If you are within 20 years of retiring, now is the time to start planning so that you can make more informed decisions about your future and be financially and emotionally prepared for one of life’s biggest transitions. Though individual situations vary, these basic recommendations should be considered by anyone preparing for retirement. The sooner you start preparing, the more successful you should be.
CREATE AN EMERGENCY FUND
It is a good idea to make sure you have an adequate emergency reserve (three to six months of living expenses) and replenish it if used. This can prevent the need for withdrawals from the retirement plans you are counting on in the event of living longer than anticipated, job loss, or other emergencies.
GET SOCIAL SECURITY RIGHT
The average American takes Social Security early at age 62. It may make sense to start taking reduced benefits if you have health issues. Otherwise, you are leaving 30% of your full retirement age (FRA) benefit on the table. If you can wait until the maximum age 70 — you will be rewarded with an 8% annual increase in benefits for every year you delay retirement.
BE CLEAR ON MEDICARE
Many fail to check on the rules around signing up for Medicare. If you don’t enroll during the 7-month window around your 65th birthday, you could be assessed a penalty, permanently increasing your Medicare Part B and D (prescription) monthly premiums.
MAX RETIREMENT CONTRIBUTIONS
Contribute the maximum you can annually to your 401(k) — or at least enough to receive a full employer match. If you are self-employed, look into options such as a SEP IRA or Solo 401k that allow you to contribute more than you can to a Traditional IRA.
MAKE A SPENDING COVENANT
Be conscientious about debt. You should have a plan in place for a) how you will pay off debt prior to retirement or b) how you will continue to pay off debt once you are retired.
AVOID RETIREMENT TAX SURPRISES
Keep in mind that retirement savings are taxed as ordinary income when withdrawn. You should consult with your advisor and tax professional well ahead of retirement on how to minimize the tax consequences of retirement account draws including Required Minimum Distributions (RMD) after age 70.5.
Ensure that you have a diversified investment portfolio across all of your accounts – tax-free, tax-deferred, and taxable. Make sure your portfolio uses funds with low expense ratios and is rebalanced regularly. The value of being a long-term investor and not panicking during a market downturn is critical the closer you get to retirement. You may not have time to make up for emotional missteps.
Don’t forget other kinds of risk. Make sure you have addressed your insurance needs so that you are adequately covered in case of disability or death, home losses, and liability claims.
FACTOR IN THE SOFT SIDE
The psychological aspects of retirement are often forgotten. People that retire without giving adequate thought to their new life can suffer from depression and isolation. Many of us tie our identities to a career, and when workplace friendships are lost too, it can be a double blow.
PLAN YOUR ENDGAME
Make sure you have at least the most basic estate planning documents in place. Documents should be reviewed every few years to make sure executors and beneficiaries are still viable and that the plan is still in line with your wishes. If you own a business, it is especially important to have a succession plan in place in case of death, disability, or divorce.
With retirement extending over decades and a desire to fill a variety of life ambitions, planning is essential. Though this list is by no means complete, it is a good place to start.