As retirement beckons, there are a number of smart steps that you can take to keep your finances in a healthy state.
You have likely been preparing for this stage of life for years.
Perhaps you have energetic plans to take full advantage of your newfound time and flexibility with round-the-world trips or new hobbies. Or, maybe you are ready to downshift into a lower gear, enjoying your later years in peace and quiet after a hectic professional life.
Regardless of your preferences, you will need to keep a healthy bill of financial health if you want to realize your retirement ambitions. Here are some tips to follow as you inch closer to your golden years.
Understand Your Financial Situation
The first and most important step is to take a full and honest accounting of the state of your savings, and match these with your intentions for retirement.
Making sure that your financial means match your objectives is a central component of any plan of action. This takes on added importance during the final years in the workforce, when you still have the ability to earn income and pad your retirement accounts (see below).
If you find that you will need more funds to follow your dreams, consider ways to increase your savings today. The magic formula for increasing savings is simple: earn more, or spend less.
Think about ways to increase your passive income, while also trying to cut down on your costs of consumption. For instance, if you are following the 50-30-20 rule, consider tweaking this approach to channel more funds into the savings portion of your monthly budget.
Review Your Investment Portfolio
It is always a wise move to regularly review your investment portfolio to make sure that it matches with your desired amount of risk. This is especially true as your working years dwindle and your risk profile changes.
For instance, a young professional, with their entire working life in front of them can afford to take a greater set of risks with their monies. They have plenty more years of earning a salary to recoup any failed investments.
On the other hand, some one closing in on retirement has a much different set of risk calculations. An aggressive strategy could backfire; as the number of prime working years is limited, so is the time remaining to claw back any lost savings.
Everyone has their own individual set of risks and preferences. Regardless of your tolerance for risk, it is important to review your portfolio to make sure you are comfortable with where your monies are invested.
Maximize Your Retirement Savings Accounts
There are a slew of retirement accounts available, and chances are that you are holding one or more of them. The marked tax advantages of a 401(k), Individual Retirement Account, and SEP-IRA all provide strong incentive to devote funds toward retirement throughout the working years.
A number of catch-up clauses can allow you to contribute even more monies as you approach retirement. For both Roth and Traditional IRAs, you can allot an extra $1,000 every year once you turn 50 into these accounts (for a maximum yearly contribution of $8,000).
For both Traditional and Roth 401(k)s, if you are over 50 years old you are eligible to contribute an additional $7,500 into your accounts. This increases the amount of your allowable personal contributions to your 401(k) to $30,500 a year. Combined with the contributions from your employer, this can add up to $76,500 a year to pay for your future retirement needs.
If you are currently in a position to make additional contributions, think about devoting funds to these accounts to increase your resources down the road.
Consider (Future) Moves
Your future retirement life may look very different from your current existence, and it might be worthwhile thinking about ways you can save money by changing residences.
This could mean potentially downsizing to a smaller lifestyle, both in terms of space and accessories. If your kids have left the nest and you no longer need so much space, it could be worthwhile considering whether to move into a smaller house or a condo. In addition to saving on the cost and ease of maintenance, you could earn some cash to plow into your retirement accounts.
This could also includes moving to another state. There are a number of states that do not have a state income tax, which could potentially allow you to save on your retirement distributions. Make sure to consult with a tax professional to best understand the tax implications for any potential move, and how they would impact your finances.
Prepare for the Unexpected
Everyone is covered when life goes according to plan. However, a responsible approach to your finances takes into account scenarios when things are not so rosy.
Making sure that you and your family are protected from unanticipated costs is an important part of planning for your future retirement. Paying off your debts, creating an emergency fund, and thinking about other possible contingencies is paramount.
Health care costs tend to rise as we get older, and setting aside funds for these possibilities–such as via a Health Savings Account–can come in handy later on. (Similar to retirement funds, if you are 55 years or older, you can devote an additional $1,000 to your HSA every year via a catch-up contribution.)
We do not know what lies around the bend of life. Make sure that you are prepared for the unexpected.
Conclusion: What to Do When Approaching Retirement
We spend our working years planning ahead for our future retirement. As we approach this professional milestone, there are a number of smart moves that can help you navigate these years as smoothly as possible.
The golden years are a time to enjoy life, doing what brings you pleasure while spending time with those individuals who are most dear to you. Take these smart steps as you approach your retirement to help make sure that you are in a strong financial position to do so.
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