Retirement is an exciting milestone—a time to leave behind the hustle and bustle of work and embrace a new chapter filled with more freedom and opportunities to enjoy life. But before you clock out for the last time, it’s essential to make sure you’re fully prepared for this significant life change. Planning well in advance ensures that your retirement years will be financially secure, fulfilling, and less stressful than your working years. Let’s discuss the key things to do before retirement, so you can transition smoothly and enjoy this new stage with confidence.
1. Evaluate Your Financial Situation
The first and most important step in getting ready for retirement is to take a close look at your finances. Understanding your current financial picture will help you figure out if you’re ready to retire or if adjustments are necessary to secure your future.
Review Your Retirement Savings
Start by checking your retirement savings accounts, such as 401(k)s, IRAs, and pension plans. Compare your total savings to your expected expenses during retirement. As a general rule, most financial experts recommend having enough savings to replace about 70% to 80% of your pre-retirement income. This cushion will allow you to maintain your lifestyle without feeling financially strained.
Create a Post-Retirement Budget
Many people underestimate how much they will need to cover living expenses in retirement. While some costs, like commuting or work-related expenses, may decrease, other areas, like healthcare and leisure activities, may rise. Creating a detailed budget that includes housing, food, transportation, travel, medical expenses and fun activities will help you understand what your financial needs will be.
2. Maximize Social Security Benefits
Maximizing Social Security is one of the critical components of how to prepare for retirement. When you claim your benefits can make a huge difference in the amount you receive over time. Social Security is an important income source as it provides lifetime income with an annual inflation adjustment. It’s also tax-preferred at the federal level and completely tax-free in many states.
Determine Your Full Retirement Age
Your “full retirement age” (FRA) is the age at which you are eligible to receive 100% of your Social Security benefits. For most people born in 1960 or later, FRA is 67. However, you can start claiming benefits as early as age 62 or choose to delay them until age 70. Keep in mind that claiming earlier reduces your monthly benefits, while waiting increases them.
Consider Delaying Benefits
If you’re in good health and have other income sources, delaying your benefits until age 70 can increase your monthly payment by as much as 8% per year for each year you delay starting your benefit beyond FRA. This increase can provide greater financial security during your later years, when healthcare costs might rise.
Use this helpful guide to determine when you should start claiming Social Security.
3. Plan for Healthcare
Healthcare is one of the biggest uncertainties in retirement planning. It’s important to have a strategy to cover medical expenses since they are likely to increase as you age.
Understand Medicare
As you near age 65, you’ll become eligible for Medicare. While Medicare covers many healthcare costs, it doesn’t cover everything. It’s essential to review what Medicare does and does not cover and consider purchasing supplemental insurance or setting aside funds for uncovered expenses.
Plan for Long-Term Care
Long-term care, such as assistance with daily activities or nursing home care, is another crucial consideration when planning for retirement. Medicare only covers these services in limited situations and does not cover custodial nursing home care at all. Look into the different kinds of long-term care insurance being offered today or earmark a portion of your savings to cover potential costs.
4. Adjust Your Investment Strategy
As you get closer to retirement, you should review your investment strategy to ensure your savings last throughout your retirement years. Your retirement may require your savings to last 20, 30 or even 40 years, depending on when you retire and how long you live. There are approaches to investing in retirement that seek to align your risk tolerance with your need to turn investment assets into retirement income.
5. Understand Required Minimum Distributions (RMDs)
If you have qualified retirement accounts, such as a 401(k) or a traditional IRA, you will be required to take a certain amount of distributions from those accounts annually once you reach a certain age. Before you retire, it’s important to understand the rules around RMDs so you can plan appropriately—and so you don’t get hit with expensive penalties for missing RMDs or not taking enough from your retirement accounts.
6. Assess Your Housing Options
Where you live during retirement can have a big impact on your quality of life and financial stability. Consider what’s best for your situation.
Stay or Downsize?
Some people prefer to stay in their family home, while others find it more practical to downsize to a smaller, more manageable property. If your home is paid off and you love the location, staying might be the best choice. However, if maintaining a large home is too costly or physically demanding, downsizing to a smaller home or a retirement community could be a great option.
Look into Relocation
Some retirees choose to relocate to areas with a lower cost of living or better weather. Consider researching retirement-friendly states that offer tax advantages or lower living costs. Keep in mind proximity to healthcare, family, and social activities when making your decision.
7. Envision Your Lifestyle
Beyond financial planning, it’s essential to think about how you want to spend your time in retirement. This is an exciting opportunity to define what’s important to you and explore activities you may not have had time for during your working years.
Find a New Purpose
Without the structure of a full-time job, it’s important to find meaningful ways to spend your time. Whether that’s volunteering, pursuing hobbies, traveling, or even part-time work, having a plan will help you avoid feeling bored or unfulfilled.
Stay Active and Social
Maintaining an active lifestyle is essential for both physical and mental well-being. Many retirees find it helpful to join clubs, take classes, or engage in regular physical activities like walking, yoga or golf. Staying socially connected with friends, family, or through community groups also promotes emotional health.
8. Seek Professional Guidance
Even with careful planning, retirement can be complex. Consulting with a financial advisor is a wise move to ensure all your bases are covered. An advisor can help you engage in a dialogue around your goals and desires, fine-tune your retirement plan, optimize your savings, and create a withdrawal strategy that minimizes taxes.
Final Thoughts
As you prepare for this exciting life transition, taking these steps will help ensure that you’re fully ready to enjoy retirement. Whether it’s organizing your finances and healthcare plans, or finding new ways to stay active, following these things to do before retirement will provide peace of mind and set you up for a successful and happy retirement.
This information may not be relied on for the purpose of determining your social security benefits or eligibility, or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal professional.
