Retirement planning is no easy task, which is why so many people spend years thinking about how best to manage their assets and income throughout their golden years. The other difficult characteristic about preparing to retire is that no two situations are exactly alike: People have different family dynamics, income sources, and comfort levels around risk.
Like most things in finance and in life, it's smart to make sure you get the basics right and control what you can control. Here, we'll review three of the most impactful steps you can take if you're preparing to move on from full-time work in 2024.
1. Get a sense of your annual spending
Knowing how much goes out on a monthly basis is key to knowing if retirement is in the cards, and it's one of the core inputs to the 4% rule calculation. With this rule, you take your annual pre-tax spending and divide by 4% to arrive at the amount you'll need to have saved for a robust 30-year retirement.
Put another way, you can take your total savings and multiply by 4% -- this will give you the pre-tax amount you're able to spend (plus inflation adjustments) over a 30-year period with only a remote chance of running out of money.
This means reviewing your credit card statements, checking and savings accounts, tax returns, and other financial documents to get a reasonable estimate of how much you typically lay out in a given year. Many people choose to work with qualified fiduciaries (like Certified Financial Planners or Certified Public Accountants) to get another set of eyes on their finances and an unbiased take on where they stand.
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2. Build a liquid and accessible emergency fund
On one hand, carrying too much cash into retirement might seem like a good idea, since cash doesn't carry any stock market risk. On the other hand, you'll also need your nest egg to last several decades (and possibly longer), which is why having some stock market exposure is generally a prudent move.
Having enough cash on hand to weather unexpected market downturns -- like the one we experienced in 2022 -- can help bridge the gap between your retirement date and when you make your Social Security claim. A liquid emergency fund will also earn a fair amount of interest now (think 4% to 5%), so all isn't lost in terms of growth.
Readily available cash is there to provide both financial and psychological security. Perhaps most importantly, a solid cash pile prevents you from selling stocks or bonds at their lows; this can prevent you from depleting your money much faster than initially expected.
3. Have a plan around health insurance and long-term care
Medical costs tend to make up a larger percentage of overall spending in retirement, mostly because healthcare needs tend to be greater, and Medicare won't cover every cost you might encounter.
What's more, you can't apply for Medicare coverage until three months before you turn 65; if you retire earlier than that, you'll have to have an alternative plan for coverage. Many people choose to continue working through their mid-60s to maintain their health insurance, and others may consider joining their spouse's plan, if that's an option.
Lastly, even when you do lock in Medicare, you might also consider buying a supplemental plan to ensure you have no gaps in coverage.
The decision as to whether to purchase long-term care insurance is also a big question for people entering retirement. Those who have more than enough saved for retirement might have plenty of their own money to spend on long-term care if the need were to arise, while others might have asset levels low enough to have those costs covered by Medicaid.
The group in the middle might be best suited to purchasing long-term care insurance, though the premiums can be expensive and the coverage may be incomplete. As with any insurance policy, it's worth kicking the tires on a long-term care policy in conjunction with your life circumstances, as private nursing care can easily -- and quickly -- run into six figures.
Nothing beats a written plan
Anytime you want something done intentionally, write it all down and commit to making periodic updates. Your retirement plan is no different. Many people happily work into their 60s and 70s, while others are ready to draw from their retirement accounts at age 55.
No matter what you decide to do, be sure you have given your retirement plan some honest thought, and don't be afraid to make adjustments where necessary.
