Spend this crucial period securing your savings and testing out the reality of your retirement plans.
For people who turned 60 this year, retirement is beginning to come into sight. The question is, are they actually ready for it?
“Your age isn’t what you should be relying on to determine when you should retire,” says Walter Updegrave, an author and journalist who runs the site Real Deal Retirement, which links to a number of calculators that let you run potential retirement scenarios. “You need to do a pre-retirement checkup.”
Ideally, five (or six) years before retirement isn’t the first time you’ve evaluated your retirement planning, but it certainly is a prime time to do it again.
“The five-year reality check is a really good idea,” says Mari Adam, a financial advisor in Boca Raton, Florida. “It’s an opportunity to test what you think you want to do against reality to see if you’re right.”
Looking at savings, Social Security claiming strategies and other financial issues is a key part of your checkup. But you also want to consider lifestyle issues such as when you’ll want to stop working full time and how you plan to spend your time instead. “Retirement’s a big transition, going from the structure of the workplace,” Updegrave says.
A nest egg is also a big consideration, especially for those who won’t receive a monthly pension. According to the Pension Rights Center, only 31 percent of Americans over 65 have pension income, and that number is falling. That means most people will have savings and Social Security as their only sources of income, unless they continue working.
“You need to do a pre-retirement checkup. How much income can (your savings) guarantee, and is that enough, combined with Social Security, to enable me to live an acceptable lifestyle?” Updegrave says. “You don’t want to pull the trigger too early and discover you don’t have enough.”
Exactly how much you’ll need to retire depends on your situation. Part of a pre-retirement checkup is determining which numbers are right for you.
Meeting with a financial planner is a good first step. You want a planner who will advise you for an hourly fee, not someone who is paid commission on investments he sells you. At this point, you want someone to help you evaluate your entire financial picture rather than sell you products.
“You can do it on your own, but most people don’t,” Adam says. “The real reason for using a professional is they make you look at it. The sooner you know, the more you can do about it.”
You will want the advisor to look at your portfolio allocation, assets and projected retirement income to assess whether you can afford your desired retirement. Saving as much as you can in the next five years won’t hurt, but you may need to revamp your investment strategy as well.
“It is so important that you get this equation right that you’d be foolish to turn it over to an amateur,” Friedman says.
Here are eight things to do in the five years before retirement:
Evaluate Social Security claiming scenarios. While you are eligible to collect Social Security starting at age 62, you’ll receive 7 to 8 percent more for every year you wait until age 70. If you’re divorced or widowed, you may be able to claim on the record of an ex-spouse, and couples may find it advantageous to stagger their claims. “It’s a good thing to do in advance,” Updegrave says. “Don’t ask the Social Security office. It’s not their job, and they’re not financial planners.”
Evaluate your savings. You should plan to take no more than 4 percent a year from your retirement savings. That means that $500,000 in savings will equal about $20,000 in annual income, or roughly $1,667 a month. “A lot of people look at the money amount they have saved, and it’s big,” Adam says. “When you translate that into an annual flow, it’s not as big as you think.”
Track your expenses. People often don’t know how much they spend on daily life, and they assume that they will live on less in retirement. But you may actually spend more early in retirement, especially if you plan to travel. Write down every cent you spend in a month and evaluate the results. “Spend some time with the data,” Friedman says. “Gain a better understanding.” If you find places you can save now and increase your retirement savings, that’s even better. If you want to look at your expenses over a longer term, put your financial information into Quicken, YNAB, Mint or a similar program to track your spending.
Get serious about relocation plans. If you plan to move when you retire, find out how much you’ll actually net for your house and how much it will cost to move to your new location. Spend as much time as you can in your new city. “Do a little bit of advance research before you just assume that you’re going to move somewhere and life’s going to be great there,” Updegrave says.
Test out your plans. If you’re envisioning a retirement filled with art lessons, quilting, golf, volunteer work or choral singing, try those activities now to see how much you like them. “The key is to do this stuff in advance and not wait until you retire,” Updegrave says.
Set yourself up for part-time work. Many people chose to continue working after they retire from a full-time job, either part time or as a consultant. Start making connections and building those businesses now. You can add any extra money you earn to your retirement savings.
Borrow for expensive home repairs while working. If your house needs a new roof or you want to modify your home to age in place, it’s easier to refinance or get a home equity line of credit while you have a full-time job.
Source: money.usnews.com ~ By Teresa Mears