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.
