Introduction
Retirement is not just a date on the calendar; it’s a significant life transition that requires meticulous financial preparation. As you move from a decade away to just a year before this new chapter, your strategies and priorities shift. The following post describes a retirement checklist with six critical steps to ensure you’re ready for the financial aspects of retirement.
1. Maximize Your Retirement Contributions
In the final year before retirement, it’s crucial to bolster your retirement savings. If you’re over 50, take advantage of catch-up contributions that allow you to add extra funds to your 401(k) and IRA accounts. This can significantly boost your nest egg, providing more comfort and security in retirement. This is because, even though your pre-retirement contributions won’t have a lot of time to grow in that final year, that money can continue to grow during your retirement. So, it’s a good idea to fund that account and maximize contributions all the way until retirement day comes. You are also shielding money from the IRS by adding retirement funds while you continue to work.
2. Eliminate High-Interest Debt
Entering retirement debt-free is ideal, but if that’s not possible, focus on paying down high-interest debts such as credit card balances. Reducing these debts can alleviate financial stress and lower your monthly expenses, making your retirement savings last longer.
3. Review Your Investment Strategy
As retirement nears, it’s important to review your investment strategy as part of your retirement checklist.
Shifting Investment Focus: Typically, you should start focusing on shifting your investments from growth-focused to more conservative options. Instead of trying to grow your assets, retirees are more concerned with preserving capital. This is because as you approach retirement you are drawing down those assets rather than contributing to them, and you have less time to recover from sharp drops in the market. This also depends on your tolerance for risk and how close you are to retirement. At the one year away point, you and your partner may need to coordinate the timing of asset class transitions.
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Consulting a Financial Advisor: It is great to talk with your financial advisor to help you adjust your investment strategy. They can help you know what is working out with your plan or what isn’t. They can also discuss the timing of any upcoming changes if there are any.
Regular ongoing reviews: Regularly reviewing your retirement portfolio is also key. This can help you ensure you’ve got an eye on the end goal, checking to see if your financial situation still aligns with your current needs and objectives.
Adjusting investment strategies: Set it and forget it isn’t a good idea when it comes to investment strategy in retirement. Neither is daily checking and modification. Changing up your investment strategies based on the changes in your goals, age, and tolerance to risk can help you maintain financial stability throughout your tenure.
The last few years before you retire is essentially a test of your preparation and planning up to that point, so always ensure you review your investment strategy.
4. Plan for Healthcare Costs
Healthcare can be one of the largest expenses in retirement. This makes planning for it a key element of your retirement checklist. Investigate your health insurance options, including Medicare, and consider purchasing supplemental insurance or setting aside savings specifically for healthcare costs. Also, explore long-term care insurance, which can cover expenses not included in traditional health plans.
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Note that starting a Health Savings Account (HSA) can help to offset some of these costs later on. This is something to consider more than a year out so that you can have a few years to build up a nice health savings nest egg.
5. Update Your Estate Plan
Before you retire, do not forget to update your estate plan. This includes your will, your power of attorney, and your healthcare directive. Why is this step necessary? An updated estate plan will help protect your assets and what you want to do with them. Since changes occur all the time, the plan may need to change to accommodate the changing circumstances in your life. Some of the changes could be a change in your home, the death of a loved one, the addition of grandchildren, or a large increase in your assets. Your powers of attorney, your health care directives, and your nominations of guardians also need to be updated. Don’t have tunnel vision and only update your property plan.
Another reason to review your estate plan as part of your retirement checklist is to ensure you still have the best person as the executor in your will. You should choose your executors, trustees, and other agents very carefully, based not just on age or profession, but on whether your candidate lives near you or has enough time to deal with health issues. Then, when you’re done, complete your plan.
After you are done, review your plan regularly, to leave your legacy to your heirs in a way that meets your wishes. After all, retirement is a big change in life. You might need to make adjustments to your existing plan to reflect changes in income, or other concerns. Bottom line, update and check the status of your estate plan regularly.
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6. Create a Detailed Budget
A detailed budget is essential for transitioning from a steady paycheck to fixed income sources. Take stock of your current savings, investments, and other retirement accounts. Determine the value of your existing retirement assets and any expected income from sources like Social Security or pensions.
List all of that expected retirement income, including Social Security, pensions, and withdrawals from savings. Then, outline your anticipated expenses, ensuring your lifestyle is sustainable with your retirement income. Start by envisioning the lifestyle you want to have during retirement. Consider factors such as travel, hobbies, healthcare expenses, and any other significant expenses you anticipate. This will help you estimate your retirement income needs.
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Use retirement calculators: Online retirement calculators can help simplify the process by taking into account various factors such as inflation, investment returns, and life expectancy. These calculators provide estimates based on your inputs and can help you determine how much you need to save to reach your retirement savings goal.
Calculate the retirement savings gap: Subtract your estimated retirement income from your projected retirement expenses. The resulting amount represents the gap that needs to be filled by your retirement savings. This is the amount you need to save to maintain your desired lifestyle during retirement. Multiply that gap by the number of years you think you will need to maintain your desired retirement lifestyle and that will help determine how much savings you will need. If that number equates to the amount you plan to have saved or less – you are probably good. If that number is larger, we have some tips for you coming in a future post.
Conclusion
The final year before retirement is a pivotal time for financial preparation. By maximizing contributions, eliminating debt, creating a budget, adjusting investments, planning for healthcare, and updating your estate plan, you can set the stage for a secure and fulfilling retirement.
Going through this retirement checklist with some working months remaining will give you more options and allow you to change your retirement expectations if needed.
Remember, retirement planning is unique to everyone, and it’s important to consider your personal circumstances and financial objectives. Consulting with a financial advisor can provide personalized guidance and help you navigate the complexities of retirement planning.