Though our working lives can seem long, retirement still sneaks up on a lot of us. In your early career, it seems like it’s a lifetime away. When you are within 10 years, it suddenly becomes much more real.
What should you be doing financially when you’re that close to retirement? We put together three checklists—one year out, five years out and 10 years out—to help you get organized and confirm you’re on track for your golden years.
What to Do When You’re One Year Out from Retirement
Congratulations! After decades of hard work and saving money, retirement is finally around the corner. As you push through this last year, make time to double-check your status and confirm you haven’t missed any of these essential steps.
❏ Write Your Retirement Budget (If You Haven’t Already)
You should have a pretty solid idea of what your future expenses will be 12 months before you leave the full-time workforce. So commit the numbers to pen and paper. Keep in mind that retirement means a change in financial lifestyle too: Certain line items—like a work-friendly wardrobe—may vanish from your expenses column, while others—regular travel, perhaps?—may appear. Leave space for unforeseen circumstances, like a car that stops working or a medical emergency.
❏ Stress Test Your Budget in the Real World
Consider testing the feasibility of your budget by taking a few weeks or so to live on it. And don’t sweat it if you’re a few dollars short at the end of each week: Budgeting a year out from your planned retirement gives you some room to maneuver and means you can extend your time in the workforce if you need extra cash.
❏ Set Up Your Withdrawal Plan
Once you have your budget set, create a retirement fund withdrawal strategy. A good rule of thumb is to withdraw about 4% from your funds per year. For the following 12 months, simply increase the dollar figure by the inflation rate. So if you have $1 million in savings, that would mean withdrawing $40,000. If inflation kicks in at 2%, you’d then withdraw $40,800 next year. Another popular strategy for the less risk-averse is to withdraw 4% annually, regardless of inflation. This means you’d have a more flush budget during years when the market rises—and your savings vested in the equities increase—and a leaner budget in bear years, which could mean needing to cut back.
❏ Rebalance Your Portfolio
Unless you have a target date fund that does this automatically, you should rebalance your portfolio regularly to account for the number of years you have left in the workforce and your comfort with risk. It’s especially important to review it shortly before you start life without a regular paycheck. In general, rebalancing near retirement means trimming higher-risk equities and moving more money to income-generating streams like bonds and cash equivalents. But while your focus is now on preserving your nest egg rather than growing it, don’t sell all your equities. Research suggests that the more stocks a retirement portfolio holds, the longer it tends to last.
❏ Research Your Medicare Options
Medicare Part A, which covers hospitalization, is premium-free for all seniors age 65 and older, so sign up for it as soon as you’re eligible. While there is an initial enrollment period that spans around the seven months you turn 65, you can register any time after 65 if you’re still working.
❏ Research Your Social Security Options
While you can begin claiming Social Security benefits as early as 62, consider waiting until you reach so-called full retirement age—which varies depending on the year of your birth—unless you desperately need the cash. Keep in mind that accessing Social Security early means a smaller monthly check for the duration of your retirement, so use one of the many online calculators to do the math.
❏ Get Dental Work (or Expensive Medical Procedures) Done on Your Employer’s Dime
Getting a checkup and cleaning at the dentist costs an average of $200, but standard Medicare doesn’t cover dental work. Most American seniors don’t have dental insurance, so it’s worth getting all the dental work you can fit in a year done before you sign off from your employer’s insurance plan.
❏ Plan for Part-Time Work or Your Second Act
Many seniors say that they intend to work part-time even after leaving their full-time job—which could be good for both your financial and mental health. Like your current job and want to continue with it at reduced hours? Consider exploring a phased retirement with your manager in which your hours gradually decrease over time. About a quarter of U.S. employers already have programs to help workers phase into retirement, though that could expand in the future as the population ages.
What to Do When You’re Five Years Out from Retirement
You’ve got some time before you retire—but not a ton—to make important financial life changes. Here’s what to consider.
❏ Increase Cash Reserves
Pensions and Social Security applications can take time to be processed, and withdrawing from your 401(k) and equivalents also requires paperwork. Make sure you have cash reserves in case these take longer than expected to get access to. Most experts recommend keeping between three to six months of living expenses on hand. Some advise socking away as much as a year’s worth of expenses in cash or cash equivalents (like money market funds), when you’re close to a major life event like retirement.
❏ Do a Portfolio Check
At five years out, many experts say that there’s plenty of time to tweak your expenses and investment strategy—as well as expected retirement date—so that you don’t end up short. As part of this, you may also want to look at rebalancing your portfolio to be more conservative as you near retirement. Many advisors think a 50/50 or 60/40 stocks-to-bonds split is a good ratio for someone nearing retirement, but changes in the economy and the rise of nontraditional investments (Bitcoin, anyone?) mean that it’s best to chat with a professional financial advisor about your specific situation.
