If you're like many Americans, your 60s will mark a long-awaited milestone: retirement. The average retirement age in the U.S. is currently 63, and while you may have plans to work longer than that, your 60s are a good time to make these key financial moves.
1. Develop a Social Security strategy
Though Social Security is only designed to replace about 40% of your pre-retirement income, it pays to get as much money out of the program as you can. Now there's no hard-and-fast rule about when to first claim Social Security, but know this: Your benefits are based on the amount you earned while you were working, and you'll collect those benefits in full if you wait until your full retirement age, which is:
- 66 for those born between 1943 and 1954
- 67 for those born in 1960 or later
- Somewhere in the middle for those born between 1955 and 1959
Though you're allowed to start getting benefits as early as age 62, doing so will reduce them by 6.67% a year for up to three years and then 5% a year thereafter. So, if your full benefit amount is $2,000 a month and your full retirement age is 66, taking benefits at 62 would knock that monthly payment down to $1,500. On the other hand, you get an 8% benefits boost by delaying Social Security past your full retirement age up until you reach 70, at which point the incentive to delay runs out. In our scenario, holding off until age 70 to collect Social Security would result in a monthly payment of $2,640.
Keep in mind that whatever benefit amount you initially lock in will remain in effect for the rest of your life. And while there's no right or wrong answer on when to claim, you should consider the implications of taking Social Security at various ages.
2. Pay off your mortgage
The less debt you have going into retirement, the easier it will be to get by on a fixed income. And since mortgages are a major source of debt for most Americans who have them, it stands to reason that if you have the opportunity to pay off your mortgage prior to retirement, that's a pretty decent use of your money (though there's a counterargument to that as well).
Of course, you may not be in a financial position to get rid of your mortgage prior to retirement, and if so, you're in good company. Back in 2001, about 22% of homeowners 65 and older still had mortgages, but that number has since increased to 30% as of 2011, the last year for which this data is available. On the other hand, if working an extra year gives you the option to enter retirement mortgage-free, that's a good way to eliminate one major source of financial stress.
3. Create a retirement budget
Most retirees need 70% to 80% of their pre-retirement income to cover their living expenses once they're no longer working. But your target may need to be higher or lower depending on factors like healthcare and whether you plan to work part-time as a retiree. That's why it's important to create a budget for what your expenses might look like in retirement. This way, you can see whether your current savings and anticipated Social Security benefits will be enough to sustain you once you leave the workforce. Remember, though you might eliminate some of your current costs in retirement, like commuting expenses, you might also see an increase in other categories, like entertainment -- so don't assume your monthly spending will automatically go down.
4. Max out your retirement plan contributions
Your 60s are a great time to take advantage of catch-up retirement plan contributions. As of 2016, anyone 50 or older can put up to $24,000 a year into a 401(k) and $6,500 a year into an IRA. And while $24,000 a year might seem out of reach, half of that, for example, could go a long way toward helping you meet your retirement goals.
Imagine you're able to sock away $12,000 a year for five years during your 60s right in time for retirement. You'd amass another $60,000, which, over the course of a 20-year retirement, would give you an extra $3,000 a year, or $250 a month -- and these figures don't even take investment growth into account. Better yet, if your employer offers to match a portion of your 401(k) contribution, you'll have even more free money coming your way to pad your nest egg.
5. Shift some assets
As you get closer to retirement, you'll probably want to start shifting some of your riskier investments, like stocks, into safer alternatives, like bonds. Now this isn't to say that you should eliminate stocks from your portfolio completely. Quite the contrary -- dividend stocks are a great way to generate retirement income. But as retirement nears, you should look at how your assets are allocated and make sure they align with your short-term needs, anticipated post-work lifestyle, and tolerance for risk.
Even with retirement right around the corner, your 60s are a great time to take stock of your finances and map out a financial plan for your future. A few smart moves in the coming years could set the stage for the comfortable retirement you've always dreamed of.