6 Smart Money Moves Experts Recommend Making 5 Years Before Retirement
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- The time just before you retire is critical—errors during this phase can have significant consequences.
- Once you know how much you spend before retirement, do a trial run of living off your anticipated income.
- Ensure your estate planning reflects your current requirements for retirement.
Moving into retirement can bring both excitement and fear. You're getting ready to bid farewell to the profession you've cultivated over many years, yet you'll soon have more opportunities to engage in hobbies like traveling, relaxing at the seaside reading a novel, or socializing with loved ones.
It’s crucial to address both the psychological and emotional elements during this transition phase; however, there are also significant monetary actions required. If you find yourself within the five-year window preceding or following retirement, you enter what professionals in finance refer to as the “red zone.” This stage is critical because choices regarding your savings and investments made at this time can greatly affect your long-term financial security.
Effective retirement planning requires a long-term outlook," explains Ashley Folkes, vice president and wealth manager at financial advisory company Farther. "It’s crucial to alleviate concerns about healthcare expenses, inflation, and unforeseen costs via comprehensive planning.
These are six steps that financial planners recommend taking when you're approximately five years away from retiring.
1. Determine your expenses
The initial step towards transitioning into retirement involves assessing your current expenses to ascertain the amount of funds required when you no longer receive a regular salary.
Avoid the hassle of preparing a detailed budget, advises Evan Beach, who serves as the president and wealth advisor at Exit 59 Advisory. Rather than doing that, he suggests examining your debit transactions over the past two years instead. bank account and dividing by 24.
" This will encompass those occasional items, yet most crucially, provides you with the data needed to determine whether you are progressing as intended," Beach notes.
2. Conduct a test run using your estimated budget.
Folkes suggests that one effective approach to tackle the issue of potentially depleting your savings too quickly or depending financially on your family during retirement is to mimic this future lifestyle by following a proposed budget right now.
He notes that this preliminary test uncovers possible differences between projected and real costs, necessitating required modifications. Should previous monetary limitations, like funding a child’s higher education, have restricted your savings, it's beneficial to identify this prior to retirement so you can still employ strategies for catching up on savings.
3. Maximize your savings
Actually, it might be wise to increase your savings efforts during this period, even if you are already progressing well. The final five years could potentially be your peak earning years, and you might experience reduced household costs since your children may have left home.
Aspiring to boost your savings? High earnings coupled with relatively modest spending make an ideal combination," explains Jessica McNamee, who founded Sirius Wealth Strategies and works as a wealth management advisor. "Over the final five years of employment, individuals should aim to increase their contributions to retirement plans.
However, don’t feel disheartened if that isn’t feasible. According to McNamee, if customers aren't able to contribute the maximum amount Approved by the IRS, she motivates them to contribute whatever they can: "Even a little bit helps more than nothing."
Make certain you have adequate cash reserves set aside. Evaluate the portion of your expenditures that will be offset by steady income sources like Social Security or a pension, along with withdrawals from your retirement funds, to figure out how much liquid cash you ought to keep accessible. (While you’re at it, examine your Social Security income statements To ensure their accuracy.)
4. Examine your investment portfolio
While you should be reviewing your asset allocation — how your investment portfolio is divided between assets such as stocks and bonds — regularly, it's essential to do a check-in when you're approaching retirement.
"Being too risky just before and just after retirement can have huge consequences to you for literally the rest of your life," says Monica Dwyer, senior vice president and wealth advisor at Harvest Financial Advisors. "Huge losses during the five years prior and a few years after your retirement can alter your trajectory, so be aware of those risks and adjust accordingly."
An individual’s asset distribution within their portfolio will vary based on personal circumstances: A person with low tolerance for risk and limited savings might adopt a distinct strategy compared to someone who also avoids risks but has more financial flexibility, or an investor capable of maintaining an aggressive stance despite fluctuating markets. This distinction could make it worthwhile finding a financial advisor Who can assist you in making suitable modifications?
Now is an excellent opportunity to ensure your portfolio is tax-diversified—meaning your funds should ideally be distributed across accounts that have pre-tax, post-tax, and tax-exempt statuses.
Dwyer mentions that it provides additional choices,
5. Address all necessary home repair issues.
It might appear simpler to postpone home repairs until after retirement when you'll have more free time, yet Beach suggests attempting to tackle these tasks sooner rather than later.
Financially speaking, you usually have the greatest flexibility with your budget from when your children move out until you retire," states Beach. "This period presents an ideal opportunity to address major purchases.
By doing this, you minimize the chance of needing to make large withdrawals at the beginning of your retirement when the state of the market is uncertain, he notes.
6. Revise your estate planning documents
If you haven't checked yours lately, it’s a good idea to revisit and revise your estate planning. Given that you’ve probably been accumulating wealth for many years now, you might be approaching the height of your net worth. Therefore, it's essential to think about how your assets should be distributed and under what circumstances. trust , for example, can allow someone to control how, when, and why assets are disbursed to beneficiaries even after the grantor has died, McNamee explains.
She also says to consider your tax situation, and whether your money is subject to federal or state estate taxes now that your net worth has grown.
She explains that most individuals create estate plans when they have young children and limited assets. However, as they approach retirement—typically about five years away—they often find themselves in an entirely different situation: with grown-up children and substantial assets. Consequently, their estate requirements will have significantly shifted, necessitating updates to align their planning accordingly.
Not sure how to begin? Think about consulting a financial advisor.
Finding a financial advisor It doesn’t have to be complicated. You can use SmartAsset’s free tool to find up to three fiduciary financial advisors in your region within minutes. These advisors have been reviewed by SmartAsset and must adhere to a fiduciary standard, ensuring they work in your best interest. Start your search now.
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