The Steps You Need to Take Before Retirement

How to Get Ready Now, Before You Stop Working

The journey to retirement begins to take on a greater sense of importance during the final decade of your working years. That’s because the steps you take during the last 10 years of your career are critical to securing a financially stable retirement.

These years can be full of major life events, too. Children may be leaving the nest and launching their own careers, and your parents may be well into their own retirements or needing extra care. You may find yourself somewhere in the middle of all of those changes, wondering what your own retirement will look like as you continue to work hard and save as much as possible.

The final decade of your working life may be when you are finally able to make saving a top priority. But with retirement nearing, there are some other important steps you should also take to help make your transition a successful one.

Define Your Ideal Retirement

As you work toward this time, consider how you will shape your plan. What do you look forward to doing the most during retirement? Will you stop working completely or do you plan to take a part-time job or start a business? There are no one-size-fits-all answers to these questions. Personalize your vision of retirement in a way that matches your values and life goals as you carefully consider your preparations.

Run an Initial Spending Plan

As retirement approaches, the budgeting process takes on a whole new level of significance. You'll want to review your spending to make sure it's aligned with your income and your goals. Once you’ve identified where your money is going, you can try to free up some extra cash to save and invest for retirement.

Run the numbers on what you expect to spend during retirement, paying special attention to areas of spending such as health care and travel, which may increase.

And be sure to take inflation into account, because prices are likely to be higher in the future.

See if You've Saved Enough

Review all of your potential sources of retirement income, including 401(k)s, IRAs, a pension if you have one, and Social Security. Will your income match or exceed your spending?

Consider the 4% rule, a rule of thumb that can help you see whether you're on the right track. The 4% rule says that if you withdraw 4% or less of your portfolio each year, you have a roughly 95% chance of your money lasting 30 years. It's not a guarantee, only a very basic guideline (and depends on your age and risk tolerance), but it may help you ballpark whether your savings are on the right track.

Decide Where You Want to Live

While asset allocation is an important factor in increasing your retirement savings, your retirement location is an important determinant of your overall life satisfaction as well as the cost of living.

Think about where you plan to spend your retirement years. Maybe you will be downsizing your home or changing your location to be closer to family and friends.

There are many important quality-of-life factors to consider, such as environment, accessibility and caliber of health care, affordability of housing, and opportunities to connect in a meaningful way with others. If you plan to move, make sure you account for the costs in your retirement budget.

The AARP Public Policy Institute offers an online Livability Index that scores locations throughout the country. You can adjust the factors to give more weight to those that are more important to you and less weight to those that are less important. It may help you evaluate your choices on where you'd like to retire.

Consider Future Health Care Costs

Securing affordable and reliable health insurance coverage during retirement should be a top priority for soon-to-be retirees. Not surprisingly, health-related costs can account for a significant portion of the budget during retirement—even for those who are on Medicare. According to the Kaiser Family Foundation, health-related costs represented 14% of household spending for those on Medicare in 2016. And they amounted to at least 20% of spending for almost three in 10 Medicare households that year.

One thing you can do to cover future health care costs is to contribute money to a tax-advantaged health savings account (HSA) while you're still working. If you are on a high-deductible health insurance plan that offers an HSA option, you and your employer can contribute a combined $4,550 to an individual plan HSA or $8,100 to a family plan HSA in 2020 if you are 55 or older. Those limits include $1,000 catch-up contributions. 

You can deduct contributions to your HSA from the amount of federal income tax you owe. Earnings from investments in your HSA account aren't treated as taxable income. And distributions from your HSA are tax-free so long as they are spent on qualified medical expenses.

Pay Off Debt

Paying off your debt before retirement is an excellent strategy to reduce overall expenses afterward. It's especially important to eliminate high-interest debt, such as credit card debt, in the years leading up to retirement.

Deciding whether to pay off your mortgage is a more difficult decision. It’s true that the retirement transition is usually easier to make financially if you are mortgage-free. But by paying off your mortgage early, you might neglect your retirement savings and so miss out on important tax-deferred gains.

A key point to consider is how high (or low) your mortgage rate is. If you obtained your mortgage or refinanced it at a time of record-low rates, it might not make financial sense to pay it off early. Keeping your home loan can free up your cash for other needs.

Review Your Asset Allocation

As retirement nears, you may want to switch from a growth model to an income model when it comes to your investment portfolio. Review your asset allocation as you approach your retirement date; you may want to switch to a more conservative strategy that prioritizes cash and investments such as bonds that pay dividends.

But you don't need to avoid stocks altogether; the American Association of Individual Investors recommends even risk-averse investors keep some of their portfolio in diversified stocks when they're about 10 years from retirement.

If you choose to lower the risk profile of your investments as you get closer to retirement age, most investment firms offer model portfolios that emphasize income accumulation or principal protection over asset growth. You can use these as a basis for rebalancing your portfolio according to your goals.

Choose Your Team Wisely

For many soon-to-be retirees, building a team of professionals who provide legal, tax, and financial guidance is a helpful way to navigate these challenging decisions. Seek out qualified professionals who are always obligated to put your interests first and abide by a fiduciary standard. And remember, it's never too late to review your retirement plans.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

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  3. Kaiser Family Foundation. "The Financial Burden of Health Care Spending: Larger for Medicare Households than for Non-Medicare Households." Accessed May 21, 2020.

  4. IRS. "Internal Revenue Bulletin: 2019-22." Accessed May 21, 2020.

  5. SHRM. "2020 HSA Limits Rise Modestly, IRS Says." Accessed May 21, 2020.

  6. IRS. "Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans." Accessed May 21, 2020.

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