Planning for retirement is very similar to running a marathon—both require an enormous amount of patience and stamina. As many expert marathon runners will tell you, it’s best to end the race at an even faster pace than you started. The same applies to retirement planning; in your last decade before your golden years, you should be hitting the gas pedal even harder instead of turning on cruise control or slowing down. Consider doing the following 10 things to help you finish your working years fully confident in your retirement plans.
1. Run the Numbers
When it comes to your retirement savings, there are countless uncertainties. While it may be impossible to predict exactly how long your nest egg will last, you can run your figures through different scenarios to evaluate what may happen if the market crashes, if you face unexpected healthcare costs, or if a spouse dies prematurely. Once you stress-test your savings in this way, you can come up with a plan to help mitigate these risks. If you wait until you’re retired to take this step, it may be too late to make the changes necessary to maximize your retirement income.
2. Test-Drive Your Retirement Income
Whether you choose to continue working during retirement or not, you’ll likely rely on a retirement income generated from several different sources, including Social Security, employer-sponsored retirement plans, personal retirement accounts, and other savings and investment programs. Throughout your working years, you’ve been contributing money to these accounts with a plan to secure a consistent income in retirement. But how do you know if it’s enough to last your whole retirement?
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 ways to decrease your budget even more?
3. Ramp Up Your Saving
It may sound obvious, but 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 2021 and 2022. At $6,500, 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 $26,000 for 2021 and $27,000 for 2022.
4. Decide Where You’ll Live
Housing costs tend to be the largest expense in retirement, with the average retiree spending $15,864 per year on housing, not including utilities or amenities. (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 you want to stay where you are, ask yourself if downsizing is a viable option. If not, look at any modifications that are needed in your current home to accommodate aging. Plan to make any expensive adjustments and repairs now, before you’re living on a tighter budget.
5. Evaluate 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 preserve 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 you can plan to maximize your lifetime benefit.
If your full retirement age (FRA) is 67 and you start claiming benefits at age 62, your monthly benefit amount will be 30% lower than if you waited for full retirement age. (2) And if you wait until age 70 to claim your benefits, your monthly check will be 24% higher than if you retire at 67. (3) 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. Research Healthcare Options
No matter how healthy you are today, you may need more health services as you age. According to the Fidelity Retiree Health Care Cost Estimate, the average couple at age 65 will require approximately $300,000 (after tax) to cover healthcare costs in retirement. (4)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. Consider Long-Term Care
Along the lines of health, think about your potential need for long-term care insurance. According to the U.S. Department of Health and Human Services, most Americans turning 65 will face the potential of requiring long-term care at some point during their later years. (5) On average nationally, it costs $297 per day or $9,034 per month for a private room in a nursing home. (6) If you decide that long-term care insurance is the way to go, now is the time to act. Insurance costs increase with age. There is also the risk that your health will change and your application for insurance will be denied. Generally, you will have fewer options the longer you wait.
If you want to get a long-term care plan in place, you have a few options. It is smart to consider 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 so you can self-insure.
9. Put a Tax Plan in Place
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’re 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 reduce your tax liability.
10. Seek Out Professional Advice
These final years before retirement are critical for making decisions that have far-reaching consequences. Even if you have been saving and planning on your own up until this point, it’s smart to consider enlisting a financial advisor to help you plan for your financial future.
Allow me to help you create a personalized retirement road map to address your concerns and guide you to financial independence. Email me at jim@glhcfinancial.com or give me a call at 916-276-8677 to see if I’m the right fit to help you pursue your ideal financial future.
About Jim
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources, knowledge, and experience to help his clients experience simplicity and clarity in their financial life. Jim spent over 20 years working for GE Financial Advisors, both in their insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
He has served as a board member of several nonprofit organizations and has been involved in Cub Scouts leadership and youth sports coaching. Jim lives in Folsom, CA, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities such as kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.
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(1) https://www.financialsamurai.com/the-average-spending-amount-in-retirement-is-surprisingly-high/
(2) https://www.ssa.gov/oact/quickcalc/early_late.html
(3) https://www.ssa.gov/pubs/EN-05-10147.pdf
(5) https://longtermcare.acl.gov/the-basics/who-needs-care.html
(6) https://www.genworth.com/aging-and-you/finances/cost-of-care.html