5 Years Before Retirement, Do This

You’ve worked hard, socked away savings, and may even have some retirement goals in mind — whether it’s climbing Kilimanjaro, spending more time with your family or moving to that cottage by the sea you’ve dreamed about during conference calls. Regardless of your goals, it’s important that your finances are on track to help you fulfill them.

In the five years preceding retirement, making sure these bases are covered can help ensure you’re truly ready for retirement, without any last-minute scramble. Here, seven things every pre-retiree should check off their list in the years leading up to retirement.

Create — And Stick To — A “Pre-Retirement” Budget

“It’s a cliche because it’s true: You can never save too much for retirement,” says Diane Oakley, executive director of the National Institute for Retirement Security (NIRS). A 2018 report by NIRS found that 77 percent of Americans fall short of conservative retirement savings targets for their age, based on the expectation of working until age 67. One way to assess whether your current retirement savings will meet your needs is to live off your retirement budget now — even if you’re years away from retiring. “This can help you assess what your lifestyle will be like and where you may need to pad your retirement savings,” says Oakley, who adds that it’s important to factor in the occasional expenses — car repairs, gifts, one-off vacations — into that overall number. Working with a financial advisor can help you come up with a reasonable budget for you — and can give you the opportunity to sock additional funds into retirement savings.

Add Extra Funds To Your Retirement Accounts

If your retirement funds aren’t as full as you’d like — and when it comes to retirement, experts agree there’s no such thing as saving too much — you may be able to pad it during the years prior to your retirement. The IRS caps how much you can contribute annually to each plan (in 2019, the maximum amount you can contribute to a 401(k) is $19,000), but once you turn 50, individuals are allowed to make what’s known as “catch-up contributions.” The maximum amount varies depending on plan: For example, as per the IRS, catch-up contributions can go up to $6,000 for a 401(k), up to $3,000 for a SIMPLE IRA or SIMPLE 401(k) and up to $1,000 for a traditional or Roth IRA. This amount is beyond the annual contribution amount.

Understand Your Future Financial Contribution To Medical Coverage

“Many retirees assume all [medical expenses] will be covered by Medicare and are surprised that’s not the case and that they’re responsible for premiums,” says Oakley. There are two primary elements to Medicare you’re likely to consider as you plan for retirement: Medicare Part A (hospital insurance only) and Medicare Part B (medical insurance). Enrollment begins three months prior to your 65th birthday. While it’s recommended that all eligible enroll in Medicare Part A, you may wish to hold off on Medicare Part B if you’re still working and are covered by your current employer plan. Still, says Oakley, it’s smart to make sure you understand what your potential Medicare contribution will be once you’re on Medicare. Most people don’t pay premiums to Part A (although there are deductibles and coinsurance costs), but there is a monthly premium to be covered under Medicare Part B. You may also want to consider supplemental insurance to pay for things not covered by Medicare, which will drive up the price you’ll pay in health insurance.

Research Your Insurance Options

Even if you feel confident in the nest egg you have, considering the worst what-if scenarios will help you suss out whether your savings are sufficient and what there might be left to do to reach your target. For example, a 2015 study by the Urban Institute found that the average American turning 65 today will incur $138,000 in future long-term care costs — which are often not covered by Medicare. If you wouldn’t easily be able to cover the expense of long-term care out of your retirement income budget alone, it may make sense to look into long-term care insurance policies, says Oakley. Similarly, if you still have outstanding expenses, such as a mortgage, or have dependents, like grandkids, it may make sense to consider life insurance.

Consider A Financial Gift Now (Rather Than Later)

If you’re thinking about your legacy or had plans to help your adult children financially, through gifting money, helping to pay for a house or subsidizing their child’s college fund, it may make sense to discuss the considerations around giving now, rather than leaving the funds in your estate plan. While these sorts of gifts should not come at the expense of your own retirement, speaking with a financial advisor about your wishes can help you arrive at a smart strategy to incorporate gift-giving into your retirement plans. While the $15,000 gift tax exclusion is an oft-cited number, there may be paths that allow you to give more, depending on your financial situation. For example, grandparents married and filing jointly can take advantage of a special election that allows them to give up to $150,000 into a tax-advantaged 529 plan over a five-year period and categorize it as a gift. Now that 529 plans include private K-12 education as well as college, it may be a path that makes sense for your family.

Explore Passive Retirement Income Streams

In the sharing economy, it’s tempting to consider downshifting with an eye toward buying an additional home to be used exclusively as a source of rental income. While renting out a property has appeal, it’s smart to think about the logistics and costs of how this action might play out in terms of expenses and management, says Oakley. Would the property truly become cash flow you could count on, or would it become a money pit? How would hiring a property manager play into your plans? Speaking with people who’ve done it can help you determine whether it’s a realistic move for you.

Similarly, networking with colleagues to begin to look for part-time or consulting opportunities you can take on once you retire may also be a smart move. Many retirees take on lower-stress post-retirement gigs to supplement their savings. Another reason a second career may be appealing: While required minimum distributions must be taken at age 70 ½, that requirement is waived if you’re enrolled in a 401(k) plan with a current employer.

Decide How And When You’ll Use Social Security

Before you focus on how you’ll make use of your nest egg, it’s smart to consider how your social security funds (which could be partially taxed) will play into your overall financial strategy. While many individuals facing retirement depend on these benefits to survive, it may be advantageous for high earners to have a plan for when they’ll apply for benefits and how they’ll use them as well.

“I’ve seen plenty of high-earning executives wondering how to maximize their benefits. They’ve paid in, and now they want a maximum return,” explains William Arone, CEO of the National Academy of Social Insurance. While people become eligible for social security benefits beginning at age 62, the full retirement age to be eligible to receive 100 percent of the retirement benefit is 66 (67 if born after 1960). But you can wait until you’re 70 to take the benefit.

“The rule of thumb has always been to wait to take benefits if you can, but, sometimes, people make the decision to take the benefit earlier, depending on their financial picture,” says Arone. For example, some couples may make a decision for one partner to take early retirement benefits while the other partner waits until they are 70. The decision of when to take social security can be complex, so speaking with a financial planner well before you’re required to make these decisions can help you determine the best strategy for your situation.

Exploring these topics now can help you avoid a crunch during the year you retire. These decisions may also determine your retirement timeline as well as give you a realistic idea of what to expect, financially, when you retire. Taking the time now to create a plan, take action where appropriate and make decisions regarding your financial future can help you enjoy and make the most of retirement once the time comes.

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