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If you are within five years of retiring, you’ve entered what many refer to as the “red zone.” During this critical time, small steps, such as adjusting your investment portfolio or revising your financial strategy, can yield significant benefits, given that you are on the brink of transitioning from saving to spending.
In my practice, I primarily assist retirees and individuals approaching retirement, aiming to provide valuable financial insights relevant to this pivotal stage, alongside lessons gathered from clients who wish they had done things differently in retrospect.
Below are essential financial strategies to consider:
Understanding Your Financial Landscape
1. Assess Your Expenses
I initially hesitated to emphasize this point, as I recognize it can be daunting, but it’s crucial. Instead of spending hours on a detailed budget, allocate just 10 minutes to review the total debits in your bank accounts from the past two years. By dividing that total by 24, you will have a clear picture of your monthly expenses.
This number is vital for determining if you are financially prepared to retire in five years or less. Most individuals I encounter wish to sustain their current spending levels during retirement. It’s also noteworthy that many retirees may find themselves spending more during leisurely weekends than they did while working. Knowing your expenditure is an essential first step.
2. Plan for Healthcare Costs
Retirement brings about various changes in your financial obligations. While you may find savings in categories like clothing, you must prepare for potentially increased healthcare expenses. If you are currently employed, your existing healthcare costs might not have been visible, as they are typically deducted pre-tax.
The extent and nature of your health insurance premiums will vary based on several factors, particularly if you retire before reaching Medicare eligibility at age 65. For self-employed individuals retiring at this age, accessing Medicare could prove significantly cheaper than previous private insurance plans.
Should you find yourself with considerable savings, be aware that Medicare Parts B and D may become costly due to your income level. Investment returns, Social Security, and other sources of income will influence your healthcare expenses post-retirement.
Financial projections are inherently uncertain, especially when forecasting over 30 years. However, they can highlight potential blind spots that warrant attention before retirement. For instance, a noticeable increase in your tax rate due to withdrawals can be managed with proper planning, ensuring you know if you need to save more to maintain your current lifestyle.
3. Address Home Maintenance Promptly
You may have delayed essential home renovations and maintenance tasks. However, many retirees find that the initial years of retirement often come with escalated expenses tied to fixing up neglected home repairs. This can strain your finances and heighten the risk of needing to draw from your savings during market downturns.
Tackling these projects before retirement will allow you to manage them without the added stress of potential disruptions during your newfound free time. Consider completing these tasks now, while you’re still working, to avoid the noise and chaos at home once you retire.
4. Explore Travel Opportunities Soon
The allure of post-retirement travel is enticing, especially to dream destinations. However, taking such trips while still receiving a paycheck can alleviate the financial burden. Many retirees lament not traveling enough during their working years and often wish they had made the most of their available time during that period.
Do not fall into the trap of postponing life’s experiences until after retirement. Remember that unused vacation time is like an unused score in golf—the lower, the better.
5. Design a Structured Week
Have you ever heard someone express a desire to return home after a seemingly perfect vacation? Part of that feeling comes from the comfort of home, but also from the structure and routine that daily life provides. Retirement often strips away your identity, relationships, and sense of routine.
A useful exercise for those nearing retirement involves comparing your current weekly schedule to your ideal week. You can create a visual representation by dividing each day into morning, afternoon, and evening blocks, outlining your existing activities first followed by your ideal pursuits. You may find that even a passion like golf cannot fill every empty slot, indicating an opportunity to enrich your post-retirement life.
Additional Resources
The insights presented here stem from my personal expertise and experiences and do not necessarily reflect the editorial guidelines of any publication. For additional resources, you can verify advisor credentials with the SEC or consult FINRA.
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