When you are in your 60’s you know that your retirement is around the corner. Getting closer to the retirement date can be both exciting and stressful. Everyone wants to have a happy and comfortable retirement.
But when you have a limited number of remaining years you need to take time to understand your retirement picture. You do not want to be one of those people who want to retire, but when that day finally arrives, they just let it happen. You want to be smart and invest time in planning and preparing for a big day. Before you take the plunge make sure that you are ready!
Here is a checklist of helpful steps to take for people in their 60s who plan to retire in the next 5 to 7 years:
1). Understand your retirement lifestyle.
Before talking about finances, I want you to answer the following questions:
- Where do I want to live in retirement?
- What do I want to do in retirement?
Answering these questions is important because it will determine the cost of your retirement. Most people already have a vision of their next phase of life. But not everyone goes into the details of planning it.
Think about retirement in stages. Your early years of retirement are going to be the most active. Then you will settle down and face a slowdown in your activities. Your retirement lifestyle will determine the cost of your retirement.
For example, I love to travel and have a long bucket list of places I want to see and countries to visit. plan on traveling the world when we retire. Once we retire, we are planning to spend half a year abroad traveling. That will take a significant amount of money to cover our travel expenses. But we already have determined a retirement budget for the first 5 years of our travels. Eventually, we will slow down and start spending more time at home. Going on one or two big trips a year will be all we can afford to pay for the cost of traveling.
Being in your 60s is an ideal time to look at your retirement plans. You are close enough to retirement to have a realistic idea of how you want to spend your golden years.
- Where Will You Live When You Retire?
- How to Set Up Retirement Lifestyle Goals
- 5 Common Emotional Stages of Retirement
- Tips for a Smooth Transition to Retirement
2). Finalize your income and expenses.
Once you have a picture of your retirement lifestyle you need to finalize your financial assets and see if you have enough money saved to pay for this life.
Financial experts suggest that you need about 80 percent of your pre-retirement income to maintain the same standard of living in retirement. Suppose my current annual income is $60,000. Multiply that number by 80 percent ($60,000 X 0.8 = $48,000). So, I will need around $48,000 in retirement to live the way I do today.
This number is a good rule of thumb if you do not plan on making any major budget changes when retire. However, not all retirees spend less in retirement. And if I have expensive hobbies like traveling, I will need a higher number.
Now when you are close to retirement, the rule of thumb “80 percent of pre-retirement income” should be replaced with real numbers. This number should include your daily living expenses and the money you want to spend on hobbies and activities.
Sources of retirement income:
When you are working you probably have a single employer and a single source of income – your salary. In retirement, everyone has different sources of income. As a retiree, you receive income from multiple sources:
- Social Security
- Annuity – a guaranteed income you must purchase yourself
Other sources of income:
- Part-time job
- Rental income
Income from your retirement funds:
- Tax-deferred accounts – 401(k), IRA
- Tax-free – Roth IRA, Roth 401(k)
- Taxable investment accounts
- Taxable bank checking and savings accounts
While working, you receive a paycheck regularly – probably every two weeks. When you retire, you might receive income monthly, quarterly, annually, and even irregularly. Getting a clear picture of your retirement income should help to make sure that you have enough money to cover all your living expenses.
I know nobody likes to read about budgeting. But the best advice is to create an estimated retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared if you have a clear picture of your expenses now and how that might change in the future.
When you retire you do not need a lot of things that you did when you were working. The costs of commute, take-out lunches, and business clothes will go down. But you will start spending more money on travel, hobbies, and activities. And your medical expenses will increase with time.
It is important to include big-ticket expenses into the retirement budget as well. Paying for a wedding, buying a new car or a lake house will require a significant amount of money withdrawn from your retirement funds.
If you do not know how to create a retirement budget or organize your finances for retirement, I recommend reading my articles:
- How to Prepare a Retirement Budget in 5 Simple Steps
- 6 Steps Guide to Organizing Your Finances for Retirement
- 5 Ways to Reorganize Your Life to Afford Retirement
- 5 Tips on How to Downsize for Retirement
3). Minimize your debt.
