Let the 10-year countdown begin! You’ve worked hard and saved for decades and you are finally entering the home stretch to your much-anticipated retirement years. While this is cause to celebrate as you draw even closer to your goal, that does not mean this is the time to turn on cruise control and passively count down the days until you pack up your office for good. Determine to finish the race well by doing these 10 things within 10 years of retirement.
1. Stress-Test Your Savings
When it comes to your retirement savings, there are countless uncertainties. True, it is impossible to predict exactly how long your nest egg will last. However, you can run your figures through different scenarios to evaluate what will happen if the market crashes, if you face unexpected healthcare costs, or if a spouse dies prematurely. Stress-testing your savings in this way allows you to come up with a plan to mitigate these risks. If you wait until you are retired to take this step, it may be too late to make the changes necessary to protect against these potentially devastating risks and maximize your retirement income.
2. Take Your Retirement Income For A Test Drive
Whether you choose to continue working during retirement or not, you’ll likely still rely at least somewhat, if not completely, on a retirement income generated from several different sources, including Social Security, employer-sponsored retirement plans, personal retirement plans, and other savings and investment programs. Over the course of your working years, you’ve likely been contributing money into most, if not all, of these accounts, so you’ll have a consistent income in retirement. But how do you know if it’s enough money?
One way is to test it out. While it’s generally recommended to assume you’ll need 80% of your current income in retirement, you and your family may need more or less. For a few months, test drive a reduced budget. To start, try living on 80% of what you currently receive. Do you find yourself pinching pennies or did you find even more ways to cut back?
3. Save More Aggressively
The closer you get to retirement, the more you should aim to save. Cut back on expenses, channel any raises and bonuses directly to savings, and automate savings increases of 1% every few months.
Your increased savings can be invested into your company 401(k) or 403(b) plan or your personal IRA. If you are over 50, you can invest an extra $1,000 a year into an IRA for a total of $7,000 for 2019. At $6,000, the catch-up contribution for those over 50 is even greater for 401(k) and 403(b) plans, allowing a total annual contribution limit of $25,000.
4. Prep Your Retirement Home
According to studies by the Employee Benefit Research Institute, housing expenses account for an overwhelming 43% of spending for those ages 75 and older—even more than healthcare. (1) As you approach retirement, think through where you’re going to live and how much you’ll spend on housing costs in retirement.
If you plan on relocating, do your research. Visit your potential locations, and decide if the climate, community, and area are right for you. If your plan includes staying where you are, ask yourself if downsizing is a viable option. If you want to stay in your current home, look at any modifications that are needed to accommodate aging. Plan to make any expensive adjustments and repairs now before you’re living on a tighter budget.
5. Keep An Eye On Your Investments
The 10-year pre-retirement mark is a particularly appropriate time to adjust your portfolio’s allocations. Meet with your financial advisor to review your current lineup and determine whether your risk tolerance should change.
Along with reallocating your investments, you’ll want to consider how the sequence of returns could impact your portfolio’s value over time. In the simplest of terms, sequence of returns refers to the risk of receiving lower or negative returns early in a period when you’re making withdrawals from your investments. If your retirement date correlates with the onset of a bear market, your savings can be depleted quickly as you withdraw from your portfolio. With a smaller investment base, you’ll have less wealth remaining to benefit from a future market upswing.
To mitigate the risk of sequence of returns ruining your retirement portfolio, work with your advisor to take the appropriate steps, such as reducing volatility, examining your withdrawal strategy, and finding different market options to protect your money.
6. Create A Social Security Strategy
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you decide to collect these benefits will impact the amount of payout you receive. At 62, you become eligible to receive Social Security benefits for the first time. But before you start claiming Social Security, it’s important to review your benefits and options for claiming so that you can plan to maximize your lifetime benefit.
If you start claiming benefits at age 62, your benefits are about 26% lower than if you waited for full retirement age, and over 40% less than if you wait until you are 70 to claim. It’s also important to consider how long you’ve worked and your lifetime average monthly earnings, which are used to calculate your benefit. In some cases, working a few extra years can have a big impact on your monthly Social Security benefit.
7. Think Long And Hard About Healthcare
No matter how healthy you are today, you may need more health services as you age. According to the Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $157,000 to $392,000 in healthcare costs. (2) Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options.
8. Don’t Forget About Long-Term Care
When it comes to your health, think not only about basic medical insurance, but think about your potential need for long-term care insurance as well. An average of 63% of today’s 65-year-olds will require some form of long-term care during their lifetimes. (3) On average nationally, it costs $253 per day or $7,698 per month for a private room in a nursing home. (4) But the older you get, the higher your cost for a long-term care insurance policy will be and the greater the likelihood of your application being denied. Generally, the last age long-term care insurance is affordable is when you are in your mid-60s.
If you decide to plan for long-term care, you have a few options. You can go with a traditional long-term care insurance policy, add a long-term care rider to your life insurance policy, purchase an annuity with a long-term care rider, or start saving for your long-term care on your own through a contingency savings account.
9. Come Up With A Tax Strategy
Tax planning can save you more money than you realize. By projecting your future income and taxes now, you may find opportunities to save. When you are living off a fixed income in retirement, tax strategizing can make a world of difference in the longevity of your nest egg.
For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability.
10. Get Professional Advice
Even if you have been successfully saving and planning on your own up until this point, these final years before retirement are critical for making decisions that have far-reaching consequences. Spend your final working years enjoying life rather than allowing anxiety to creep in as you begin to worry about your plans for this huge life change. Our team at Haydel, Biel & Associates (HBA Wealth) would love to help you create a personalized retirement plan that will address your concerns and unique life circumstances. Take the first step: contact me at (626) 529-8347 or email me directly at [email protected] today!
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].
(1) “How Does Household Expenditure Change With Age for Older Americans?” Employee Benefit Research Institute. September 2014. https://www.ebri.org/pdf/notespdf/EBRI_Notes_09_Sept-14_OldrAms-WBS.pdf