You've experienced the trauma of receiving your first AARP membership card in the mail, and followed that with the shock of realizing you are getting closer to retirement. Have you adequately prepared for, or even seriously thought about, your retirement years? If not, it's time to do so.
Here are six steps to help you verify that you are on the right retirement path, or to help you get on track if you're not.
1. Start Prioritizing Expenses – As the old saying goes, if you are in a hole, the first step is to stop digging. Prioritize your expenses now and try out a more frugal lifestyle. Not only will this help you save for retirement, it assists you to assess realistically what's important to you. Start taking advantage of all discounts available to you and put that AARP card to use.
2. Plan Your Retirement Timing – How long can you handle working? It's not uncommon for retirees to become bored and re-enter the workforce. Do you plan to work part-time past retirement? (If so, be sure to check income limits to make sure you don't reduce your benefits.) Take this into account as you move on to the next steps.
3. Take Full Advantage of Retirement Accounts – 401(k)s and IRAs allow catch-up contributions after age 50. For 2016, individuals can add an extra $6,000 ($24,000 total) in contributions to a traditional 401(k) or $3,000 to a SIMPLE 401(k), and IRAs allow an extra $1,000 ($6,500 total). If you are not contributing to your limit, you probably should do so ASAP.
Be sure the 401(k) portfolio meets your needs. If you are starting late, you can't afford to be too conservative. You may need a larger ratio of stocks compared to bonds to potentially capture higher returns. Hopefully, your nest egg will grow quickly in this way, but remember there will be additional risk. Then, as you get closer to actual retirement, you’ll want to consider dialing back the risk and rebalance more towards safety.
4. Deal With Debt – At this stage, you should be winding down debts such as mortgages and college tuition. If you have remaining debt, pay it off as soon as possible by tackling the higher interest rate debt first. It may seem like you are going in reverse, but you are saving on overall interest charges. Reduce expenses as much as possible to pay off debt without shortchanging retirement plan contributions.
5. Assess your Situation Honestly and Set Realistic Goals – The vast majority of people underestimate retirement expenses. For example, it's been projected by Fidelity in 2015 that an average 65-year old couple will spend between $245,000 on collective health care costs during the balance of their lives beyond what Medicare will cover.
It's important to assess realistically your retirement expenses and income to determine the amount of money you will need for the next stage in your life. Add a large cushion for unexpected expenses – then add more. Very few people overestimate unexpected expenses.
Ask all the questions you can possibly think of. What is your projected Social Security benefit? Do you have retirement income from a pension? Are you planning on selling your house and downsizing, and if so, is your estimate of the proceeds realistic? Do you plan to travel extensively? Do you have expensive pastimes like golf?
Don't be afraid to tackle the hard questions, especially with regard to healthcare. What are your preferred options if you reach the point that you can't take care of yourself, or your spouse is unable to do so, because of your specialized care needs? Would long-term care insurance give you peace of mind for the cost? Are you likely to be caring for aging parents?
6. Set your retirement goals and keep them realistic - If you are starting your planning at age 50 and you wanted to retire on the French Riviera or buy a Caribbean island, it is probably too late for that. (However, if you choose to retire in a developing nation like Mexico, Costa Rica, or Belize, your money can go a lot further.) Even staying put in your current location, it is not too late to live a comfortable retirement including an active lifestyle and hobbies that you enjoy, providing you live sensibly.
It's hard to evaluate objectively your own situation, so don't be afraid to seek professional advice in planning for retirement. The initial assessment can be frightening, but having a realistic plan to follow is likely to reduce stress and help you focus on your retirement goals. With good planning and preparation in your 50's, you may reap the benefits with a relatively stress-free retirement in your 70's and beyond. But don’t forget to take care of your health so you can enjoy your retirement!
Brad is a Registered Representative with, and Securities and Advisory Services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. CA Insurance License #: 0B22199.
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