This article is intended for educational purposes only and is not legal advice. For guidance on your personal situation, please contact a lawyer.
Remember the big shock, the feeling of liberation you perhaps felt when you first started getting a real paycheck? Remember the feeling of satisfaction you got as the years went on and you were able to save and invest for the future?
If you're planning to retire in, say, five years, that future will arrive in what may seem like the blink of an eye. (It was for me.) And there's no time like the present to shift how you're thinking and acting about hatching that nest egg. Here are five steps to take.
Image source: Getty Images.
1. Review what you have and what you'll need
First, determine your expected retirement income and expenses. A great way to start is the simplest. Take a legal pad or create a simple spreadsheet and create two columns. Label the one on the left "income" and the one on the right "expenses."
Then, on the left side, put in, line by line, what you expect to get every month in Social Security, annuities, and interest and dividends from savings and stocks. Same thing on the right side for expenses, from housing, food, and health-care essentials to discretionary stuff like travel and gifts and just generally enjoying life.
Add up each column and compare the monthly totals. That'll quickly reveal if you're on track or need to adjust.
This also would be a great time to take a hard look at some expenses you could reduce now. (Like maybe that cable bill?)
2. Update your investment mix
Paper losses are just that until you need them, right? The closer you get to retirement, the less time you have for your investments to recover from stock market turbulence.
If you haven't begun yet, now's the time to review how well your portfolio's asset mix aligns with your risk tolerance and timeline. Consider beginning to shift some higher-risk stocks into more conservative investments, including laddered bonds and income stocks, and in today's interest-rate environment, certificates of deposit (CDs) and money markets.
Here's where a trusted financial advisor can help you position your assets appropriately now and going forward. That includes establishing an expected withdrawal rate that you can begin preparing for now.
3. Max out retirement contributions
This one could easily be at the top of the list. Be sure to contribute as much as you can to your employer-sponsored 401(k)s and your individual IRAs. At least contribute up to the employee match for the former, or you're leaving free money on the table.
As for the latter, whether a Roth or traditional IRA is better for you is a separate question. You can have both, too, and a financial advisor or tax expert can help you make an informed choice.
For 2023, you can contribute up to $22,500 to a 401(k), 403(b), and most 457 plans if you're under 50, or $30,000 if 50 or older. The IRA contribution limit is $6,500 plus a $1,000 catch-up contribution if 50 or older. Do what you can now, and you'll thank yourself later.
4. Have a healthy understanding of your insurance options
The average person can expect to spend about $157,700 to cover their healthcare expenses in retirement, according to the 2023 version of the annual Fidelity Retiree Health Care Cost Estimate.
While you may be covered now, check to see if your employer offers any company retiree health insurance or other post-employment benefits, including COBRA coverage. That matters the most to the millions of folks who retire before they reach the magic Medicare age of 65 and are otherwise waiting as long as they can to begin drawing Social Security. While you're still working, you can also take advantage of a pre-tax health savings account until you do retire.
The point is, take the time while you have it to understand what's available to you, where the gaps are in your coverage, and exactly how you can realistically budget for your healthcare needs when the paychecks stop.
Image source: Getty Images.
5. Stay active and engaged
Retirement means leaving your job behind but not your interests. Loved your career? Find ways to continue it by, for instance, helping mentor rising young stars. Or take some classes. Many universities offer them to seniors for free. Now's the time to do your homework on that.
Pursue a hobby you've never had time to really dig into in the past. It's a good time now to dabble in things you like.
It's easy to find research that says staying active in retirement, especially through meaningful activities, is important to your mental health and general sense of well-being. It's also intuitive. You didn't get to this point already by sitting idle, right?
The big takeaway for your big getaway
The transition to retirement requires both financial and lifestyle preparation. By taking key steps like reviewing your budgets, investments, and insurance plans in the final years before retiring, you can help ensure this milestone is as smooth as possible. With adequate planning, you can retire with confidence.
