By Dejan Ilijevski
Preparing for retirement is like running a marathon—it takes a high level of perseverance, focus, and patience to cross the finish line. Like any experienced marathon runner would recommend, it’s best to end the race even stronger than you began.
When it comes to retirement planning, the same principle holds true for your last decade of work. Instead of coasting or stepping back, consider accelerating your planning efforts. Here are 10 pre-retirement financial tips you can use to feel clear and confident about your retirement plan as you near the end of your working years.
1. Run the Numbers
When it comes to your retirement savings, there are countless uncertainties. While it may be impossible to predict exactly how long your nest egg will last, you can run your figures through different scenarios to evaluate what may happen if the market crashes, if you face unexpected healthcare costs, or if a spouse dies prematurely. Once you stress-test your savings in this way, you can come up with a plan to help mitigate these risks. If you wait until you’re retired to take this step, it may be too late to make the changes necessary to maximize your retirement income.
2. Test-Drive Your Retirement Income
Whether you choose to continue working during retirement or not, you’ll likely rely on a retirement income generated from several different sources, including Social Security, employer-sponsored retirement plans, personal retirement accounts, and other savings and investment programs. Throughout your working years, you’ve been contributing money to these accounts with a plan to secure a consistent income in retirement. But how do you know if it’s enough to last your whole retirement?
One way is to test it out. While it’s generally recommended to assume you’ll need 80% of your current income in retirement, you and your family may need more or less. For a few months, test-drive a reduced budget. To start, try living on 80% of what you currently receive. Do you find yourself pinching pennies or did you find ways to decrease your budget even more?
3. Ramp Up Your Saving
It may sound obvious, but the closer you get to retirement, the more you should aim to save. Cut back on expenses, channel any raises and bonuses directly to savings, and automate savings increases of 1% every few months.
Your increased savings can be invested into your company 401(k) or 403(b) plan or your personal IRA. If you are over 50, you can invest an extra $1,000 a year into an IRA, totaling $7,500 for 2024. The catch-up contribution is even greater for 401(k) and 403(b) plans, where you can contribute an additional $7,500, making your total contribution $30,000.
4. Decide Where You’ll Live
Housing costs tend to be the largest expense in retirement, with the average retiree spending $20,362 per year on housing, not including utilities or amenities. As you approach retirement, think through where you’re going to live and how much you’ll spend on housing costs in retirement.
If you plan on relocating, do your research. Visit your potential locations, and decide if the climate, community, and area are right for you. If you want to stay where you are, ask yourself if downsizing is a viable option. If not, look at any modifications that are needed in your current home to accommodate aging. Plan to make any expensive adjustments and repairs now, before you’re living on a tighter budget.
5. Evaluate Your Investments
The 10-year pre-retirement mark is a particularly appropriate time to adjust your portfolio’s allocations. Meet with your financial advisor to review your current lineup and determine whether your risk tolerance should change.
Along with reallocating your investments, you’ll want to consider how the sequence of returns could impact your portfolio’s value over time. In the simplest of terms, sequence of returns refers to the risk of receiving lower or negative returns early in a period when you’re making withdrawals from your investments. If your retirement date correlates with the onset of a bear market, your savings can be depleted quickly as you withdraw from your portfolio. With a smaller investment base, you’ll have less wealth remaining to benefit from a future market upswing.
To mitigate the risk of sequence of returns ruining your retirement portfolio, work with your advisor to take the appropriate steps, such as reducing volatility, examining your withdrawal strategy, and finding different market options to preserve your money.
6. Create a Social Security Strategy
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you decide to collect these benefits will impact the amount of payout you receive. At 62, you become eligible to receive Social Security benefits for the first time. But before you start claiming Social Security, it’s important to review your benefits and options for claiming so you can plan to maximize your lifetime benefit.
