As a CERTIFIED FINANCIAL PLANNER™ professional with over 30 years in the financial services industry, I am often asked, ‘Is it too early to start planning for retirement?’ And my answer is always the same – it is never too early! The Report on the Economic Well-Being of U.S. Households in 2018 which was released in May 2019 had some interesting findings. For the group of Americans 60+ years, 13% reported they had no savings for retirement but 45% perceived that they were prepared for retirement. Unfortunately, these numbers indicate that 55% are, therefore, not prepared for retirement. And, with people living longer, these numbers are concerning.
However, if you feel like you fall into the category of individuals not prepared for retirement, there are some key financial strategies and steps that you can take now which will hopefully push you into the other category.
The financial Red Zone refers to the 5 years leading up to one’s retirement. This time is critical because if a mistake is made, it can have drastic implications compared to a financial decision made years earlier. When a football team gets the ball inside the opposing team’s 20-yard line, they are considered to be in the red zone. Why? Because there is more opportunity for them to score. Whether it be the football field or your financial timeline – time is of the essence and each step you take can have either positive or negative consequences to your final outcome. Here are the steps I recommend to guide your retirement down the right path:
5 years away from retirement:
1. Choose a target date
One of the first steps to consider – choose a target retirement date. Even if you move the date later, it is important to set a date. This allows you to zero in on what your finances will need to do for you. Although, before you set your retirement plan in motion, there are a few factors to assess which could impact your retirement. They include longer lifespan which means savings need to last longer, inflation and the impact that will have on future purchasing power, a conservative asset allocation which could put you at risk for not being able to outpace inflation, spending rate that exceeds your planned expenses and rising health care costs. It is an exhaustive list, but it’s a realistic one and must be taken into account when planning for your future.
2. Catch up on retirement contributions
During this time frame, cut back on expenses where possible and increase your savings by investing the maximum into your 401(k). Out of concern that baby boomers were not saving enough for their retirement, Congress added a new catch-up contribution that allowed individuals age 50 or older to make additional contributions to their retirement plan. In 2001, the Economic Growth and Tax Reconciliation Relief Act (EGTRRA) was signed by President George W. Bush and made significant changes to retirement plans and tax rates. For 2020, individuals who are 50 years+ can contribute an additional $6,500 to their account above the $19,500 annual limit for a total of $26,000.
3 years away from retirement:
1. Assess future health care needs
According to HealthView Services, a provider of health-care cost project software, they reported recently on CNBC.com, a healthy 65-year-old couple who retired in 2019 will need close to $390,000 to cover health care expenses during retirement. This number includes premiums for Medicare B (medical insurance) and D (prescription drug coverage), dental insurance, and out-of-pocket costs related to doctor’s exams, hearing services and other medical expenses. During this time, educate yourself on Medicare and how any employer-sponsored health benefits will work with Medicare. And often not thought about in these terms, but a healthier person will most likely spend more on medical expenses during their lifetime due to their longer life expectancy.
2. Understand Social Security
Over the years, I have heard from many individuals that they don’t understand Social Security. Spend the time now familiarizing yourself with how Social Security works, the benefits due to you and the steps you need to take to initiate your payments upon retirement. Determine the age at which you would like to start receiving payments. Often, individuals delay the age at which they begin collecting to increase their monthly payments. As Social Security payments are one component of your retirement plan, work with your financial advisor to help guide you through various scenarios to find out what is right for you. Everyone’s circumstances are completely different – just because your friend or sibling started drawing benefits at a certain age, doesn’t necessarily mean that’s the correct course of action for you.
1 year from retirement:
1. Create a budget
If you haven’t already done so, create a detailed plan of your expenses – make sure you factor in inflation. Once you go through this process, you may find the lifestyle you want in retirement will cost more than you had anticipated. Better to find this out now as you have a few options – postponing your retirement date, finding ways to reduce your expenses or even possibly working part-time during retirement.
2. Revisit your asset allocation
As you near retirement, this is the time to move to a less risky approach to investing. Perhaps, the dollars invested for years in aggressive performing funds should be invested in more conservative performing funds.
Retirement can be a time of great joy and excitement as the next chapter of your life unfolds – it’s often filled with more time, freedom, traveling and enjoying those hobbies and activities that your working life didn’t allow. However, it can also be a time of anxiety, stress and worry – will I have enough funds to cover me through my retirement years? Take comfort in knowing you still have time to prepare for this phase of life. If you are more than 5 years away from retirement, there are steps you can take now which will better prepare you for your future.