Sandwiched between your career’s final chapter and retirement is a transitional period known as “pre-retirement,” according to LeAnn Erenberger, Wealth Management Advisor for U.S. Bancorp Investments. Although there’s no hard and fast rule for when this phase should start, if you’re not paying attention, it could pass you by and leave you ill-prepared for what comes next.
“Pre-retirement too often consists of when you finish your last day at work and wondering how you’re going to get through the next 20 to 30 years,” Erenberger says. “Well before your retirement date, you should start thinking about what retirement’s going to look like and laying the foundation for it.”
Here are seven things you can consider doing today that may help make retirement go more smoothly.
Retirement planning should start in your head, not in your bank account. “Planning for retirement is like planning for a vacation. Most people want to know where they’re going, where they’re going to be staying and what attractions there are to see along the way,” Erenberger says. “If you sit down and get a clear understanding of what’s important to you, you’ve got a much greater chance of accomplishing that.”
“If you focus on paring back instead of spending during pre-retirement, you can save a lot, fast,” says Erenberger. Pre-retirement is a good time to get back to personal finance basics like budgeting.
“If you track your spending for a few months to see where your money is going, you may discover opportunities to save a significant amount for retirement without having a big impact on your lifestyle,” she adds.
Liquidating assets also generates extra funds. For example, if you live in a home that’s bigger than you need, consider downsizing before you retire.
“Let’s say you’ve got a $700,000 house and $500,000 worth of equity. If you can move into a $300,000 house, there’s $200,000 right there that you can put to work in the market,” Erenberger says, although the gain from a home sale may be taxable.
You can begin collecting Social Security benefits between 62 and 70 but waiting longer increases your monthly benefits. If you begin collecting at 62, your benefits will be about 26 percent lower than what you’re eligible to collect at your “full retirement age” of 66 or 67, depending on when you were born. After you reach your full retirement age, Social Security benefits increase 8 percent each year until age 70. Plus, working longer equals extra income and savings.
If working longer full time isn’t an option, working part-time in retirement could provide modest cash flow, Erenberger says. Or you could remain in your current career field and possibly transition into a consulting role.
Read more about pursuing an “encore career” in retirement.
“Beginning at age 50, there are a lot of catch-up provisions that you can start to take advantage of,” Erenberger says.
Depending on your income, starting at age 50 you can contribute an additional $1,000 per year to an IRA. Likewise, you can add an extra $6,500 to the annual contribution limit for a workplace savings plan, like a 401(k) or a 403(b).
Healthcare is typically one of the biggest expenses in retirement. And while Medicare provides basic healthcare coverage for most retirees, it isn’t free and it doesn’t cover everything.
A Health Savings Account (HSA) can help you accumulate savings in a tax-advantaged way while you’re still working, giving you a source of healthcare funds in retirement. You can no longer make contributions to an HSA once you enroll in Medicare, you can use the funds to cover insurance premiums and other out-of-pocket expenses.
Another way to offset expenses is long-term care insurance (LTCI), which can help cover services received in your home, through an assisted living facility or a nursing home. Start shopping for LTCI in your 50s, with a view to purchasing a policy by your early 60s. By starting early, you may reap significant savings.
As your focus is shifting from wealth accumulation to generating income that lasts through your lifetime, you may want to review and adjust your investment strategy.
“It’s important to know where your secure source of income is coming from,” Erenberger says. “You may need to adjust your investment portfolio in a way that’s appropriate for your risk tolerance, income needs, and longer term goals for your funds.”
Developing a plan for your retirement can yield both emotional and financial returns.
“Many financial mistakes happen not because of bad investment selection or timing but because the person making them wasn’t emotionally comfortable,” says Erenberger. “If you plan ahead, you may be able to eliminate a lot of the stress associated with retirement and truly enjoy it.”
Find more resources for pre-retirement in our retirement planning toolkit.