Can you hear music playing? Either you have a stray tab open on your browser or you've been daydreaming about your retirement party again. If it's the latter, you're close to saying goodbye to the workforce forever. Congratulations -- that means you've worked hard, you've saved hard, and you're ready to live a life of leisure.
There might be one nagging worry that keeps you going to the office, however. In a survey of 631 CPA financial planners, 48% said their clients were worried about running out of money in retirement. Planners cited healthcare costs, market changes, and unexpected costs as risk factors for their retiree clients. If you're nervous about outliving your portfolio, make these five money moves now to get your financial house in order.
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1. Start budgeting
Your paycheck may be helping you out more than you realize. If you get an annual bonus or a nice raise every year, that influx of cash can seamlessly cover extra spending. Once you retire, you won't have that safety net. Sure, your income will increase in dollars, thanks to inflation and cost-of-living adjustments. But those amounts won't increase your buying power the way a big raise would. And that means it'll be harder to recover if you overspend.
This is why budgeting for retirees is so important. You're on a fixed income for the next 30 years, and it's tough to increase your income when you overspend. Developing your budget habit now gives you time to work out the kinks before you turn in your resignation.
Budgeting forces you to deep-dive into your spending, too. That exercise may reveal new insights that affect your expectations about living expenses in retirement. It's better to learn those insights now versus later.
2. Pay off debt
Debt is especially difficult for retirees to manage. The monthly interest expense takes a bite out of your budget, and you get nothing in return. Pay off that debt while you are working, and you'll have that much more cash to live on.
There's also another, less obvious advantage to paying off debt before retirement. If you are charging and rolling over balances, you may be overspending without knowing it. The overspend gets lumped into that credit card balance -- and you don't feel the sting if you make the same payment each month.
Paying off debt balances, on the other hand, forces you to live within your monthly income. And that's a necessary skill for all retirees.
3. Check your asset allocation
Your asset allocation is the composition of your retirement portfolio across different asset types, such as stocks and bonds. Stocks and equity funds provide the highest growth opportunity, but they can be volatile. Bonds and bonds funds, on the other hand, return stable income. Younger investors tend to target a more aggressive allocation that's heavily focused on stocks. Older investors want more protection in their portfolios from market swings, and so they prefer a more conservative allocation.
If you're not sure where your allocation should be, use the rule of 110. Using this approach, you'd subtract your age from 110, and the result is the percentage of your portfolio that should be in stocks and equity funds. At 30, for example, your portfolio should be 80% equities and 20% bonds. But at 50, this composition should be 60% equities and 40% bonds.
Check in on your 401(k) and IRA portfolios today. Your online account dashboard should display your asset allocation in a pie chart. Make sure you're not invested too aggressively. Note that if your money is invested entirely in target-date retirement funds, this reallocation to a more conservative portfolio happens automatically.
4. Decide on timing of your Social Security claim
Set up your account with the my Social Security website so you can review your claiming options. Once you log in, you'll have access to your estimated benefits and your Full Retirement Age or (FRA). FRA is the age you qualify for your standard benefit.
You can claim Social Security before FRA, as early as age 62. Or you can delay your claim until age 70. Early claims lower your monthly benefit and delayed claims increase your monthly benefit. The right timing is different for everyone. Key considerations include how much savings you have, how secure your job is, and how healthy you are. If you're in great shape, for example, you might want to keep working and delay your Social Security claim.
5. Have a back-up plan
You may have been planning your retirement for decades, but there's no guarantee it'll go the way you expect. You might decide at age 65 that you want to delay your retirement to help a child buy a home. Or, you might want to leave your job at age 60 because your boss is a nightmare. Think through scenarios that could prompt retirement earlier or later than you expected. A delay to your retirement might prompt you to evaluate your diet and exercise regimen so you can stay in tip-top shape and keep working. Your contingency plans for early retirement might include early filing for Social Security and downsizing your home.
Of course, you can always change your mind. People do retire and then return to the workforce, either because they're bored or they miss the paycheck. Use that strategy and you'll have two retirement parties to enjoy.
