By Ryan Vogel
Retirement used to be that far-off milestone you dreamed about. But it’s not so far off anymore. Your dreams of white sandy beaches, days spent on the golf course, or more time with family are just around the corner. That doesn’t mean it’s time to put your feet up and count down the days until you pack up your office for good. Here are 10 things to do within 10 years of retirement so you can finish the race stronger than you started!
1. Run The Numbers
There are countless uncertainties when it comes to your retirement savings. While it may be impossible to predict exactly how long your nest egg will last, you can run your figures through different scenarios to see what might 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 prepare for these risks. If you wait until you are 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
Your retirement income will likely be a mix of funds from Social Security, employer-sponsored retirement plans, personal retirement savings, and a variety of other investments. Over the course of your working years, you’ve been contributing money to these accounts so you’ll have a consistent income in retirement. But how do you know if it’ll be enough to carry you through your golden years?
One way to know is to test it out by confirming your current expenses to see if they match up with your projected income. While the general rule of thumb is that you spend 70% - 80% of your expenses in retirement, we find that number to be incorrect. Usually people spend the same or even a little more immediately after retirement. Expenses do reduce over time, but we find it best to plan for maintaining the same amount of expenses pre and post retirement.
If you find the exercise of keeping track of your expenses too burdensome, try this simple technique. Use one checking account for all your expenses and look at the balance at the beginning of the month. Most people have the same amount deposited from work each month. Add your deposits from work to your beginning balance, then subtract that number from the balance at the end of the month. The result is your expenses. Did your results line up with what you were projecting in retirement?
3. Increase Your Savings Rate
The closer you get to retirement, the more you should aim to save. Channel any raises and bonuses directly to savings and make sure you are maximizing your deferrals to retirement plans.
Your increased savings can be invested into your company 401(k) or 403(b) plan or your personal IRA. If you are over age 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. Also, if your retirement plan allows for after tax contributions, consider doing those as well. There is no immediate tax benefit, but when you stop working you can do a tax-free rollover of these after-tax contributions into a Roth IRA, where they will continue to grow tax free.
4. Decide Where You Will Live
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. Consider vacationing at potential locations to 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 you might need to accommodate aging. Plan to make any expensive adjustments and repairs now before you’re living on a tighter budget.
5. Watch Those Investments
As you approach the date where you will no longer be earning an income it is a good idea to review your investment portfolio’s asset allocation, especially at the 10-year pre-retirement mark. Meet with your financial advisor to discuss your retirement plans and see if you should be making any changes.
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.
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 retirement when you’re making withdrawals from your investments. If your retirement date coincides with the onset of a downturn in the stock 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 the stock market recovery. To mitigate this risk, work with your advisor to take the appropriate steps, such as reducing volatility, examining your withdrawal strategy, and finding different options to protect your money.
6. Create A Social Security Strategy
Social Security benefits can be claimed anytime between ages 62 and 70, but the timing of when you decide to collect these benefits will impact the amount of payout you receive. 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 major 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 supplemental policies. Work with an experienced professional to help you evaluate and decide on coverage that best meets your needs.
8. Don’t Forget About Long-Term Care
Along the lines of health, think about your potential need for long-term care. 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) 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. 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 so you can self-insure.
9. Create 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. Rely On A Professional
Even if you have been 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. If you want to spend your final working years enjoying life rather than worrying, our team at Novi Wealth Partners would love to help you create a personalized retirement road map that will address your concerns and guide you to financial independence. Take the first step by reaching out to us at (609) 921-7002 or info@noviwealth.com to schedule a no-obligation discovery meeting today!
About Novi Wealth Partners
Novi Wealth Partners is an independent, fee-only comprehensive financial planning firm dedicated to empowering clients to discover their definition of true wealth while providing the confidence to achieve it. With 20+ years of experience, we have found that most people don’t care about money, but instead, they care about what money can do for them and their loved ones. As a result, we focus on guiding our clients to find their unique vision for their life and developing a plan to help them live out their values. Our goal is to truly understand our clients on a personal level and help them navigate life’s many changes.
We are located in Princeton, New Jersey and we service clients both locally and nationally. There are four CERTIFIED FINANCIAL PLANNER® practitioners in the firm, all of whom are members of the prestigious National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA). We prioritize a team-based approach, which allows us to deliver comprehensive financial planning, investment management, tax planning advice, retirement planning, estate planning advice, risk management advice, and concierge level wealth management. We are committed to providing each of our clients a level of service as unique as they are and we are proud, as Fee-Only™ financial advisors, to offer unbiased financial expertise. To learn more about Novi Wealth Partners or to get started on your financial journey, visit our website or connect with us on LinkedIn.
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(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