“Money is something you got to make in case you don’t die.” — Max Asnas
This week we’re going to bring it all together by looking at what you need to do as the countdown to retirement begins.
Remember when retirement was more of a hazy concept than something to actually plan for? For most of your life it wasn’t a pressing concern. It was far in the future and there were infinite possibilities that could change the outcome.
You could get a big raise. Win the lottery. Get a big inheritance from a relative you didn’t know you had. Heck, maybe you’d even die before the big day arrived.
But the years tick by and the options narrow. In the blink of an eye, here you are: entering the final chapters of your life, whose quality will depend largely upon what you’ve saved and how you’ll manage it.
We’ve covered a lot of territory over the last 13 weeks. Hopefully you’ve come through it with a stronger understanding of your options and possibilities. If you’ve done the exercises, you’re now in greater control of your finances. You’ve learned all you need to know to properly position yourself, and you’ve started taking action.
As I’ve mentioned, I’ve spent my entire adult life, more than 40 years, educating people about personal finance. Yet it wasn’t until I wrote this course that the realities of my own retirement began to sink in. With each chapter I considered my personal options with fresh, more focused eyes.
I hope that’s been your experience as well.
As I mentioned in the introduction, this course was designed for those between the ages of 45 and 65: close enough to retirement to picture it, but far enough away to potentially influence the outcome.
While that’s a fairly narrow age range, there’s still a big difference between being 45 and 65. So let’s use our last week together for a countdown to retirement, with specific tasks you should be doing each year.
Countdown to Retirement: Annually
Whether you’re 20 or 80, do the following on a regular schedule. None of these tasks takes more than a few minutes. They’re the kind of things you can do during the commercial breaks of your favorite shows.
If you’re part of a couple, do them together or discuss the results together. Remember, if everyone’s not on the train, it’s not leaving the station.
Net worth review: Update your net worth statement on the last day of every month, and stare at it for a few minutes. Are you getting richer or poorer? Either way, see where the changes came from. Are you spending less? Saving more? Are your investments gaining or losing?
Spending plan review: Review your expenses monthly. Use a budgeting app like You Need a Budget or Mint to track expenses and establish savings goals. Your mission is to find extra money in your budget to retire debt and add to savings, and to do that, to the extent possible, without sacrificing your quality of life.
Investment review: You don’t need to review your retirement asset allocation very often. Annually is fine. Maintain your chosen mix of retirement investments by checking the allocation between stocks, bonds and cash. Apply the simple asset allocation rule: age subtracted from 100 = percentage in stocks. Remaining assets should be divided equally into bonds and a safe, short-term interest-bearing account.
Debt review: Unless what you financed is increasing in value by more than the interest you’re paying to finance it, debt is robbing you of retirement assets. Destroy it.
If you’re on an active debt destruction plan, check your progress monthly. If you’re not, review it as you review your monthly net worth.
Countdown to Retirement: Five Years Left
While you’ve been tracking your investment balances monthly and checking your asset allocations annually, now’s the time to sharpen the pencil.
Investment projection: You know how much you have; now see what you can expect to have when retirement arrives.
Use the retirement calculators from Week 6: Start with what you have, then add contributions you expect to make over the next five years, as well as a reasonable percentage you expect to earn. The result is what you’re planning to have when retirement arrives.
Do this with your 401(k) plans and other retirement accounts, as well as other savings you’ve set aside.
It’s important to go through this exercise five years from retirement, while you still have time to make meaningful adjustments. If you’re not on target, you have options. Tighten your budget, ask for a raise, pick up extra work or do whatever is necessary to add to your savings.
Long-term care insurance: Ideally, you should check out long-term care insurance in your 50s, since it gets more expensive as you age. Even starting early, many people will find it out of reach, but there are scaled-back policies with limited benefits that might offset at least some of the cost. Learn your options.
Estate planning: Hopefully you’ve got a will and other estate planning documents in place, but if you don’t, now’s the time. If you do have them, review them. See “8 Essential Documents for Estate Planning” to see what you need and find links to get them cheap.
Countdown to Retirement: Four Years Left
You still have plenty of time, but there are some pre-retirement activities that will take some time.
Where will you live? Think about where you want to live in your retirement years. You may decide to add to your retirement savings by downsizing and staying where you are, moving to a different state, moving into a retirement community, or some combination.
You’ll need to do some research, check out options in person and proceed at a leisurely pace. That’s why you want to start the process now. In addition, some retirement communities have long waiting lists, so if you find someplace you like, get your name on a list, even if you won’t move in for years.
Countdown to Retirement: Three Years Left
What will you do? We all change as time goes by. If it’s been a while since you created your happiness list and thought about what you want your retirement to look like, review and renew it. Still interested in doing the same things, or has your perspective changed?
Start wrapping your mind around what it’s going to feel like when you’re no longer working. It’s not too soon to begin creating a new you. If a new hobby or new career is on your horizon, put a toe in the water. Take a class or two, join a group, start that new hobby.
Feeling uncertain? Ask yourself, “If I only had a few years to live, what would I do with that time?” Then get started doing it.
Countdown to Retirement: Two Years Left
Need to refinance? Many people don’t realize you can’t borrow money without regular income. Lenders don’t care if you have a million dollars in the bank, because you could go to Vegas and lose it tomorrow.
If your pension and/or Social Security won’t support a big loan, refinance while you still have a paycheck.
Practice makes perfect: By now you have a pretty good idea of the retirement income you expect to be receiving from Social Security, savings and other sources. The question is, can you live on it? Now’s the time to find out.
If your retirement income will be less than your current income, experiment by living on your level of retirement income while you’re still working.
If you find you’re not making ends meet, start exploring other options, like downsizing, working longer or maybe getting a reverse mortgage.
On the other hand, if living on your future retirement income is a snap, feel great about what’s ahead!
Check your check: Remember, what you receive in Social Security benefits is based on your highest 35 years of earnings. If you reviewed your future benefits a few years back, check them again. Your higher earnings over the last few years may have replaced lower earnings from decades ago, making for a (slightly) higher monthly benefit payment ahead.
Countdown to Retirement: One Year Left
You’re almost there, but you’re ready! You have a good idea of where you’ll live, what you’re going to do and whether your income will be adequate. Retirement may sneak up on other people, but not you.
Medicare checkup: If you’re not already familiar with Medicare, get that way. Review your options and decide if Medicare or a Medicare Advantage plan is for you. You may be automatically enrolled, or you may need to sign up. To avoid penalties, do it when you’re supposed to. Learn more here.
Investment projection: Remember a while back when you projected how much you’d have in your investment accounts when retirement rolled around? Now see how close you were.
Since stocks, bonds and interest rates have been fluctuating all this time, it will be a miracle if you end up with exactly what you projected. That’s OK. Hopefully it will be close enough.
If you’ve met or exceeded your projections, good for you. If you haven’t, make a contingency plan.
If you’re planning to live mostly from savings, and those savings are invested largely in stocks, you may want to create a cash cushion by selling some investments. That way, if the stock and/or bond markets are crashing right as you retire, you won’t be forced to sell anything at a loss to meet living expenses.
While the countdown above will apply to most people, it won’t fit everyone perfectly. Some of us may be retiring in our 50s, others at 70. That’s OK. If you understand the steps, you’ll be able to modify them to your situation.
In fact, consider that your final homework assignment: Your task for this week is to write out the countdown for finally making your retirement dreams a reality. Take the above and make it yours with dates and personal instructions.
After that, it’s all in your capable hands.