These Are the Most Important Things to Do 5 Years Before You Retire
Retirement isn’t something that you just decide to do on a whim — it takes a lot of time and planning, especially if you want to get everything you’re entitled to.
Getting ready for retirement begins the year you start working, though you may not think about it much until you’re getting close to retirement age. If you’re not quite ready to stop working but you know it’s coming up in the next five years or so, there are some crucial steps you should take right now to ensure a seamless, simple road to a happy retirement.
1. Have a backup career plan
The years leading up to retirement are some of the most crucial. Unfortunately, it’s not unheard of for employees aged 55 to 64 to get laid off, even if they’re spent decades faithfully serving their employer. Time.com reports that most unemployed Americans aged 55 to 64 have been jobless for at least 11 months.
Take steps to avoid this happening to you by preparing for the worst. Always have a backup career plan, whether it’s freelancing, working for a competitor, or starting your own business. And be aware of what’s going on in your company. Notice a lot of layoffs happening? It might be time to dust off your resume and get ahead of the potential catastrophe rather than pretend it isn’t happening.
Next: This move can put money in the bank.
2. Downsize your home
Even if you have your mortgage paid off, housing represents the largest portion of post-retirement spending thanks to general upkeep, taxes, utilities, and other overlooked factors that come along with taking care of your property.
Plus, selling your house to buy something smaller puts a lot of extra cash in your savings account, especially if your property value has increased over the years. Time.com estimates that trading a $250,000 home for a $150,000 home will free up more than $3,000 in annual expenses.
Next: Collect money that you’ve earned.
3. Cash in stocks
You may spend decades saving for retirement, but the years directly preceding and following your actual retirement date are the most crucial. That’s why some experts recommend reducing equities during this time period to reduce your risk of losing your hard-earned nest egg.
You can always reinvest later if you want to, but cashing out right before retiring will only help your financial situation.
Next: Patience can pay off.
4. Maximize Social Security earnings
It can pay to be patient.
Time.com reports that a person who starts collecting Social Security at 62 will get about $24,000 per year while that same person can get $42,000 per year by retiring at 70. Considering that these payments last as long as you live no matter how long you live, the amount accrued over time could be significant.
Next: Write it all down.
5. Estimate expenses and compare to your nest egg
It can be as simple as breaking out a legal pad or making a basic Excel spreadsheet. No matter how you do it, the time to estimate expenses versus income is right now.
Having a handle on how much you’re spending now will help you figure out what you need for the future. Calculate expenses and subtract that amount from the income you’ll collect during retirement, such as pensions and Social Security. Take that number and multiply it by 25. As long as your savings are bigger than the result, you probably have enough to withdraw 4% from your portfolio each year leading up to retirement.
Next: Talk to a professional.
6. Find a financial advisor
Not everyone has a mind for math, and that’s all right. The best way to ensure you’re taking the proper steps to a comfortable retirement is to speak with a financial planning professional who has experience working with retirees.
The sooner you enlist the help of a financial planner, the more time you’ll have to follow the steps they recommend for getting the life you want after retiring.
Next: Pay attention to taxes.
7. Don’t forget to evaluate tax consequences
You may be in a lower tax bracket in a few years, meaning you should start maximizing tax-deductible contributions right now.
A little good news: Up to $500,000 of capital gains from your home sale if you’re married ($250,000 if you’re single) may be tax free, subject to IRS regulations. If you have company stock to diversify, you should plan for the amount of tax that will be owed the year you sell or prepare for it by spreading the sale over several calendar years.
In general, retirees tend to underestimate the amount of taxes they’ll pay during retirement. Don’t forget to account for these important numbers when you’re making your exit strategy.
Next: Communication is key.
8. Talk to your family
Not every aspect of retirement is financial.
Retiring will drastically change your life, and it can change your relationships, too. Make sure that you’ve set boundaries with family members and that you’ve discussed your long-term and short-term plans.
Does your daughter think you’ll be watching the grandkids full time now that you’re no longer working? Is your spouse expecting to go on monthly cruises? It’s important to be realistic about expectations for the future and communicate them clearly to your loved ones.
Next: Stay hopeful no matter what the numbers say.
9. Don’t get discouraged
All the financial calculators in the world can’t predict the future. Even if you have a specific number in mind to keep your quality of life the same after you require, chances are your spending will go down, not up, after you retire.
So even if you’re not quite meeting your financial goals in the five years before retirement, it doesn’t mean all hope is lost. Keep smiling and make a plan to increase your savings so you can live the life you want after retirement.
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