“Tower, this is Bill. I’m on the final approach to retirement and need landing instructions. Do you copy?”
“Roger, Bill. Sending course corrections now. Then you are clear to land.”
Retirement is not something that just happens when you tell your employer goodbye and walk out the door. It’s a constant process of planning, adjusting, correcting, and keeping your eye on the end game. If you’re within 10 years of retirement, it’s time to review your flight plan to ensure a soft landing. Here’s a checklist of to-do’s before you land.
Set Your Retirement Date
There’s nothing like a specific date to keep you focused. Without a target, you can get distracted, and money that should be saved for retirement gets redirected to “things that come up,” and you end up with less retirement money than you wanted.
Estimate How Much Retirement Income You’ll Need
Calculating, as best you can, how much retirement income you’ll need is another way of staying focused. Knowing how much you’ll need allows you to calculate how big your retirement savings pool needs to be in order to generate that income.
There is a cycle to retirement spending. Most people spend a little more in early retirement, less as they age, and then a lot more if their health declines. While it sounds high, assume that you’ll need as much income in retirement as you have while you’re still working.
Get Out of Debt
According to the Employee Benefit Research Institute (EBRI), almost 69% of families headed by people ages 55 and over have debt. The average amount of debt is $88,481. Eliminating debt frees up money to save and also reduces the amount of income you have to have in retirement.
One method of getting out of debt is called the Debt Snowball Method. You start by focusing on the smallest debt you owe. Continue making the minimum payments to that balance. Pay extra if you can. Then, when it’s paid off, you roll the money you were paying on that debt into the next smallest bill. As each debt is paid off, the freed-up amount for that creditor is applied to the next smallest debt until you are debt-free.
This is simple, but it does require disciple and commitment. You’ll be tempted to stray from the plan. That’s why you start with the smallest balance rather than with the highest interest rate. Seeing an entire debt wiped out and a balance go to zero will keep you motivated.
Find More Money to Save
I know, you’ve worked hard all your life and you’ve been saving toward retirement for a long time. But put on a push to add as much to your retirement savings in these last few pre-retirement years as you can.
- Look for ways to cut expenses and put that money away.
- Save all tax refunds, raises, bonuses, inheritances, or money from a side hustle.
- If you don’t mind giving up some time, consider a second job.
- Consider ways to create sustained passive income that will carry over into retirement.
- Sell collectibles you’re not attached to, or sell that old car you thought you’d fix up but never got around to. Be honest with yourself about whether you ever will.
Take Advantage of Catch-Up Contributions
You want to save more money and the government wants you to save more money. Beginning at age 50 you’re eligible for catch-up contributions—additional money you can save on top of your maxed out retirement contributions.
For 2022, the maximum annual 401(k) contribution is $20,500. For those 50 and older, you can also make a $6,500 catch-up contribution for a total of $27,000 added to your retirement savings.
In 2022, the maximum IRA contribution is $6,000 with an additional $1,000 catch-up contribution for a total of $7,000 added to your retirement savings.
Many people are eligible for both 401(k) and IRA contributions.
Identify Retirement Income That Won’t Come Out of Retirement Assets
This is another way of deciding how much you’ll have to pull out of your retirement assets. This type of income can come from:
- Social Security
- Pension
- Annuities or insurance
- Rental Income
- Part-time or Full-time job
- Home equity / Reverse mortgage
Check Your Social Security Earnings Record
The Social Security Administration keeps a running total of your Social Security wages for each year. The number is supposed to be accurate, but mistakes can be made. That’s why it’s important to check the numbers for accuracy.
There is a time limit for making corrections. The SSA is very clear. The official wording says, “An earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived.”
Checking your earnings record ensures that when you retire, your Social Security check is as much as it’s supposed to be.
Plan for Out-of-Pocket Medical Expenses
There are three medical scenarios that must be considered:
- Early Retirement-If you retire early where will your medical care come from? You’re not eligible for Medicare until 65, so if you retire before that will you have continued medical coverage from your former employer, will you have medical coverage from a spouse who is still working, will you buy an individual medical policy until you’re eligible for Medicare or will you have COBRA insurance. This can be costly and destroy all the retirement planning you’ve done.
- Medicare—there is a persistent myth that Medicare pays for all your medical care. Absolutely NOT true. Medicare pays for 80% of Medicare-approved expenses. Anything past that comes out of your pocket, which can also put a dent in your retirement income. You should consider a Medicare Advantage Plan or a Medicare Supplement plan.
- Long-term Care—What happens if your health declines and you need long-term care. Do you have long-term care insurance? If not, you’ll have to pay for those expenses yourself. In 2022, the national average annual cost of long-term care in a semi-private room is $93,075. The average annual cost of a private room is $105,850.
Should You Move
Moving to another state may be beneficial to your retirement plan. There are eight states with no state income tax. Some states don’t tax pensions. Others don’t tax your Social Security. You may decide to stay where you are, but you should spend a little time seeing what other parts of the country have to offer.
Don’t Count on an Inheritance
According to Charles Schwab, 53% of young adults believe their parents will leave them an inheritance. In reality, only 21% of people actually receive an inheritance. There are several reasons why.
There’s been a generational shift in attitude about leaving an inheritance to kids. The World War II generation wanted to leave something for their kids, and would even sacrifice to make sure of it. Baby Boomers adopted the theory that they would enjoy life, and if there was anything left for the kids, well, that would be just fine.
Perhaps the biggest reason so few people receive an inheritance is because of medicine. Because of all the medical advances in the late 20th century and into the 21st century, people are living much longer, often well into their 90’s. Longer life means more years a person has to draw income from their retirement savings.
And it’s the new and more efficient medical technologies helping people live longer that are driving up the cost of medical care. Just in the last 3 years medical inflation was 6% in 2020, 7% in 2021, and it’s expected to be 6.5% in 2022. Inheritances may soon join the list of endangered species.
The longer you wait to make course corrections to your retirement plan the more difficult it will be, so, don’t put it off. Do it now. The last thing you want is a crash landing.