7 Steps to Prepare for Your Upcoming Retirement

November 11, 2021

It’s Never Too Soon to Get your Affairs in Order for Retirement

If you’re nearing the tail end of the working phase of your life, first off, congratulations; what an amazing achievement! You’ve knuckled down, made a living, and you’re finally beginning to see the light at the end of the tunnel.

It’s been a hell of a journey, and you’re no doubt tired, not just of work, but the constant focus on personal and financial growth. But even though the end is in sight, it’s important that you don’t rest on your laurels. If you have it in you, now’s the time for your sprint finish!

Making the most of the last 10 years or so before you bow out of the professional sphere can have a seismic effect on the quality and comfort of life after the rat race. So, let’s take a look at 7 important steps you can take to ensure a life of leisure when you finally clock out for good.

  1. Demolishing Debt

Now’s the time to start taking some big chunks out of any outstanding debts. If you have a mortgage, it’s worth speaking to your bank about increasing your monthly payments or perhaps paying off a lump sum amount.

You should also holster that credit card of yours and start paying for as many things with cash as possible, even major purchases with price tags that make you wince.

This step is all about minimizing interest over the coming years. If you can wrap up current debts and avoid new debt (or limit it, anyway), you won’t have to deal with interest siphoning off your retirement income.

Without that pecuniary drain to worry about, you’ll have a much clearer picture of your future financial standing, which brings us to our next point…

2. Calculating Retirement Income (Don’t Rely on the 4% Rule)

Planning for your retirement is all based on one overarching question… how much money are you going to be bringing in when you’re not working.

Your first port of call should be to assess how much income you’ll have available in social security and employer pensions. These nest eggs are going to form the core of your financial resources during retirement.

You should try to figure out what sort of state your savings and investment portfolio will be in, as you’ll be using these assets to supplement your core nest eggs and securely increase your withdrawal rate. If you plan on working part-time, you will also need to factor probable income into the equation.

If you do have money tied up in investments, it used to be said that you could make your profit last for 30 years by following the 4% rule. This rule stipulates that you can withdraw 4% of your total investment portfolio in your first year of retirement, then amend that figure to account for inflation as the years go by.

However, the 4% rule is a flawed concept for a few reasons:

  • It’s based on a 30-year time frame. It’s a morbid thought, but, depending on the age you retire, the possibility of living a further 30 years may be unlikely.
  • It assumes your portfolio will never draw a negative balance.
  • It uses historical market returns as a point of reference. In this day and age, market returns on your portfolio are almost definitely going to be a lot smaller.
  • The rule is also based on a very specific portfolio type, namely, 50% stocks and 50% bonds.
  • The 4% rule is incredibly rigid and relies on the idea that you’ll need or want to spend the same amount every year, which is rarely the case.

Feel free to use the 4% rule as the foundation of your calculations, but a more personalized approach that takes into account life expectancy and confidence in your portfolio stands to be far more accurate.

Once you customize the 4% rule to estimate your assets and withdrawal rate, is it enough on top of your other nest eggs to support the life you’d like to lead? If not, you may want to consider working for a few more years or reducing your discretionary spending (non-essential purchases). We’d also recommend deferring your social security payments, as your benefits will increase by 8% annually between the age of 66 and 70.

3. Calculating Retirement Expenses

The next step is to figure out roughly how much you’ll be spending a year during your retirement. If the figure matches your projected income too closely or exceeds it, you’ll have to make some pretty significant changes in order to afford your desired lifestyle.

Use your current spending as a starting point, and try to predict how expenses may change. For example, the price of healthcare and gas might increase, but the price of food and clothing may decrease.

4. Account for Future Medical Care Expenses

It’s no secret that, as we age, we need more and more medical attention. Granted, if you’re over 65, Medicare will cover routine medical expenses, but you should be preparing yourself financially for plenty of non-routine care too.

You should also consider the eventuality that you will have to enter some form of assisted living home, which isn’t cheap, so now is the perfect time to invest in long-term care insurance. The sooner you do so, the lower the premiums will be and the greater the chance your application will be accepted.

On top of insurance, if you invest in a health-based savings account, you should maximize your contribution, as, if you don’t spend it, it compounds tax-free, ensuring you have a respectable sum to fall back on in your golden years.

5. Invest for Growth and Diversify Your Portfolio

You may be tempted to take your foot off the gas when it comes to your investments in order to minimize risk, but that’s not strictly the best course of action. Instead, you should be working on securing your investments.

A well-balanced, diverse portfolio gives you the most robust possible safety net to survive downturns in the market, and investing for growth decreases the chances of running out of money over the course of a long retirement period.

6. Optimize Your Retirement Accounts

If you can afford to maximize your contributions to retirement payment schemes such as IRAs and 401Ks, do so. This will boost the matching contribution that your employer is obliged to pay into your pension. If you’re over 50, you’re eligible to make even larger “Catch-Up” contributions.

Where possible, it can also be useful to look into account consolidation, as this simplifies your financial standings and provides a clear picture of your current and projected assets.

7. Figure Out Where You’ll Be Living

Your place of residence will have a massive effect on your finances after retirement. For example, if you move from a tax-heavy city to a modest home in a state with low tax rates, you’ll save a significant amount on expenses, which is money that can be put towards other things, such as holidays, inheritance savings, or material possessions.

Final Thoughts

We know the 10-years-left mark may seem early to assess your post-work prospects, but truthfully, there’s no better time to put your sources of income under the microscope and check if they’re robust enough to support your retirement plans.

Are you going to get an easy-going part-time job to bolster your pension? Are you finally going to satisfy that wanderlust you’ve been cultivating over the past three decades?

Whatever your plans are, these 7 steps will help you prepare the foundation of your dream retirement as you enter the autumn years of your professional life.

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