How to Prepare Your Finances for Retirement in 7 Steps

Senior couple in cafe
Photo by Monkey Business Images / Shutterstock.com

After years of dreaming, it’s finally almost here: Sometime soon, you plan to retire.

Perhaps you intend to quit working a decade from now — or this summer. Either way, you still have time to get your finances in shape before beginning what could be the happiest period of your life.

Following are seven key steps to ready your nest egg for retirement.

1. Consider talking to a pro

During retirement, you must be extra careful to squeeze the most out of every dollar you have saved.

Withdraw the money too quickly — especially during a bear market — and it might not last the rest of your life. Foolishly make withdrawals without thinking about the tax implications, and you could end up wasting a lot of cash.

So, even if you have a DIY mind, it might make sense to sit down with a fee-only financial adviser and get some expert guidance.

One fast and free way to find a vetted fiduciary adviser — meaning a professional who will put your best interests before his or her own wallet — is by using a service like Wealthramp.

2. Establish a monthly budget

How much will life’s wants and needs cost you each month during retirement? It’s crucial to know. So, sit down and crunch the numbers.

Total up your bills — mortgage, insurance, gas money, groceries. Then, figure out how much you spend on discretionary items and having fun.

Lastly, add all those figures together so you have a realistic sense of how much money you need to survive and thrive.

If you need help budgeting or tracking your spending, consider a software program like YNAB, aka You Need a Budget.

3. Decide on a withdrawal amount

A common nugget of retirement advice is that if you withdraw 4% of your savings every year — and not more than that amount — from a well-diversified investment portfolio, you can do so without a significant risk that you will run out of money before you run out of life.

At a 4% withdrawal rate, a $500,000 nest egg will provide $20,000 in annual income, for example. A $1 million nest egg will double that to $40,000.

Is that enough money for you? If not, you might want to work longer to give your nest egg more time to grow.

But if the figure is close to what you need, Social Security benefits might get you over the hump. Retirement benefit payments averaged $1,471 per month in 2019, according to the Social Security Administration.

4. Figure out how to cut unnecessary costs

If you reach the unsettling conclusion that your income won’t be adequate to cover expenses, look for ways to trim costs.

Fortunately, a handful of important costs are likely to simply disappear during retirement. And if you are clever, you can think of plenty of other places to cut back.

Start by checking out “15 Painless Ways You Can Cut Costs in 2020.”

5. Weigh whether to dial down your risk

Most experts suggest reducing the risk associated with your portfolio once you reach retirement. A younger person still has paychecks coming in, and plenty of time to recover from stock market downturns. That’s not so true in your golden years.

Money Talks News founder Stacy Johnson has a standard formula that can serve as a solid guideline for determining the right portfolio mix. As he explains it in “5 Mistakes That Will Ruin Your Investment Returns“:

“Because the stock market is risky, it’s not the basket for all your eggs. Here’s the formula I’ve suggested countless times over the years: Start by subtracting your age from 100, then put no more than the resulting figure as a percentage of your long-term savings into stocks.”

However, he emphasizes that this is just a “rule of thumb” that may or may not be right for you. Once again, consulting with a financial adviser can help you figure out what makes sense for your situation.

6. Estimate health care costs

Many expenses fall during retirement. You might drive less and buy fewer clothes now that you don’t have a job. As you grow older, you are likely to stay at home more and consume less overall.

But one cost probably will grow: health care expenses. In fact, Fidelity Investments estimates that a man who retired in 2019 at age 65 would need $135,000 for health care expenses throughout retirement. A woman in the same situation would need $150,000, primarily because women tend to live longer than men.

One way to help pay for such expenses is to tap into a health savings account. This wonderful tool is one of the most tax-friendly vehicles for saving. If you already have a health savings account, keep contributing to it.

If you haven’t opened an HSA yet — and if you qualify — consider doing so and making it a crucial part of your nest egg.

For more on HSAs, check out “5 Reasons to Use a Health Savings Account as a Retirement Fund.”

If you decide an HSA is right for you, check out a platform like Lively, which seeks to simplify the process of managing your HSA.

7. Get rid of remaining debt

Carrying debts into retirement is a recipe for disaster. It’s probably OK to have mortgage debt, but every other type of obligation has the power to capsize your boat should seas turn stormy in either the overall economy or your own personal financial life.

So, pay down as many debts as you can before walking away from work. If you need help, stop by our Solutions Center and look for experts who can help you overcome obstacles such as credit card debt.

For a more DIY approach, check out “Resolutions 2020: Crush Your Debt in 3 Simple Steps.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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