The decade leading up to your retirement is one of the most
critical periods for retirement planning. There are a number of financial
planning issues to consider during this time period to help ensure a
financially secure retirement for you.
Prepare a retirement spending plan
This is the time to take a hard look at how you plan to
spend your time in retirement and how much your desired retirement lifestyle
will cost. This can encompass a lot of things including your housing. Will you
stay in your current house or perhaps downsize? Will you relocate to another
part of the country?
You should also consider the types of activities you will be
doing in retirement. Perhaps you will be doing a lot of traveling. This is the
time to look at what you think you will be spending in retirement and to equate
that to a monthly spending budget.
Maximize your retirement plan contributions
Much has been written about the benefits of contributing as
much as possible to your retirement plan, such as a 401(k), as early as
possible. This allows workers to take advantage of the miracle of compounding
over a long period of time.
The decade leading up to retirement are also important years
to maximize your retirement plan contributions. For many of you these will be
your peak earnings years. Money contributed to your 401(k), 403(b), a
self-employed retirement plan and an IRA all will add up. These contributions
are important, this is not the time to let up on your retirement savings
efforts.
Review your Social Security record
This is an ideal time to review your Social Security
earnings record. It’s important to ensure that it is accurate and that nothing
is omitted. The top 35 years of your earnings record are used in the
calculation of your benefit. If you have less than 35 years’ worth of earnings
than those missing years are added in as zero earnings, reducing your benefits.
The next 10 years’ worth of earnings will likely help
increase your benefit levels. This is also a good time to begin thinking about
when you will claim your Social Security benefit.
Make a plan for your retirement healthcare needs
One of the biggest expenses for retirees is the cost of
healthcare. In their most recent estimate, Fidelity Investments indicates that
a couple aged 65 in 2022 will need $315,000 to cover their healthcare costs in
retirement. This does not include long-term care costs.
For most people Medicare will be their prime source of
healthcare coverage in retirement. As you get closer to Medicare eligibility it
is important to learn all that you can about how the various parts work.
While you are working, consider contributing to a health
savings account (HSA) if you have access to one. These are medical savings
accounts associated with a high deductible health insurance plan. Contributions
to an HSA are made on a pretax basis, earnings on the money grows tax-free.
Withdrawals for qualified medical expenses are tax-free as well.
The beauty of an HSA for retirement is that the money in the
account can be carried over from year-to-year if the money is not used. Money
in the account can often be invested. The money can be used in retirement to
cover the cost of Medicare premiums, any deductibles and a host of other
healthcare expenses in retirement.
Inventory all sources of retirement income
It’s important to get a handle on all potential sources of
retirement income before retirement. These may vary somewhat based on your
individual situation, but the list often includes:
IRAs, both Roth and traditional
Employer-sponsored retirement plan accounts such as a 401(k)
or 403(b)
Investments in taxable accounts
A workplace pension
Social Security
Real estate holdings
An interest in a business
Annuities
Stock-based compensation from an employer
Deferred compensation arrangements
In addition, you may work part-time or in your own business
through part of your retirement. Earnings from these pursuits can certainly
help boost your income during retirement.
Run retirement projections
As you calculate your retirement spending and review all of
the resources that could be turned into income during retirement, this is a
good time to begin running some retirement projections to see where you stand.
There are a number of online retirement calculators that will let you run
projections to see if your various sources of retirement income are enough to
support your projected level of spending for your life expectancy.
Alternatively you might consider engaging the services of a fee-only financial
adviser to help with this stage of your retirement planning.
If the projection indicates that the likelihood of outliving
your retirement assets is low, that’s great. If the outcome is unfavorable,
then it’s time to rethink your retirement planning a bit. Perhaps you will need
to reduce your spending in retirement. Or perhaps you may need to consider
working longer.
This projection should be run at least annually as you
approach retirement and into retirement. Things can change over time and you
want to stay on top of the potential impact on your retirement. If the results
come up as unfavorable you may still have time to make some adjustments in your
retirement planning strategy.
Formulate a retirement withdrawal strategy
As you head into retirement, it’s important to take all of
the information you’ve gleaned from the steps outlined above to formulate an
initial withdrawal strategy to fund your retirement spending needs. Which
accounts will be tapped first? Your withdrawal strategy will depend upon a
number of things including your tax situation, whether or not you have reached
age 59 ½ and when you decide to claim Social Security.
Your retirement withdrawal strategy will evolve over time as
you move through retirement and it’s important to revisit your withdrawal
strategy on a regular basis in retirement.
The decade leading up to retirement is the time when you
need to get your planning in order as you move into retirement. The seven steps
discussed here are important ones that can help get you on the right financial
path for retirement.
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