Retirement today is different from in days of yore. Maybe you will quit work entirely. Or keep working but cut back your hours. Or perhaps you’ll move to a less-demanding job. Some people quit work and then, bored or in need of money, return to the old job or find a new one.
However you do your retirement, there’ll be big changes ahead. These can include:
- Taking Social Security and Medicare benefits
- Learning to live on less
- Focusing more on family, friends, hobbies and fun
- Planning how to make all these life changes go smoothly
With some Medicare decisions, there are no do-overs. That’s true, too, when you enroll in Social Security. Choose wrong, and you’ll live forever with the consequences of the choice.
We want to help you start planning right and well-ahead. Here, we’ve compiled some critical moves to make in the year (or more) before you quit work, collect Social Security or start Medicare.
1. Pay off high-interest debt
Going into retirement debt-free is ideal. If you can’t do that, try at least to shed any high-interest rate debt you have.
Living on a limited income, the last thing you’ll want is spending cash flow on interest payments. That makes eliminating credit card debt a priority.
Some pre-retirees may wonder: Should I raid retirement savings to pay off high-rate debt?
Washington Post personal finance advice columnist Michelle Singletary empathizes with older people who face this dilemma. She stresses protecting retirement savings:
“Here’s when you should withdraw funds from your retirement account if you’re not already retired: when there is no other choice.”
That includes using any and all non-retirement savings and non-debt sources of help.
Remember: Early withdrawals from retirement funds not only are painful, they can be expensive, depriving your savings of a chance to grow and, if you’re under age 59½, possibly requiring you to pay a 10% early-withdrawal penalty on the withdrawal. (Borrowing from a retirement account is somewhat better than withdrawing from it, Singletary says.)
Also, of course, you’ll likely have to pay income tax on a withdrawal.
2. Pad your emergency fund
More than you probably can guess, you’ll need a nice, fat financial cushion for unexpected expenses in retirement. While you are working, stuff your emergency fund with money and more money. Keep it untouched until needed for a true emergency.
Use pre-retirement to peer into the future and plan how you’ll respond when, for example, you must:
- Replace a vehicle or furnace or roof.
- Pay for home upgrades for aging in place.
- Help a family member in distress.
- Pay for a long-awaited vacation.
- Cover an expensive dental procedure.
3. Plan Social Security
Your age when you start taking Social Security benefits usually determines the amount of your monthly Social Security checks for the rest of your life. Rule of thumb: The longer you wait, the bigger your checks will be. (Here are more Social Security basics.)
Still, there are times when starting benefits early makes sense. Know the pros and cons before acting.
Find out how much you’ll receive. It’s easy to estimate your monthly checks: Use this Social Security Online Benefits Calculator. Enter different retirement dates to see how waiting or claiming earlier will change your monthly benefit. You’ll need your earnings history, found at your My Social Security account, unless you still need to create one.
4. Preview your budget
There’s typically not much financial wiggle room in retirement, so nail down what your spending will be and begin cutting costs soon — like, now.
To get a rough idea of what you’ll have to live on, review last year’s spending. Estimate, if you don’t have records. Use receipts or last year’s budget if you do.
Or use this simple system to estimate your spending.
Next, list your income sources in retirement.
If your current spending outstrips your expected retirement income, you know what to do.
5. Plan for inflation
Most of us were surprised by high rates of U.S. inflation in the last few years. Inflation now is relatively tame. However, in comparison, it was well over 6% between October 2021 and January 2023, and peaked at 9.1% in mid-2022.
If you are nearing retirement, will your income keep up?
Interestingly, retirement fund managers seem to be expecting inflation to continue settling down.
At Fidelity, portfolio managers are assuming 2.5% inflation as they plan clients’ retirement income and goals, the company says.
“We typically recommend assuming a long-term inflation rate of 3%, which is between the Federal Reserve target and the recent inflation rate.”
Even if it’s less than you feared, make some adjustment to your spending or income for inflation; 2.5% to 3% might be a good rule of thumb. Add a bigger buffer if you are feeling extra cautious.
6. Prepare for health care
Medicare will likely cut your medical expenses by a great deal in retirement, protecting you from the catastrophic medical bills that can drive younger people into bankruptcy.
No wonder this program is so popular: In 2023, 81% of Americans polled by the Kaiser Family Foundation had a somewhat (46%) or very favorable (35%) view of Medicare.
Medicare works differently from other health plans you may have had. Know the rules, especially when you first enroll at age 65. It’s easy then to make an error that can’t be reversed. Example: failing to sign up on time can mean you’ll pay ongoing financial penalties.
Pay close attention to Medicare’s enrollment dates; they may not line up with your other retirement dates — for quitting work, for instance, or starting Social Security.
Good to know: If you’re already receiving Social Security benefits when you turn 65, your Medicare will start automatically. There’s no need to sign up.
7. Plot some memories
Financial planning is really important, but so is planning for fun.
Use your pre-retirement year — or years — to hatch ideas about how you want to spend your retirement and whom you want to spend it with.
Start saving for pleasure, from hobbies to helping others, and from travel to bumming around doing nothing in particular.
After all, now’s the start of the rest of your life.
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