You know how retirement readiness works: The longer you save and invest, the better chance you have at retiring with a fat savings balance. Conversely, in the years just before retirement, it's tough to catch up if you're behind on your savings goals.
That doesn't mean all hope is lost, however. Even if you're retiring at the end of this year, you can still take big steps to improve your finances. Here are five of them to try now.
1. Streamline your living expenses
If you expect a mismatch between your living expenses and your retirement income, you have two choices. Address the mismatch now or deal with it later. But taking action now to trim back your spending is the better option for two reasons:
- You'll have more cash available before you retire to implement the other strategies outlined below.
- You'll get to practice living on a smaller budget while you still have paycheck income to cover spending mistakes.
Pour over your bank statements for the last few months. Often, just doing that will reveal opportunities to cut back on spending. Trim the fat away, and then set spending limits for your big variable costs, like food and entertainment. Use the months between now and retirement to practice living within those limits.
2. Pay off credit card debt
Credit card balances that you roll over every month are budget killers. You may be paying 16% or more in interest on those balances and getting no lifestyle value in return.
If paying off your credit cards before you retire feels impossible, start with a smaller goal. See if you can reduce your balance by $500 or $1,000 in the next six months, for example. At 16% interest, a $1,000 pay down spares you about $13 in monthly interest charges.
3. Shore up your emergency fund
A healthy cash balance limits your dependence on those credit cards going forward. While you know that in theory, you might be wondering how you can pay down debt and fund your cash savings at the same time. This is a challenge many savers face. Unfortunately, there's no universal solution.
Mathematically, it makes sense to pay down debt first because your credit card charges a higher interest rate than you earn in your savings account. But emotionally, it's rewarding and comforting to see your cash balance rise.
Many savers find the sweet spot is to prioritize debt pay down while still saving a small amount in cash. Your sweet spot might be different. You can judge what feels right by your motivation. If you're feeling hopeless about your debt, for example, make that your priority for now.
4. Check your risk in your retirement account
Here's a retirement-readiness action item that doesn't require excess cash: Evaluate how risky your retirement portfolio is.
If you haven't adjusted your retirement investments in a while, you might be sitting on too much risk. That risk can create volatility in your balance, which is not what you want as you head into retirement.
A major indicator of risk is how much you have invested in stocks vs. bonds. A greater percentage of stocks is riskier than a lower percentage of stocks. For example:
- A portfolio that's 90% stocks and 10% bonds is very risky. You'd expect to see a lot of volatility with that composition.
- A portfolio that's 50% stocks and 50% bonds is less risky. It's also more appropriate for someone who's nearing retirement age.
Check your composition of stocks vs. bonds, and make adjustments to limit volatility in your account.
5. Shift to dividend payers
High-quality dividend-paying stocks and funds have several advantages for retirees:
- The best dividend payers increase their dividends regularly. That can help you combat inflation in retirement.
- Your cash dividends reduce your dependence on selling stocks to fund your retirement withdrawals. That helps limit your exposure to timing mistakes like selling when the market is down temporarily.
- Quality dividend stocks increase in value over time. That means you earn in two ways, from dividend income and rising share prices.
If you want to shift away from riskier growth stocks, dividend-paying stocks could be a good alternative. Look for Dividend Aristocrats or Dividend Kings. These are companies that have a long history of increasing their dividends each year. Alternatively, you can invest in funds that hold both Aristocrats and Kings.
Small but mighty action steps
Maybe you can't add a zero to the end of your savings account before retirement. But you can take other steps to bolster your finances.
Budgeting, paying down debt, increasing cash savings, managing your risk, and shifting into dividend payers are powerful action items individually. Combine them, and you can head into retirement with more confidence and a sense of empowerment as you watch your finances improve.