Planning for retirement can be overwhelming, but it becomes much easier if you start early. If you plan to retire next year, there are specific things you must consider and implement now as you prepare for an independent retirement. Here are seven tips to help you prepare to retire.
#1- Pay off debt.
Before you retire, it's essential to eliminate as much debt as possible. Whether credit card debt, mortgage loans, or student debt, any outstanding financial obligations may affect your retirement savings. Eliminating these debts can help you manage your monthly expenses and have more cash for your golden years.
#2- Estimate your retirement income needs.
The first step in retirement planning is estimating how much money you need to retire. A common rule of thumb suggests that you may need about 75—80% of your pre-retirement income to maintain a similar lifestyle throughout retirement.
The amount varies depending on health, lifestyle, debts, travel plans, etc. A financial or insurance professional can help determine if this percentage is appropriate for you.
#3- Fully fund an emergency fund.
An emergency fund is crucial to safeguard against unexpected financial emergencies that could derail your retirement plan. Your emergency fund should be large enough to cover six to twelve months of living expenses.
#4- Purchase for long-term care.
Many need to pay more attention to the cost of healthcare in retirement as they plan for their future. You're more likely to require extended medical or nursing home care as you age. Long-term care insurance provides care in a long-term care facility, at home, assisted living, or other care arrangements, depending on the policy and riders.
Without adequate financial resources or insurance for long-term care costs, your retirement assets may face early liquidation. Visit with a long-term care specialist or financial professional to understand how these policies work and what is covered.
#5- Evaluate your retirement savings portfolio.
As you approach retirement, you must revise your investment strategy and adjust your portfolio to manage risk. Moving away from aggressive investments and toward conservative, income-generating assets may be appropriate to your situation.
#6- Create a retirement savings spend-down plan.
As retirement approaches, it's essential to start thinking about how you will draw down your retirement savings. You may opt for systematic withdrawal plans from your retirement accounts or consider annuities that provide a steady income stream in retirement.
Also, consider the taxes on your retirement income, determining the order in which you want to draw down assets from pre-tax, taxable, and tax-free accounts.
#7- Take advantage of catch-up contributions.
If you're 50 or older, the IRS allows catch-up contributions to retirement accounts like 401(k)s and IRAs. This 'catch-up' will enable you to save more in these accounts above the standard contribution limit, helping boost your retirement savings quickly before you retire.
In conclusion, planning for retirement involves several critical steps and requires diligent financial management. It’s essential to remember that everyone's financial situation is different. Therefore, working with financial, insurance, and tax professionals can help as you work toward your retirement goals.