About 4 million American baby boomers will reach retirement age every year for the next 14 years. If you’re one of them, the best time to move from passive saving to active planning is now, according to Craig Bartlett, CFP, Division Consulting Manager for U.S. Bancorp Investments. Somewhere between the last chapter of your career and the first chapter of your golden years, he says, is a transitional period known as “pre-retirement.” Although there’s no hard and fast rule for when this phase should start or how long it should last, if you’re not paying attention, it could arrive too late and pass too quickly.
Unfortunately, Americans are having trouble saving for retirement. More than half of the country's private-sector workers have no retirement savings, according to an analysis of a 2013 Survey of Consumer Finances (SCF) published by the U.S. Government Accountability Office in 2015.*
“Pre-retirement for far too many people consists of when they finish their last day at work and find themselves wondering how they’re going to get through the next 20 to 30 years,” Bartlett says. “Well before your retirement date, you should start thinking about what retirement’s going to look like and laying the foundation for it.”
Indeed, whether retirement is five years away or 15, there are things you can begin doing today to make retirement go more smoothly tomorrow. Here are six of them.
1. Envision Your Retirement
Retirement planning should start in your head, not in your bank account, according to Bartlett. “Retirement is analogous to going on the vacation of a lifetime,” he says. “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. 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.”
2. Tighten Your Purse Strings
If you spend pre-retirement stashing extra dollars instead of spending them, you can save a lot, fast. For that reason, pre-retirement is a good time to get back to personal-finance basics — including budgeting, according to Tom Rushin, CIMA, Division Consulting Manager for U.S. Bancorp Investments.
“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 of money for retirement without having a big impact on your lifestyle,” Rushin explains.
3. Consider Downsizing
Liquidating assets also can generate extra cash for retirement. If you live in a home that’s bigger than you need, for instance, consider downsizing before you retire instead of after.
“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,” Rushin explains. Although there are situations when the gain from selling a home may be taxable.
4. Rethink Your Retirement Age
Delaying retirement could yield major benefits, