By Lee Sherbakoff, CPA/PFS, CFP®, RICP®
Days of golfing, checking travel destinations off your bucket list, spending more time with the kids and grandkids, investing in a hobby…are these your retirement dreams? Most of us have at least a general idea of what we want retirement to look like, but before you get caught up in your plans, complete these 10 things within 10 years of retirement to help you finish your working years stronger than you started!
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 will 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 designed to mitigate these risks. If you wait until you are retired to take this step, it may be too late to make the changes necessary to maximize your retirement income.
2. Take Your Retirement Income For A Test Drive
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 plans, and other savings and investment programs. Throughout your working years, you’ve been contributing money to these accounts so you can 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 cut back?
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 for a total of $7,000 for 2020. At $6,500, the catch-up contribution for those over 50 is even greater for 401(k) and 403(b) plans, allowing a total annual contribution limit of $26,000.
4. Decide Where You Will Live
Housing costs tend to be the largest expense in retirement, with the average retiree spending $16,723 per year on housing, not including utilities or amenities. (1) 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 your plan includes staying where you are, ask yourself if downsizing is a viable option. If you want to stay in your current home, look at any modifications that are needed 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 you start claiming benefits at age 62, your benefits are about 26% lower than if you waited for full retirement age, and over 40% less than if you wait until you are 70 to claim. 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 Employee Benefits Research Institute, the average couple at age 65 will require anywhere from $183,000 to $363,000 in healthcare costs in retirement. (2) 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 U.S. Department of Health and Human Services, most Americans turning age 65 will face the potential of requiring long-term care at some point during their later years. (3) On average nationally, it costs $280 per day or $8,517 per month for a private room in a nursing home. (4) 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. You can go with 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. Create A Tax Strategy
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 are 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. Get Professional Advice
Even if you have been saving and planning on your own up until this point, these final years before retirement are critical for making decisions that have far-reaching consequences. If you want to spend your final working years enjoying life rather than worrying, our team at Nalls Sherbakoff would love to help you create a personalized retirement road map to address your concerns and guide you to financial independence. Set up a complimentary appointment so we can see if our services are the right fit for you by calling us at (865) 691-0898 or contacting us online.
About Lee
Lee Sherbakoff is principal and financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. He specializes in serving pre-retirees and retirees, helping them create and execute financial plans and retirement income plans that lead to sustainable long-term, real-life returns that meet their deepest and most important financial goals and objectives. Lee has a Bachelor of Science in Finance from The University of Tennessee and a Master of Strategic Studies from the U.S. Army War College as well as the Certified Public Accountant (CPA), Personal Financial Specialist (PFS), Certified Financial Planner™ (CFP®), and Retirement Income Certified Professional (RICP®) credentials. Lee spent over 31 years in the U.S. Army Reserves, including serving at the Army’s highest levels on the Department of Army staff at the Pentagon and being deployed in support of Operation Desert Storm (1991) and Operation Iraqi Freedom (2008-2009). When he’s not loyally serving his clients, Lee enjoys giving back to the community and to his profession, acting as a council member of the Tennessee Society of CPAs and a member of the American Institute of CPAs. In addition, he is past President of the Knoxville Chapter of Tennessee Society of CPAs and past President of the East Tennessee chapter of the Financial Planning Association. To learn more about Lee, connect with him on LinkedIn.
DISCLOSURES: The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.
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(1) https://www.fool.com/retirement/2019/06/10/heres-what-the-average-retiree-spends-on-housing-e.aspx
(3) https://longtermcare.acl.gov/the-basics/who-needs-care.html
(4) https://www.genworth.com/aging-and-you/finances/cost-of-care.html