Many workers don't retire on a whim; rather, they plan out their retirement ahead of time so they're duly prepared. If you're getting closer to retirement but aren't quite there yet, you're probably growing excited about the prospect of leaving the workforce and exploring your next stage of life. But if you want that transition to go smoothly, you'll need to make sure you're in a good place financially. With that in mind, here are a few key moves to make if retirement is about three years away.
1. Assess your savings
Though the income you'll get from Social Security will play a role in helping you manage your senior living expenses, those benefits alone aren't enough. Rather, you'll need your own savings to keep up with your various bills, from housing to food to healthcare. That's why it's critical to take a hard look at your savings a few years before your target retirement date, and make sure they're up to snuff.
Now when you examine your IRA or 401(k) balance, you'll want to focus on more than just the number; you'll also want to determine what type of yearly withdrawal that balance will allow for. As a general rule, retirees are typically advised to start off by withdrawing 4% of their nest eggs during their first year of retirement, and then adjust future withdrawals for inflation.
So let's say you're sitting on a $300,000 IRA about three years before retirement. That might seem like a lot of money, but when you apply that 4% withdrawal rate, you're looking at just $12,000 of income from savings during your first year of retirement. Given that Social Security pays the average recipient today a little less than $17,000 a year, those numbers combined may not buy you the lifestyle you want.
But there's good news -- if you're not actually planning to leave the workforce for a few more years, you can ramp up your savings rate between now and your estimated retirement date, and boost your nest egg in the process. Case in point: Maxing out a 401(k) for the next three years will leave you with an additional $73,500 for retirement without even factoring in investment growth. (This figure also assumes that you're 50 or older, and are eligible for an annual contribution of $24,500.) But if you wait until you're much closer to retirement to perform that nest egg assessment, you may not get the same opportunity to catch up on savings if need be.
2. Convert some savings to a Roth IRA
Though Roth IRAs offer a number of benefits, the fact that they allow for tax-free withdrawals in retirement is what prompts many seniors to fund one. So if you're housing your savings in a traditional IRA, now's the time to consider moving some of that money into a Roth. This way, you'll enjoy tax-free withdrawals on a portion of your savings, which will no doubt help from a cash-flow perspective at a time when you're getting used to a whole new set of finances.
Of course, you will need to pay taxes on whatever amount you convert to a Roth account at present. But think about it: Would you rather pay those tax now, while you still have a steady income, or later, when your income is limited? If the former sounds better, then go ahead and make that move.
3. Get out of debt
Carrying debt can impact your finances at any stage of life, including your working years. But once you're living on a fixed income, any debt payments you have hanging over your head could constitute a major burden. That's why it's imperative that you devise a plan to get out of debt before you make your retirement official -- and if possible, that includes mortgage debt as well.
That said, the most critical step on your debt-elimination plan is knocking out whatever costly credit card debt you're still carrying. To that end, review your various balances, see which ones are costing you the most in interest, and pay those off first. Another option is to transfer your different balances onto a single card with a lower rate.
As far as your mortgage is concerned, if you're close to having your home paid off, try submitting a payment every two weeks rather than once a month. This way, you'll end up making three extra payments over the course of three years, which might just do the trick. Otherwise, simply apply whatever extra cash you're able to eke out toward your mortgage, assuming you've already knocked out your credit card debt. Remember, while it's ideal to enter retirement without debt of any sort, you're better off going in with mortgage debt than owing money on a credit card.
The choices you make in the years leading up to retirement could impact your golden years for the long haul. If you're getting close to retirement, spend some time assessing your savings, researching Roth IRAs, and getting rid of debt. You'll be thankful for it once you do pull the trigger on retirement and bring your career to a close.