If your full retirement age (FRA) is 67 and you start claiming benefits at age 62, your monthly benefit amount will be 30% lower than if you waited for full retirement age. And if you wait until age 70 to claim your benefits, your monthly check will be 24% higher than if you retire at 67. It’s also important to consider how long you’ve worked and your lifetime average monthly earnings, which are used to calculate your benefit. In some cases, working a few extra years can have a big impact on your monthly Social Security benefit.
7. Research Healthcare Options
No matter how healthy you are today, you may need more health services as you age. According to the Fidelity Retiree Health Care Cost Estimate, the average couple at age 65 will require approximately $315,000 (after tax) to cover healthcare costs in retirement. Most people don’t even have that much in their retirement accounts to live on, let alone cover medical costs. Even with Medicare, there could be significant out-of-pocket expenses and many conditions and treatments that are not covered.
When choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options.
8. Consider Long-Term Care
Along the lines of health, think about your potential need for long-term care insurance. According to the Administration for Community Living, most Americans turning 65 will require long-term care at some point during their later years. On average nationally, it costs $306 per day or $9,305 per month for a private room in a nursing home. If you decide that long-term care insurance is the way to go, now is the time to act. Insurance costs increase with age. There is also the risk that your health will change and your application for insurance will be denied. Generally, you will have fewer options the longer you wait.
If you want to get a long-term care plan in place, you have a few options. It is smart to consider a traditional long-term care insurance policy, add a long-term care rider to your life insurance policy, purchase an annuity with a long-term care rider, or start saving for your long-term care so you can self-insure.
9. Put a Tax Plan in Place
Tax planning can save you more money than you realize. By projecting your future income and taxes now, you may find opportunities to save. When you’re living off a fixed income in retirement, tax strategizing can make a world of difference in the longevity of your nest egg.
For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and reduce your tax liability.
10. Work With a Trusted Advisor
The years leading up to retirement are crucial for making decisions that will impact your future. While you may have been handling your finances independently so far, it’s worth considering working with a financial advisor to prepare and plan ahead.
At SCM Investment Services, we work to create a customized retirement plan to address your needs and steer you toward financial stability. To schedule a complimentary introductory meeting or request a free financial health checkup, call (219) 225-1934 or email dejan@scminvesting.com. Together, we explore how I can support you in pursuing your financial goals.
About Dejan
Dejan Ilijevski is Financial Advisor, Investment Manager, and Founder of SCM Investment Services, an independent, fiduciary, fee-only financial advisory and investment management firm based in Lake Elmo, Minnesota. With an evidence-based approach to investing grounded in economic theory and reliant on insights from financial science, he customizes globally diversified portfolios of mutual funds and ETFs for his clients. With 20 years of experience in the trading/financial services industry, and described as trustworthy and community-oriented, Dejan is passionate about helping individuals and families, prioritizing their best interest first and foremost.
Originally Dejan pursued a career in research and technology but was recruited by a startup trading firm at the Chicago Board of Trade. He took advantage of this rare opportunity, curious to learn more about capital markets. Dejan’s technical background provided a unique skill set, and by the end of his rookie year, he routinely transacted over $1 billion in U.S. Treasury notes daily, making him one of Chicago’s biggest bond traders. He consistently earned the highest profits for the firm for many years and continued to advance professionally in the trading arena.
With newfound experience and insight, Dejan came to realize his parents were being exploited by their financial advisor and that the financial services industry does not work in your best interest. After earning his MBA from the University of Chicago Booth School of Business, Dejan left the trading industry to start an independent financial advisory firm based on integrity and transparency and built on the belief that everyone deserves trusted, knowledgeable financial advice—blending Wall Street expertise with Main Street values.
Serving the broader community as an investor advocate, a proponent for financial literacy, and sponsoring nonprofit initiatives, Dejan is a trusted subject matter resource for many financial news media publications. He and his wife, Daniela, reside in Munster, Indiana, with their two kids. In his free time, he enjoys road cycling, reading, playing soccer, traveling, going on adventures (even skydiving!), and serving local charities. To learn more about Dejan, connect with him on LinkedIn.
