The Home Stretch: 7 Things to Do in the Decade Before You Retire

Updated 2.2.2023: In 2023, the required minimum distribution (RMD) age raised to 73.

As you approach retirement age, it may feel like the finish line is in sight. But what do you see waiting for you once you get there? If your mind is pulling up a blank, know that it’s important to nail down the details of your retirement plan, including your finances. To finish strong in the race to retirement, there are several items you need to check off your list. Doing so will set you up for success in your golden years.

Steps to take leading up to retirement

1. Determine the right time

The question of when to retire is not an easy one to answer. There are many considerations, such as personal readiness, unexpected expenses that may delay your plans, or the cost of health care (more on this later). Nothing is set in stone and timelines should be flexible in case you need to move out your goal post.

If you’re married, one important factor to consider is whether you need to plan as a couple. As a couple, it’s important to think about life expectancy and age differences when deciding to leave the workforce.

The majority of people retire between 61 and 65, but ultimately you determine the right time for you. In any situation, you will need to be prepared for many important age-related milestones such as:

• Age 50: IRA/401(k) Catch-Up contributions begin.
• Age 55: Eligible for early distributions from current qualified employer plan.
• Age 59 ½: Full retirement age for qualified plans.
• Age 60: Widow Social Security eligibility.
• Age 62: Early Social Security Benefits Eligibility.
• Age 65: Sign up for Medicare.
• Age 66-67: Social Security full retirement age.
• Age 70: Maximum Social Security Benefits.
• Age 72: Retired Minimum Distributions (RMDs) begin.

Work with a financial advisor to discuss how to prepare for each milestone and determine when is the right age to think about retirement based on your unique situation and goals.

2. Take aim at your retirement target

After determining when you want to retire, you’ll want to ask yourself: “How much money do I need to retire?” There are three rules of thumb that can help you estimate this number.

• Rule of thumb #1. In general, it’s recommended to save 70-90% of your pre-retirement income. The reason you may need less than your full pre-retirement income is because certain costs are likely to go down. Without a job to commute to you’ll likely spend less money on gas, dry cleaning, or other expenditures related to the workforce. As well, you may finish paying off your mortgage and find you have fewer monthly payments. But keep an eye on your monthly costs: These reductions can be countered by other costs that often increase in retirement, such as health care coverage. About two-thirds of retirees spend over $375 a month on heath care.¹ There is one additional benefit to retirement that will provide your budget with more wiggle room: Even if things like health care costs do offset the items you save on monthly, you no longer need to pay toward Social Security or Medicare taxes. And, you will no longer be saving for retirement.
• Rule of thumb #2. Save multiples of your salary by age. As you get older, you should have a higher multiple of your salary saved for retirement. For example, if you are making $100,000 at age 55, you should have a retirement savings six to eight times your total salary before you plan to retire. Refer to the chart below for a visual of what you should have saved by each age increment.
• Rule of thumb #3. Once you determine your desired annual income in retirement, you should calculate whether you can achieve that desired income using a 4% withdrawal rate. Say your desired annual income is $50,000. In order to have access to this amount for 20 years, you would need $1,091,000 saved by the time you retire. Assessing your current investments can help you spot areas of opportunity. Keeping with the example above, investing in something with a 5% return would lower the amount you would need to save upfront to hit your desired annual income. In this case, you would need to save $782,000 by the time you retire instead of $1,091,000. It’s important to understand investment returns are not guaranteed and you generally need to take on more risk to get a higher return. Working with a financial advisor to develop a retirement savings and investment plan is appropriate for your individual circumstances.

These rules of thumb are meant to give you a general idea of how much you may need to have saved before you plan to retire. While these numbers seem large, it’s possible and there are other ways to increase your retirement savings.

3. Maximize your nest egg

As you near the end of your working years, you can save more than ever before. There are multiple tax-advantaged options for you to increase your retirement savings. Here are a couple ways you can do so:

• Take advantage of work-sponsored plans.
• Participate in catch-up contributions at age 50.
• Determine if you’re eligible to add personal retirement savings through a traditional or Roth IRA.
• Add a spousal IRA for a non-working spouse, if eligible.

4. Get a portfolio checkup

It’s important to take your portfolio in for a checkup, especially as you near retirement. Today’s workforce is more mobile than ever, meaning workers have switched jobs quite a few times over their career. Today, the most common way people save for retirement is through a workplace plan like a 401(k). They are structured with automatic enrollment as a way to increase retirement savings. However, this means a lot of retirement accounts often get created then forgotten, abandoned, or left behind at previous employers.

Enlist a financial advisor to consolidate all your retirement accounts. This can help put your overall asset allocation in one clear view. It may be very different than what you originally thought, which is why it’s important.

In your portfolio checkup, it’s also a good time to confirm the beneficiary information on all your retirement accounts or any trusts in your time. Financial advisors can help with your portfolio and make sure you’re on track to retire comfortably.

5. Create a Social Security strategy

Social Security may be a primary income source for retirees. It’s important to understand some of the basics of how Social Security works so you can maximize this program for your situation. First, you should know your full retirement age (FRA) which is the age you’re eligible for full retirement benefits from Social Security. This is determined by the year you were born. Regardless of your FRA, the youngest age you can receive retirement benefits from Social Security is 62. You can file for benefits any time between age 62 and 70 – but there’s advantages to waiting longer. The longer you delay past your full retirement age, the more you’ll receive in benefits.

It’s important to work with your financial advisor to estimate how much income Social Security will generate and develop a strategy for when it would be beneficial to begin receiving benefits.

6. Build a retirement income stream

To pay for living expenses in retirement, you’ll likely need a combination of income from Social Security and other income sources. One strategy to convert your retirement savings into income is by taking your retirement savings and investing it into something that generates interest payments. For example, opening money market accounts and certificates are a conservative option. Going this route can be beneficial because your principal is safe even if return is modest.

If you are interested in income-generating investments that are less conservative and may potentially offer a higher yield, a systematic withdrawal sells a small portion of your overall retirement portfolio at regular intervals to generate income. Be mindful that these high-yield options also come with additional risks.

Each investment strategy for producing income in retirement has its pros and cons. Using a portfolio of income-producing investments may help keep your nest egg intact by only distributing income, rather than your original retirement savings. Creating a systematic withdrawal plan can help ensure you’ll receive consistent income each month, but it also runs the risk of eating into your original investment. Work with your financial advisor to explore options and strategies together.

7. Look beyond the money

Once you confirm that your basic needs and comforts will be satisfied in retirement, it’s important to look beyond the money. As the old saying goes: money isn’t everything. It’s important to focus on happiness, including your health, friendships, and family. In fact, strong friendships and good relationships with family are shown to boost both mental and physical health which leads to a happier retirement.

Taking steps now to ensure you remain healthy will help you in the long run. Along with maintaining good relationships, consider how you will incorporate exercise and health check-ups into your budget. Whether you take daily walks around the neighborhood or set aside $10 a month for a gym membership, staying active will pay off. As well, investing in annual doctor’s appointments and preventative health care will give you peace of mind and potentially help you catch health issues while they are still manageable.

Along with your retirement plan, you need a retirement living plan. With long life expectancy and better health during later years, people can do a lot during retirement. However you plan to spend your time, it’s important to do something that’s meaningful to you.

Ready to begin retirement planning, but not sure where to start? Contact Erik Waldron with Investment Services at 513.243.4328 x305 or [email protected]. There are many things to keep in mind when it comes to investing. For a further in-depth analysis on the topic, please visit our Youtube profile to view our on-demand webinar, Taking Control of Your Financial Future: Five Things Every Woman Should Know About Investing.