considers full retirement age, can reduce benefits by as much as 30%. Waiting until age 70 to collect can boost your monthly check even more - as much as 30% over what you would have received at your full retirement age.
The Social Security Administration has a free calculator and lots of other information available. Sign up for a Social Security account and you can see how different decisions would affect your benefits. Be aware that filing for Social Security is a one-time decision and can’t be undone. A financial planner can help you understand when you should file to get the most benefits for your unique financial situation.
When it comes to withdrawals from your personal investments, although there are no guarantees, the rule of thumb is to withdraw no more than 4% annually. Don’t take that number as gospel, though: your spending, Social Security, other income sources, inflation and other factors can have a major effect on how much you can withdraw from your retirement accounts.
Know the finish line
Retirement itself isn’t the finish line. It’s the next chapter in what will hopefully be a long, well-lived life. Your investments need to reflect that you may be retired for decades. That means understanding which investments to hold onto.
Stocks can earn you additional income when the marketing is growing, but are volatile. Bonds are less risky and help you weather any future down markets, but be aware that they may not generate all of the income you need on their own. The key is creating a portfolio that will likely grow over time. Your financial planner can help you with the portfolio you’ll need to sustain yourself in retirement.
Pay attention to taxes
Knowing which retirement accounts to withdraw from, how much, and when are all equally important. Each retirement account has its own tax rules. You want to be as tax efficient as possible so that you don’t end up owing more taxes than you planned to.
It’s exciting to be nearing retirement. Enjoy this time and make sure you have a plan in place for the retirement you’ve been dreaming about.