❏ Talk to a Certified Financial Planner
If you’re panicking about not having enough money saved, plan on a session with a certified financial planner (CFP) to decide on the best path forward. Look for CFPs that operate on a fee (and not commission) basis and have signed a fiduciary pledge, which means that they are required to consider your interests before theirs. Even if you have a good retirement strategy in place, it’s still a good idea to have a chat with an advisor before any major life event. They might, for instance, be able to help you with tax planning and save you money in the long run.
❏ Settle Major Expenses That You Can Foresee
If you know you’re overdue for a new vehicle or that your roof needs replacing, it’s a good idea to pay for these big ticket items—or at least budget for them—before you retire and have to live on fixed income. That leaky roof isn’t going to fix itself even five years from now, so you might as well pay for it while it’s still easy to pull overtime. Even if you are going to sell your house and move to your dream retirement locale, it’s not a bad idea to pay for some upgrades ahead of time. Tweaks like improving the landscaping or remodeling the kitchen may net you a higher selling price that will make a downsized or different retirement life more comfortable—and you’ll get to enjoy them for a few years before letting go of your home.
❏ Research and Visit Potential Retirement Sites
If you’re thinking about retiring in a new location, you’ll want to visit that place for an extended period of time to make sure you like it. Try to live like a local—use an Airbnb instead of a hotel, perhaps?—to replicate your upcoming day-to-day life as closely as possible. Also, pay attention not just to regular cost-of-living expenses but also what fees may cost in long-term-care facilities that you may require decades later. Keep in mind that these can vary significantly depending on what state you’re in.
❏ Look Into a Certification for a Second Job
Expanded life spans and higher living costs mean that many retirees choose to work a second job even in retirement. But if you’re planning on switching sectors or turning your hobby into a post-retirement career, be aware that certification might be required. Keep in mind that states popular with retirees (we’re thinking Hawaii, Nevada and Arizona) also have some of the higher licensing burdens in the country, so you might not be able to just start a new part-time gig. If you’re already on a reduced-hours scheme as you phase into retirement, use your spare time to take certification courses so that you won’t have a gap in income once you leave your main job.
What to Do When You’re 10 Years Out from Retirement
You’ve probably been chugging along, saving for retirement without thinking much about it. But when you’re 10 years away, it’s time to really drill down.
❏ Start Thinking About Your Retirement Budget
Even though you’re a decade from retirement, you should still have a good idea of how you want to live and a rough idea of what it is going to cost. Take time to do some calculations to make sure you’re on track. Doing so now will save you from a world of potential panic. At a decade out, you can still increase your savings, explore new income streams and lower your expenses to pad your retirement funds.
❏ Max Out Your 401(k) and Other Retirement Savings Plans
You’re likely at your peak earning potential. To sweeten the deal, many 50-somethings also find that expenses are at their lowest point in years since major costs (raising children, paying off a mortgage) may be in the rearview mirror. Take advantage of the last few years that you can contribute to tax-advantaged retirement saving plans, including catch-up contributions: Once you hit 50, you’re allowed to put an extra $6,500 per year tax-free into your 401(k) and an extra $1,000 per year in your traditional IRA. That money compounds fast, even if you only have a decade left.
❏ Open a Roth IRA
If you’re already maxing out your 401(k), consider opening a Roth IRA. It’s a good place to sock away cash that you may need in case of an emergency in retirement. (Since you’ve already paid tax on these funds, you can tap them without penalty.) By contrast, drawing more than you’ve planned from a 401(k) in a given year because you have a medical emergency or need to fix a leaking roof could bump you into the next tax bracket or, at the very least, cost you a call to your tax planner.
❏ Max Out Your Health Savings Account Contributions
Health savings account (HSAs) contributions are tax beneficial in three ways: You put in pre-tax dollars, they can grow tax-free and any money you use from the account on qualified medical expenses—a broad definition that includes sunscreen and acupuncture treatment—is not taxed. In that way, an HSA can be even better than a 401(k) if you are expecting healthcare costs in retirement (it’s a fact of life that everyone should be!).
❏ Think About a “Plan B” Career
Even if you’re currently in a job that you enjoy, you shouldn’t necessarily count on sticking with a comparable role for your last decade in the full-time workforce. Burnout is common among individuals in high-ranking executive roles, while ageism in some sectors unfortunately means you could be at elevated risk of being laid off before your younger and cheaper colleagues are. To make sure you land on your feet, start scouting out alternatives.
❏ Do a Portfolio Check
While low interest rates continue to wreak havoc on conventional wisdom that you should have something approximating a 60/40 stocks-to-bonds portfolio split as you near retirement, you should still reduce your exposure to risky assets over time. A simple approach would be to shift your money into target date retirement funds, but in volatile times, it may be worth checking in with a certified financial planner.
Keep Planning!
Retirement is a process that you need to be thinking about no matter at what point you are in your career. Even if you are 25 or 30 years from your target retirement age, there are things you can do today to make sure you’ll be in good shape then. Keep planning when you have free time and focus on saving as much as you can. Retirement, after all, will be the biggest expense of your lifetime.
Katerina Ang is a freelance writer and former editor at Vogue Business and The Wall Street Journal.