1) Visualize or practice being retired – what will you be spending your time on daily?
On the surface, this one isn’t financial in nature, but it’s so critical. For some, the transition from the 9-5 grind to a slower pace with more room for leisure is easy. Surprisingly though, we’ve seen many retire and struggle with the change. Most of us have worked our whole lives - we don’t know any different.
While you’re working, you have a purpose each day - meetings to attend, projects to complete, deadlines to meet. Some find that when they step away, they lose that sense of purpose. When you retire, your purpose each day will undoubtedly change, but you need to continue to have one. That could be watching the grandkids, volunteering, visiting with friends or traveling. Spend time thinking about what you’ll be doing in your next chapter.
2) Develop a Retirement budget.
We’ve written at length about the fact that what you’ll spend in retirement is just as important as what you’ve accumulated, but it’s so important, it’s worth reiterating. You must know (or at least have a ballpark estimate of) what you’ll spend once you’re retired. You’ll have much more time on your hands, so think about the financial implications. Will you travel? Join new groups or clubs? Be dining out more frequently? Having an understanding of your expenses, will be critical to our next point.
3) Run a retirement projection.
This is where a financial planner can help. In short, will your savings be enough to last you through the rest of your days? When you consider how much you’ve saved, how it’s invested, what you expect for income (social security, pensions, annuities, etc.) and your desired spending (see #2), will your money last?
Don’t wait until you’ve already retired to do this. It’s difficult to ‘unretire’. Before you turn in your resignation, do some math to figure out if you’re financially ready. On the flip side, this math might be such that you can spend more in retirement or retire earlier than you thought. We’ve seen many people fly blind on the longevity of their money and live life scared that they’ll run out--this is tragic to us as planners. Perhaps you could have taken trips with your family or used dollars saved to enrich your life, but were scared you’d outlive your money. This exercise can bring unparalleled financial peace of mind, so don’t skip it.
4) Understand your portfolio allocation – is it right?
We’ve seen folks that cared little about the financial markets during their early working years suddenly start watching their balances daily as retirement nears. At this point, you don’t have the luxury of significant additions to your savings, so you may become hyper focused on the day-to-day or week-to-week fluctuations of your portfolio.
Your goal here should be to find a risk/return ‘sweet spot’ with your investments. You want your investments to grow enough that you can sustain the retirement goals you set in #3 above, but you also don’t want to take on more risk than you can tolerate. If a bad day in the stock market means you’re losing sleep, it’s likely you’re taking more risk than you should or aren’t seeing the big picture when it comes to investing. One of our favorite investment ideas is “the right allocation is the one you can stick to.”
5) Stockpile cash as a buffer.
It’s been academically studied that having ample cash on hand is directly linked to positive perception of our financial well being and in turn, life satisfaction. Read that again...having ample cash on hand can increase life satisfaction. That’s powerful.
So as you near retirement, give yourself some ‘pillow power’ and work to stockpile some excess cash in a liquid, safe vehicle (such as an FDIC insured high yield online savings account) that is accessible to you. If you’re on the precipice of retirement, we think two years’ worth of expenses is a good starting point.
6) Evaluate and determine the optimal age to take social security and/or pensions.
Many people are tempted to simply start social security or a workplace pension as soon as possible. In most cases, however, it might behoove you to use other sources and let those benefits accrue a bit longer. For those born after 1943, your social security benefit grows by about 8% each year you delay. The rough math works out that if you live to age 80, you are better off waiting.
Of course, there is no perfect answer that applies to everyone, so it’s important to take some time to consider the timing for ‘turning on’ your benefits.
7) Understand the taxation of your anticipated retirement withdrawals.
When you save into a traditional IRA or 401k, your contributions are “pre-tax”. The IRS encourages us to save for our retirement by letting us ‘defer’ tax on those savings until withdrawal. This means that if you want to spend $1 from your IRA or 401k once retired, you might need to withdraw $1.20-$1.30 to be able to pay your taxes and end up with $1 to spend. This is why it’s important to understand the composition of your net worth statement. Are all of our savings in pre-tax vehicles or do you have some savings in Roth or brokerage accounts? Understanding your situation as it relates to pre or post tax accounts is critical to running the retirement projection as discussed in #3 above.
8) Understand your healthcare and medicare options and the ballpark of what they will cost.
If you intend to retire early, covering the ‘gap’ between your employer provided health insurance and the start of medicare at age 65 can be one of your largest expenses. If you’re retiring at age 65 or later, you may be transitioning directly to medicare. Medicare can be very complicated, so you might consider sitting down with a specialist in this area to make an educated decision.
Before you retire, think about where/how you’ll get health insurance. Some employer plans allow employees to continue coverage into retirement (for a cost, obviously). You could also consider using COBRA or a plan from your state’s health insurance exchange to bridge the gap to medicare.
9) Evaluate and determine whether Long Term Care insurance is right for you or not.
Perhaps you’ve seen a parent, relative or friend quickly deplete their life savings because a physical or mental decline pushed them into a facility or required home healthcare. A long term care insurance policy can help protect you against this risk. The time to consider a policy like this is likely in your 50’s, well before the risk arises. These policies can be costly, so if do plan to use one, you’ll want to purchase it while you’re still working.
These policies are very nuanced and can be customized to meet your specific needs. You might explore them and decide it’s not for you. That’s totally acceptable if you’ve done your homework. However, we think it’s at least worth considering while you’re still working.
10) Don’t be too focused on paying off your mortgage.
Many people have the dream of retiring 100% debt free. There’s nothing wrong with that goal if you have the means to do so. However, we see many folks in their 50’s obsessed with idea of piling discretionary income into paying off their mortgage. If you think you’ll be staying in your current home in retirement, we aren’t huge fans of this idea.
You don’t have much flexibility if in retirement you have no mortgage, but little saved. Your options in that case are to sell your home or be forced to use the equity through a reverse mortgage or a home equity loan. In today’s environment, you have access to extremely low mortgage interest rates. Take advantage of them. Odds are you can earn more by investing excess dollars than you save in mortgage interest by paying it down. What fun is retirement if you’re house rich and cash poor?