If you will be retiring in the next few years, you can consider yourself a pre-retiree. Those who plan to retire in the next five years need to start preparing their finances for the transition. Here are some of the New Year’s resolutions pre-retirees should make this year to get ready for retirement:
1. Identify goals and objectives. At this point in your life, you need more than a vague notion of what retirement will entail. “You have to know what your retirement looks like before you get there,” says Greg Hammer, CEO and president of Hammer Financial Group in Schererville, Indiana. Start thinking about retirement travel and hobbies and how much those activities will cost to see if you can afford them.
Plus, you’d better check with your spouse to ensure he or she doesn’t have different plans. “Have an understanding and an agreement with a spouse as early as possible,” says Justin Richter, senior wealth advisor with Mariner Wealth Advisors in Leawood, Kansas.
[See: How to Max Out Your 401(k) in 2018.]
2. Pay off debt. If you’ve been talking about getting out of debt, now is the time to get serious. A mortgage, credit card balance or even student loans can cripple a retirement budget. Pay off the bills now while you are earning money. That will leave you in a better place financially than waiting until retirement to draw down savings to pay off the debt.
3. Take advantage of catch-up contributions. Workers who slacked off on saving when they were younger get a chance to put more aside once they hit age 50. The government allows catch-up contributions of $1,000 to traditional and Roth IRAs each year, for a total possible contribution of $6,500 annually. Older workers can also put an additional $6,000 aside in their 401(k) account for a total of $24,500. Those who are age 55 or older and use a high-deductible health plan can put another $1,000 in their health savings account as well. That brings their maximum tax-deductible HSA contribution to $7,900 for those with a qualifying family health insurance plan.
4. Create a retirement income plan. Having enough money in retirement savings is only the beginning of preparing for retirement expenses. “How are your savings going to create income?” asks Andrea Coombes, investing and retirement specialist with NerdWallet. Different buckets of money may fall under various tax rules. Some money may be tax-free, while other sources of cash are taxable. Pre-retirees need to draw up a plan that minimizes taxes while providing the income they need to maintain their lifestyle.
5. Decide on a Social Security strategy. Part of determining an income plan is figuring out when to claim Social Security. Although retirees can claim benefits as young as age 62, they can lose up to a third of their monthly benefit amount by failing to wait until their full retirement age. “We find a lot of participants don’t think much about life expectancy,” says Jeff Scott, vice president of corporate benefits, retirement for insurance brokerage and consulting firm NFP. With people living longer, it can make sense to delay the start of Social Security. Doing so provides an 8 percent increase in monthly benefits for each year from full retirement age to age 70. “The nice thing about waiting is that these values are guaranteed to go up,” Scott says.
[See: 10 Social Security Claiming Strategies That Work.]
6. Reallocate investments. It’s been eight years since the end of the last recession, and the stock market has hit a series of record highs in 2017. That’s good news for investors, but it can lull people into a false sense of security. “We’ve become immune to what the market can do,” Hammer says. “The pre-retiree market is probably in the biggest danger zone I’ve ever seen.” That’s because the current bull market can lead people to invest more aggressively than they should immediately before retirement. “I believe in the market, but I believe it’s going to crack,” Hammer says. Pre-retirees need to be prepared for a market correction by reviewing their investments and reallocating them to more conservative funds as needed.
7. Review life insurance coverage. Life insurance traditionally hasn’t been considered a need for retirees who are often empty nesters and don’t have to provide for a family. However, there can be a need for life insurance if you carry a mortgage or other debt or are raising grandchildren. Mary Beth Storjohann, CEO and founder of Workable Wealth and a spokesperson for the insurance firm Haven Life, says those without survivorship benefits on a pension may need to provide for a spouse. If you think you will need additional life insurance in retirement, the window may be quickly closing to get coverage. While some companies will issue new policies up to age 65, poor health could disqualify someone.
8. Research health insurance options. If you’re retiring early, have a plan for health insurance. Medicare won’t begin until age 65, so early retirees need to find coverage elsewhere. COBRA coverage allows many workers to continue buying their workplace coverage, but the price can be exorbitant. Buying an individual policy through the government health insurance marketplace is another option.
[Read: Medicare Enrollment Deadlines You Shouldn’t Miss.]
9. Meet with a financial advisor. Even if you don’t have a regular financial advisor, paying for a session with a planner can be money well spent. A finance expert can help identify anything that may be lacking in your retirement plan. “It’s usually the spending that isn’t thought about as closely,” Richter says. An advisor can help a pre-retiree realistically estimate what a budget will look like in retirement. Plus, advisors can help you prepare for the possibility of a market downturn. “Reviewing risk profile is a key thing to do in 2018,” Richter says.
Pre-retirees have plenty to keep themselves busy in 2018. You can spend time dreaming about the future, but don’t forget to also take these practical steps to ensure your retirement will be a successful one.
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9 Financial Resolutions for Pre-Retirees originally appeared on usnews.com
