Life has treated you pretty well up to this point. Your career is going good, your kids are growing up and leaving the nest, and you’re finally starting to focus on yourself and what you want out of life.
How you manage your money now becomes more important than ever as you consider ways to best position yourself for those rapidly approaching retirement years.
Here are 7 smart money moves to make before you retire.
1. Estimate How Much You’ll Need
The first step of your retirement financial planning process is to estimate how much you’ll need to live on in your retirement years. It’s important to not get frustrated by conflicting advice on how to calculate this amount. Use a retirement calculator to help you determine an estimate as to how much you’ll need. Having a ballpark figure in place will help you to map out a plan and set some financial goals. When you are going through this process it might be helpful to ask yourself this question: ‘do I think taxes will be higher in the future?’
2. Consider Your Income Sources
Once you have an estimate of how much you’ll need for retirement, calculate how much will be available from other sources besides your savings. This can include an estimate of your Social Security benefit at your retirement age, or a pension from a previous or current employer.
If you have a 401k then figure out what the expected value will be at your planned retirement age. Remember, a 401(k) was never intended to be more than a Supplemental Retirement Account. A sound retirement strategy includes assets that are non-correlated to the market, buffer assets and leverage-based assets. If you have had this type of discussion related to your retirement planning it might help you to model how a buffer asset and tax-exempt income would benefit you in retirement.
Another good question to ask yourself is: Does my 401(k) Supplemental Retirement Plan make contributions on my behalf if I become disabled and I am unable to work? 18% of American’s become disabled during their work-life and have no more contributions going into their retirement (remember Long Term Disability Insurance only covers between 40-60% of your income). Having this risk covered is just a small part of where leverage-based assets become a critical part of your planning.
While considering your income sources and how much you’ll need, it’s important to calculate any taxes that will be paid out of this money, too.
3. Create a Retirement Budget
Approximately 10 years from when you plan to retire is an excellent time to start crunching numbers and creating a retirement budget. You want to be close enough to your retirement years that you can accurately estimate your income and expenses. While creating your retirement budget, many expenses will decrease, but your medical expenses will likely increase as you age, so that’s something to keep in mind.
4. Become More Tax Aware
It’s important to highlight the need to do proper tax planning now to avoid the trap that many have fallen into over the years. If you have money in a 401k it’s smart to be looking for ways to reduce or cover for those taxes. Keep in mind the possibility that taxes will be rising as you come into retirement and may continue to increase throughout your lifetime.
Even though a 401(k) plan was created as a supplement to retirement planning, it does offer catch-up contributions for employees over the age of 50. There are reasons that it makes sense to do this and there are just as many reasons that these additional dollars may be better allocated in a different type of asset. Each person’s situation is different. Some people need to become more tax-aware while others need leverage to create a higher retirement income that provides for more mathematical certainty. For those individuals who have a long retirement, those extra funds can create some much needed and appreciated returns over the course of your retirement.
5. Research Your Retirement Options
Whether you plan to stay put in your current home, downsize to a smaller place, or relocate to a foreign land after retirement, in-depth research is a must no matter where you plan on retiring. Consider region specific factors such as the state and local taxes, as well as many other factors, such as the local real estate market, access to the kinds of activities you enjoy, weather conditions, proximity to friends and family, and access to quality healthcare.
6. Find Additional Income Sources
If you’re concerned about being able to save enough money for retirement, consider taking on a second job, or finding additional income sources. It might not seem like enough to make a difference, but even a little bit adds up quickly.
7. Pay Off Your Debt
Getting out of debt and learning how to stay out of debt should be a high priority. "Debt limits how effective your planning can be prior to retirement and will limit your cash flow during retirement," advises retirement income planning consultant, Jeff Mohlman.
If you have any debt, whether big or small, getting it paid off should be addressed before retiring. Regardless what type of debt it is - mortgage, auto, student loan, credit card, home equity – this is likely one of the best places to look for freeing up cash flow for retirement planning. Any money spent here is funds that can’t be used for better purposes. Looking for leveraged assets to get out of debt and assist with retirement savings are often the best resources to help you achieve these goals. It's valuable to have a professional help along the way so that as you pay down/off debt you don't just go right back and add it on again.
It’s not too late to make a change with your retirement planning, even if you plan on retiring within 10 years. Take advantage of what you can do to increase your retirement savings by contacting Safe Money Partners to discuss the best options for your unique situation.