Do you have a game plan for retirement? If you’re one of the roughly 4 million American baby boomers who will reach retirement age every year for the next 11 years, the best time to actively plan for retirement is now.
Sandwiched between your career’s final chapter and retirement is a transitional period known as “pre-retirement,” according to Craig Bartlett, CFP®, division consulting manager for U.S. Bancorp Investments. Although there’s no hard and fast rule for when this phase should start, if you’re not paying attention, it could pass you by and leave you ill-prepared for what comes next.
“Pre-retirement too often consists of when you finish your last day at work and wondering how you’re going to get through the next 20 to 30 years,” Bartlett says. “Well before your retirement date, you should start thinking about what retirement’s going to look like and laying the foundation for it.”
Here are six things you can consider doing today that may help make retirement go more smoothly tomorrow.
Retirement planning should start in your head, not in your bank account. “Planning for retirement is similar to planning for a vacation. Most people want to know where they’re going, where they’re going to be staying and what attractions there are to see along the way,” Bartlett says. “If you sit down and get a clear understanding of what’s important to you, you’ve got a much greater chance of accomplishing that.”
“If you focus on paring back instead of spending during pre-retirement, you can save a lot, fast,” says Tom Rushin, CIMA®, division consulting manager for U.S. Bancorp Investments. Pre-retirement is a good time to get back to personal finance basics like budgeting.
“If you track your spending for a few months to see where your money is going, you may discover opportunities to save a significant amount for retirement without having a big impact on your lifestyle,” Rushin says.
Liquidating assets also generates extra funds. For example, if you live in a home that’s bigger than you need, consider downsizing before you retire.
“Let’s say you’ve got a $700,000 house and $500,000 worth of equity. If you can move into a $300,000 house, there’s $200,000 right there that you can put to work in the market,” Rushin says, although the gain from a home sale may be taxable.
You can begin collecting Social Security benefits between 62 and 70, but waiting longer increases your monthly benefits. If you begin collecting at 62, your benefits will be about 26 percent lower than what you’re eligible to collect at your “full retirement age” of 66 or 67, depending on when you were born. After you reach your full retirement age, Social Security benefits increase 8 percent each year until age 70. Plus, working longer equals extra income and savings.
If working full time longer isn’t an option, working part-time in retirement could provide modest cash flow, Bartlett says. Or you could remain in your current career field and possibly transition into a consulting role.
If you’re considering incorporating health savings, Roth IRAs, nonqualified annuities and life insurance policies into your savings strategy, there are a couple of reasons to purchase or enroll in them prior to retirement.
First, insurance products tend to have lower premiums when purchased before retirement. Second, the sooner you can set aside money, the longer it will have to potentially grow.
Fortunately, federal rules favor pre-retirement investing. “Beginning at age 50, there are a lot of catch-up provisions that you can start to take advantage of,” Bartlett says.
Depending on your income, starting at age 50 you can contribute up to $6,500 per year to an IRA instead of the standard $5,500. Likewise, you can exceed the annual contribution limit for a workplace savings plan, like a 401(k) or a 403(b), by an additional $6,000 per year.
It’s also important to review your asset allocation. Common retirement investment wisdom — that you should become more conservative as you age — may not be the best plan for you.
“You do need to have some money that’s invested conservatively because you may need cash on hand to pay bills. At the same time, it can be wise for some to have a higher-risk bucket of assets that are pegged for longer-term use, depending on your needs and risk tolerance” Rushin says.
Moreover, developing a plan for your retirement can yield both emotional and financial returns, according to Bartlett.
“Many financial mistakes happen not because of bad investment selection or timing but because the person making them wasn’t emotionally comfortable,” he says. “If you plan ahead, you may be able to eliminate a lot of the stress associated with retirement and truly enjoy it.”
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