When you are in your 60s make it a goal to pay off your credit card debt, student loans, car loans, home equity loans, and any personal loans before your retirement date. Do everything you can to retire debt-free and even pay off your mortgage if possible.
When you stop working and start living on a fixed income you will need to stretch those retirement dollars as far as you can. How can you enjoy your retirement if you must spend a portion of your retirement income to make mortgage or debt payments each month?
If you are carrying a high-rate credit card debt you are putting a lot of pressure on your finances. There are two most popular debt payment strategies – the snowball strategy and the avalanche strategy.
The snowball strategy works by paying off the credit card with the smallest balance and then working your way up until all credit card debt is settled. The avalanche strategy allows you to pay off your highest interest rate debt first and then work it down. I recommend focusing on your highest-interest debt first because the longer it takes you to pay it off, the more money you will pay towards interest.
And if you can help it, do not add any more debt to the pile while paying off old debts.
Over the years Roman and I have accumulated $170,000 in debt – car loans, student loans, construction loans, and medical expenses. It took us 21 years (from 1999 to 2020) to pay them off. The only debt we have left is the mortgage. We try to increase our payments towards the principal. Recently, we refinanced but I do not think we will finish paying it off in full before we retire.
When you are in your 60s, one of the smartest things you can do is to pay off your mortgage before you retire. A mortgage-free retirement is usually best because you can spend more money on the fun stuff. Retirees often have to withdraw money from their retirement funds to cover their mortgage payments.
Unfortunately, those withdrawals typically trigger more taxes. That is why it is better to pay down your mortgage while you are still working, so you can keep your housing expenses low.
Look at your mortgage balance and try to figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly. Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments. In addition to that look into refinancing your mortgage to get a lower rate and to reduce your monthly payments.
However, for many people paying off the house is not financially possible. When a payoff is not feasible, you should reduce mortgage debt by refinancing it. We recently refinanced our mortgage with AmeriSave Mortgage Corporation at 2.5 percent. It helps to lower our monthly payments and save us $500 a month.
When you are in your 60s, getting out of debt should be your priority. At this age, you have to make the most of your remaining years in the workforce to increase your retirement savings within the next 5 to 7 years.
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4). Maximize your retirement savings.
When you are only a few years away from retirement, being short on retirement savings can be problematic. The best option is to start spending less so you can put more money into your retirement savings.
Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA.
The 2021 contribution limits are:
- $19,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000.
- $6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).
When you are getting closer to retirement, maximizing your traditional 401(k) and IRA accounts is important but not always enough. While you are still working you can make it a priority to save even more money in your Roth IRA account, emergency fund, and perhaps taxable investment funds if possible.
Another way to increase your retirement savings is to work longer. The goal is to make the most of your working years. You need to maximize the time you have left. Earning an income for a few more years could improve your financial security in retirement.
I am sure you may not like to hear this, but the fastest way to save more money for retirement is to cut your expenses. If you start practicing how to curb your spending and live on less money today, it will make your life easier in retirement.
Many people in their 60s enjoy the life of empty nesters. When the kids are gone, they start spending more on luxuries. It is easy to get used to a luxurious lifestyle, start spending more and saving less. However, it will be tricky to save money and even to retire if you let your spending get out of control. After all, the less you spend the more you save.
5). What is your retirement income plan?
After decades of earning and saving money for retirement, you need to shift gears and start spending what you have saved. And being just a few years away from retirement date is the best time to find out how much income you can pull from your nest egg.
There are three sources of your retirement income:
- Social Security
- Pension income (if you are the lucky one)
- Income from your investments and savings
When you stop working you need money to pay for your retirement expenses. After you retire, you will receive Social Security payments. But that will be only a portion of your retirement income. You will start receiving payouts from your retirement savings.
But you will have to figure out a strategy of how to withdraw money from your retirement funds. This withdrawal strategy should give you the income you need from your first month of retirement through your 80s or 90s.
The “4% rule” is a well-known rule of thumb and a good starting point. According to this rule, you can withdraw 4% of your account balance.
For example, if you have $500,000 saved in retirement funds you can withdraw 4% of that amount – $20,000 in the first year of your retirement. You can adjust that number every year for inflation but following this rule should help you not to run out of money for at least 30 years.
