How to Prepare for a Successful Retirement
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 your ability to actually enjoy retirement—however you may choose to define that season of life.
A lot of major life events tend to occur during the late stages of your career. If you have children, they are likely launching their own careers and leaving the nest. Your own parents may be nearing the latter stages of their own retirement years. As a result, you may find yourself somewhere in the middle of all of those life changes wondering what your own retirement will look like while you continue to work hard and save as much as you possibly can.
In fact, the final decade of your career may seem like the time when you finally have the ability to make socking away money for retirement a top priority. But with retirement on the horizon, there are some important steps to take (other than saving as much as possible) to help make your transition a successful one.
Define What Your Ideal Retirement Looks Like
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 venture? 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 what your ideal retirement looks like.
Run an Initial Budget Plan for Retirement
Reviewing your budget or personal spending plan is something most of us agree we should all be doing but is easier said than done. As retirement approaches, the budgeting process takes on a whole new level of significance.
Once you’ve identified where your money is going, you can try to free up some extra money to save and invest for retirement. You should also pay special attention to the areas of spending, like health care and travel, that will probably be increasing the most during your post-work years. And be sure to take inflation into account—about 3% a year.
See If Your Retirement Savings Will Be Enough
Your budget can help you determine whether you have saved enough for retirement. Review all of your potential retirement-income sources—401(k)s, IRAs, pension, and Social Security—and count on spending about 4% of your money each year you're not working. That figure is more of a general guideline than a hard-and-fast rule, but it can help you see whether you're on the right track.
Decide Where You Want to Live During Retirement
While asset allocation is an important factor in increasing your retirement savings, your retirement location is an important determinant of your overall life satisfaction and 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 accessibility and caliber of health care, affordability of housing, and opportunities to connect in a meaningful way with other residents.
The AARP Public Policy Institute offers an online Livability Index that provides an overall score—and scores for seven factors that are considered when calculating the overall score—for 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.
Consider Future Health Care Costs
Obtaining 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 3 in 10 Medicare households that year.
One thing you can do to cover future health care costs is contribute money to a tax-advantaged health savings account (HSA) while you're still working. If you are in 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 50 or older. A high-deductible health plan is one for which the deductible is $1,400 for an individual or $2,800 for a family.
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.
Determine Whether You Should Pay Off Your Mortgage
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 cards, in the years leading up to retirement. However, determining whether it makes sense to pay off a mortgage isn’t quite as easy of a decision to make in the years leading up to your retirement.
Yes, it’s true that the retirement transition is usually easier to make from a financial standpoint 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.
Review Your Asset Allocation
As retirement nears, your ability to stomach significant volatility in the investment markets is likely to change. That is why it’s essential to review the allocation of assets in your overall retirement portfolio on a regular basis.
You do not need to automatically start running from the stock market in the years leading up to retirement. In fact, the American Association of Individual Investors recommends even risk-averse investors keep 50% of their portfolio in diversified stocks when they're about 10 years from retirement.
However, if you do choose to lower the risk profile of your investments as you get closer to retirement age, most every investment firm offers model portfolios that emphasize income accumulation or principal protection over asset growth.
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.
Merrill. "7 Steps to Prepare for Your Upcoming Retirement." Accessed March 22, 2020.
Chris Hogan. "What to Do When Retirement Is 10 Years Away." Accessed March 22, 2020.
AARP Public Policy Institute. "What Is the Livability Index?" Accessed March 21, 2020.
Kaiser Family Foundation. "The Financial Burden of Health Care Spending: Larger for Medicare Households than for Non-Medicare Households." Accessed March 22, 2020.
SHRM. "2020 HSA Limits Rise Modestly, IRS Says." Accessed March 22, 2020.
Charles Schwab. "Should You Pay Off Your Mortgage Early, Before You Retire?" Accessed March 22, 2020.
American Association of Individual Investors. "AAII Asset Allocation Models." Accessed March 22, 2020.