The financial state of the Social Security Administration, as well as the uncertainty of the current U.S. and world economies, might be making you nervous about your upcoming retirement. Although some elements of retirement will always be a risk — since you can’t know the future state of economies, your lifespan, and other factors that can affect your finances — careful and thorough planning will carry you a long way in security for the future.
As you approach retirement, these steps will help you create a plan that’ll work for you:
1. Start early.
Getting a head start is vital to effective retirement planning. Try to start planning as early as five years before you retire. Starting too early may cause inaccuracies in your finer calculations, but some steps can be done earlier than others. Hopefully, you already have a stable and profitable 401-K, or other investments, to draw from. If you don’t, start as soon as possible.
2. Work out the details of your retirement lifestyle.
This includes housing, medical needs, plans for travel, income sources, and other factors that’ll determine your budget. The kind of life you live now may be very different than the one you’ll live after retirement. Retirement living is typically much simpler — by necessity and also desire. However, this doesn’t necessarily mean you’ll need less income.
Although you may be spending less (or nothing) on housing and bills, traveling more and preparing fewer home-cooked meals will cause your discretionary spending to increase. You also need to consider your present health and how it may change in the coming years. While Medicare will most likely provide for many of your medical expenses, you may need supplemental sources. Evaluate your current spending patterns as a clue for your future spending, and along with your known expenses, create a tentative budget. If possible, consult an outside source for advice on whether your plan is realistic and sound.
3. Pay off as much debt as possible.
This is one of the simplest, but most crucial, steps when retirement planning. Paying off debt when you have higher income frees up more of your retirement income for necessary living expenses. If some debt can’t be avoided, such as a mortgage, pay off as much as possible and look into refinancing to get a lower interest rate for your remaining payment plan.
4. Determine your best Social Security benefits enrollment age and ensure enrollment in Medicare programs.
This topic could be exhaustive, but in brief: the later you begin withdrawing from Social Security, the better. If possible, wait for your full retirement age, and even better, until you turn 70. The Social Security Administration’s website can help you calculate at which age you’ll receive the most benefits.
Medicare, the medical plan for Social Security, is very complex, and contains parts A, B, C, and D. Some parts will include automatic enrollment, while others require you to apply a few months before you begin withdrawing Social Security. Talk with a Medicare expert and follow the guidelines on when and what to enroll in.
5. Update investments to avoid major losses close to retirement.
The younger you are when you start your investment plans, the more risk you can afford, which usually equals more profit. The closer you get to retirement, the more you’ll want to scale back on riskier investments and stick with those that’ll provide a stable and predictable income.
But, just because you’re retiring doesn’t mean you won’t need to continue to actively invest — especially with the uncertainty of Social Security income for future generations. The better your portfolio, the more chance you have of steady resources for years to come, so seek help from an experienced investor and/or retirement financial planner for even more security.
What would you add to this list?
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.