This past weekend, I enjoyed a wonderful visit from my mom. As I was enjoying a morning cup of coffee (and not adequately caffeinated for a serious discussion), she told me about her retirement plans. Actually, she mainly shared how she was financially prepared to leave the workforce within the next year but not quite sure she was ready for full retirement.
Now, I wouldn’t be a real good son if I didn’t offer to help and I always try to provide guidance when it’s appropriate. The good news is that my mom has put herself in a good position to leave her job as an academic adviser when she is ready. But as we went through her financial planning checklist of things to do, she acknowledged that her retirement confidence level would be much higher had she gone through several important steps 10 years earlier. So for all the moms and dads out there looking to retire in the near future without sons or daughters that are financial planners, here are some of the most important action steps you can take now to prepare for retirement:
1. Write down your life goals, not just your retirement goals. Set goals across all areas of your life including: family, career/volunteer, social, health, spiritual/personal growth, and learning. I’ve always believed it’s not a meaningful goal unless you put it in writing. Once you set your SMART goals, ask yourself some of these tough questions to help make sure your finances are aligned with your life goals, values, and vision for the future.
2. Review your personal spending plan. Examine your current spending using online budgeting tools such as Mint, YNAB, or Personal Capital. The old school paper and pencil method also works as does the Expense Tracker or Easy Spending Plan worksheets. Once you’ve identified where your money is going, you can try to free up some extra money to save and invest for retirement. You can also go ahead and create a Budget Plan for Retirement to identify areas of spending like health care or travel that may be changing the most during your financial freedom years.
3. Maximize your retirement savings to tax advantaged accounts. The IRS contribution limit to 401(k)s is $17,500 in 2014 ($23,000 for ages 50 or older). You can also consider contributing an additional $5,500 to a traditional or Roth IRA ($6,500 for ages 50 or older). Already maxed out on your retirement contributions at work? Consider these investment alternatives to a 401k plan.
4. Run multiple retirement calculations. Estimating your retirement outlook is a best practice financial planning activity and should be done at least once a year. Be sure to use multiple calculators to account for different assumptions and methodology. Some calculators you can use include this basic retirement plan estimator, Financial Engines (if offered through your retirement plan at work), BasicESPlanner (more advanced), or this retirement calculator.
5. Review your health insurance coverage options. This is the number one concern for soon to be retirees for a reason. Health-related costs are a significant portion of the budget during retirement. If you have retiree medical insurance, go ahead and start reviewing your options and the associated costs. You should also visit the healthcare.gov site if you will be retiring prior to age 65 when Medicare eligibility kicks in. If you are in a high deductible plan with an HSA option, take full advantage of your ability to set aside up to $3,300 for individual coverage or $6,550 for family coverage (plus $1,000 for both if age 55 or older) of pre-tax dollars in a health savings account to help cover future costs.
6. Obtain long term care insurance. Long term care costs can be a significant drain on a family’s net worth. You can choose to either self-insure with your retirement nest egg, spend down assets to qualify for Medicaid, or purchase long-term care insurance. To learn more about long term care insurance, check out lifehappens.org or longtermcare.gov.
7. Have a plan to eliminate your debt (including the mortgage). What do many financially confident retirees have in common? They are debt-free! You can use a mortgage payoff calculator to help you coordinate the timing of your mortgage elimination plan.
8. Re-Assess your tolerance for risk. It’s natural to invest more conservatively as we age but the pendulum can shift too much in the flight to safety and longer life expectancies increase the risk of outliving our money. An extreme move to conservative investment options may also not always be prudent in a rising interest rate environment. Many financial planners consider Social Security as part of the fixed income portion of your total retirement portfolio so the remaining assets can be more aggressive.
9. Update your estate planning documents. What worked during your 30’s may not be the best plan in your 50’s and 60’s. That is why it is important to make sure you have crucial estate planning documents in place such as a will, durable power of attorney, health care power of attorney, and advanced health care directive. Check out these 5 Steps to Estate Planning to make sure you have your own estate plan (rather than relying on the intestacy laws of the state you live in).
10. Estimate your pension (if you have one) and Social Security income. If you are eligible for a pension through your current or former employer, you should go ahead and estimate your benefit. Start weighing the pros and cons of choosing a monthly pension vs. lump sum option. Next, estimate your Social Security so you know the total sum of your guaranteed income sources. (Yeah, I know that I used the word guarantee in the same sentence as Social Security but long-term funding issues are less of a concern if you are retiring within the next 10 years.)
The action steps listed above are best practice retirement planning behaviors regardless of your age or proximity to retirement. However, the sense of urgency definitely goes up once that retirement date is 10 years or less away. Don’t wait to the last minute to get started with your own retirement planning. Even if you don’t feel too confident about your ability to retire on your terms, a little proactive planning can help you see how to create a flexible plan that fits your life goals.