Though, you have to be aware that there are a few problems associated with following this rule:
- Return risk – the risk of earning smaller returns than it was in the past.
- Longevity risk – the risk of living a long time and running out of money at the end of your life.
- Series of return risks – the risk of a market downturn during your early withdrawal phase.
Even it is not perfect, the 4% rule is a good starting point you can adjust with time.
6). Decide how to cover medical expenses.
You will become eligible for Medicare at the age of 65. If you plan to retire before age 65 you will need to find a separate plan to cover your medical expenses.
Your health insurance provided by your employer ends when you stop working. Even though your current employer promise to cover your health insurance in retirement does not mean they will not change their mind in the future or reduce coverage significantly. Thus, you will need to find and buy your health insurance coverage. Individual health insurance is expensive and could cost more than $1,000 a month. Make sure to shop around for the best prices.
Even being eligible for Medicare brings its own set of challenges because it does not cover all medical expenses. Medicare does not cover premiums, deductibles, co-pays for doctor visits, dental and vision care, long-term care, personal care, and other expenses. This means you need to include healthcare costs in your retirement budget.
7). Protect yourself and those you love.
Have you thought about how to protect yourself as you age and how to help your family care for you if you need it? When the time comes that you need assistance who will manage your finances, your medical care, and your regular day-to-day life? I understand that these are difficult topics to discuss. But it is a part of reality to grow old. And if you love your family you will plan for it, so your loved ones will not struggle and may have to scramble to care for you.
I write often in my articles about the cost of medical expenses in retirement. I want to remind my readers that healthcare is the second biggest expense in retirement after housing and you need to plan for it. Medicare is not free. It does not cover all your medical expenses and does not pay for long-term care.
Long-term care insurance is the most recommended way of planning for future expenses. It will cover nursing homes, assisted living facilities, and in-home care. It will help you not to be a financial burden on your family if that time comes. And you do not want to leave your husband or wife with nothing because the entire nest egg was used up taking care of you.
8). Think of tax strategies.
In retirement, we still need to pay taxes, but not all sources of income are taxed the same.
Withdrawals from tax-deferred accounts such as 401(k) plans and traditional IRAs will be taxed as an ordinary income. Withdrawals from Roth IRAs and Roth 401(k) plans will be tax-free. If you want to withdraw money from taxable investment accounts, you will have to pay capital gains taxes.
In addition to taxes, you need to remember about required minimum distributions (RMD). You will face this requirement when you reach the age of 72. By the US tax law, you are required to start taking withdrawals from your retirement accounts such as 401(k) and IRA (excluding Roth IRAs). The amount you must withdraw will be determined by the IRS. If you have more than one retirement account, you can withdraw money from each account or total RMD from just one account.
It is important to remember that your RMD withdrawals might push you into a higher tax bracket.
Think about what tax strategies will work for you the best. If it makes more sense, you can roll your assets into Roth IRA before you reach RMD age. Another option is to start taking withdrawals from your retirement accounts before RMD kicks in so you would not face the sudden jump in taxes.
9). Reallocate your investments.
The last few years have been volatile years for financial markets. Many people pulled money out of the stock market. When you are close to your retirement date is tempting to stay away from stocks to reduce the risk of losing money in your retirement funds.
But keep in mind that stocks provide growth. And investing in growth is important at this stage of life. If you retire at 65 and spend 20 to 30 years in retirement, you need to have enough growth to make your money last that long.
Put it on your checklist to review your asset allocation and make sure your portfolio is diversified and invested for growth. What I am suggesting is to have a balanced mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals.
Your 60s is a decade full of transitions. Perhaps your kids are out of the house, and you are thinking about downsizing. Perhaps you would like to relocate to a warmer climate. Medicare will kick in at 65 and you may also find yourself ready to leave the full-time job that defined so much of your daily life. Somehow you have to navigate the various transitions in this new period of your life.
Regardless of how you plan the transition to retirement, your most precious asset at this stage of life is your attitude. How you envision your future is everything. A positive attitude will carry you forward into the future and your golden years.
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