Retirement is the single largest financial goal that most people will strive for, which is why it’s such an important focus in financial planning and wealth management. Whether you’re 25 or 55, it’s never too early (or too late) to start crafting your retirement plan. The more prepared you are, the better your chances of achieving a long and comfortable retirement.
Full Retirement Age
The age at which you plan to retire will have a significant impact on your financial preparedness and resources during retirement. The full retirement age for individuals born in 1960 or later is 67, at least in terms of receiving Social Security benefits. You can also choose to start receiving benefits as early as 62, though you’ll receive a reduced amount. Finally, you can postpone your benefits until age 70 to earn the highest possible benefit.
It’s important to remember that while there are age restrictions to receive your Social Security retirement benefits, retirement isn’t dependent on your age. Instead, you can retire at the age at which you’ve built substantial financial savings and resources to support yourself for the rest of your life. For some, that may come far earlier than the traditional “retirement age,” and for others, it may come later.
As you’re getting ready for retirement, go through these 10 steps to help you prepare and evaluate your future retirement from every angle.
1. Take inventory of your assets
The saying “knowledge is power” is never truer than when we’re talking about your personal finances. When you’re planning for retirement, it’s essential to have a clear inventory of all of your assets and liabilities. Tracking this information will help you understand when you may be able to retire. It will also give you and your financial planner steps to help you reach your goal more quickly.
2. Build an emergency fund
An emergency fund is critical whether you’re nearing retirement or not. During your working years, an emergency fund can provide a buffer in case of job loss or other financial emergencies. Notably, it can help you avoid having to take loans or withdrawals from your retirement accounts.
An emergency fund is just as important during retirement. Without an emergency fund, a large, unforeseen expense could require you to pull more from your retirement funds than expected, which could impact the longevity of your savings. The last thing you want is for a financial emergency early in retirement to shave years off your savings.
3. Become debt-free
It’s ideal to go into retirement without debt. While it’s not a deal-breaker to have a mortgage when you retire (especially if you’re able to claim the mortgage interest deduction), it’s important to pay off high-interest debt like credit cards and personal loans.
These types of expensive debt create a drain on your retirement savings, forcing you to spend through your funds more quickly.
By prioritizing those debts before you retire, you can help your retirement dollars last longer.
Just make sure you aren’t still reliant on credit cards and personal loans for your day-to-day expenses when you retire. Paying off the debt doesn’t solve anything if the root problem is still there.
4. Determine your retirement needs
Everyone’s retirement needs are different, so it’s important to run your own numbers. You can use your current spending and your desired lifestyle during retirement to get an idea of your required annual spending. This information will help you determine how much you should have saved to retire, how much you should be saving monthly to reach that goal, and whether you’re currently on track to get there.
If you aren’t sure where to start, we can help. When you work with an advisor at Wealth Enhancement, we’ll help assess your situation to make sure you’re on track for retirement. If you’re ready to speak with someone, you can even schedule a free consultation with us today.
5. Consider your Social Security claiming strategy
For most retirees, Social Security is still an important part of their retirement savings strategy (though it shouldn’t be the only part). Depending on your own financial resources and retirement goals, you can create a Social Security claiming strategy that fits your needs.
Remember that you can claim benefits as early as 62 years old, but it will be a reduced amount. If you want to retire early and have other financial resources to offset the lower amount, you may decide the reduced benefit is worth it. On the other hand, if your priority is getting the largest possible benefit amount, then you may decide to wait until age 67 or 70 to start receiving benefits.
Finally, remember that you don’t have to start receiving benefits at the time you retire. On one hand, you could retire early and live off your personal savings, choosing to receive Social Security benefits later. On the other hand, you may decide to start collecting benefits while you’re still working.
6. Square away your health insurance
Health insurance is one of the biggest costs that retirees face, and it’s important to have a plan in place. Once you turn 65, you can enroll in Medicare.
Medicare Part A (hospital insurance) is free for most individuals 65 and older, while Medicare Part B (medical insurance) and Part D (drug coverage) require a monthly premium. You may also decide to purchase either a supplemental insurance plan or a Medicare Advantage plan (known as Part C) to replace Original Medicare.
It’s often best to consult a financial planner or another expert when deciding the best health insurance plan for you. And remember—if you retire before age 65, you’ll have to find alternative coverage to fill in the gap between when you retire and when you’re eligible for government-provided coverage.
7. Update your portfolio
Your investment portfolio should change and adapt throughout your life depending on the current phase you’re in and how far you are from retirement.
Generally speaking, you can afford to assume the most risk as a young investor. However, as you get closer to retirement, it’s typical to reduce your portfolio risk. After all, the last thing you want is for a recession to wipe out a large portion of your portfolio when you’re planning to retire in a couple of years.
There’s no perfect portfolio allocation for everyone, but a financial planner can help you find the right balance for you based on your risk tolerance, risk capacity, and time horizon.
8. Plan out your estate
As you near retirement, you may also be thinking about what happens to your assets when you pass away.
If you have children or grandchildren, you may want to preserve some of your wealth to pass along to them. Even if you don’t have loved ones to pass along your assets to (or significant assets to pass along), it’s still important to have an estate plan in place. A well-crafted estate plan puts you in the driver’s seat, rather than allowing someone else to make the decisions.
And remember—your estate plan can begin while you’re still alive. If you want to pass along your assets to loved ones, a financial planner can help you put a plan and the right tools in place to do that during your lifetime.
9. Investigate your retirement investing needs
Just because you’ve reached retirement doesn’t mean you’ll stop investing. However, your strategy is likely to change.
First, your investment strategy will change because you’ll likely have less money to put away each month. During your working years, you were likely contributing to a workplace retirement plan like a 401(k), as well as individual retirement accounts.
However, you likely won’t be making those contributions anymore. Additionally, your approach is likely to change since your risk capacity has changed in retirement.
You can certainly continue investing, but it’s important to adjust your strategy to fit your current needs.
10. Learn how to withdraw funds and minimize taxes
Unfortunately, taxes are likely to eat into your retirement income, but there are ways to minimize the impact. You can be proactive about reducing your tax liability by using Roth accounts or health savings accounts (HSAs), both of which allow for tax-free withdrawals after a certain age.
You can also reduce your taxes by being strategic about how and when you pull from each of your various accounts, as well as by using any tax credits and deductions available to you.
Both before and during retirement, a financial planner or another tax expert can help you craft a plan to minimize your tax burden, allowing you to keep more of your hard-earned retirement dollars.
“Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.”
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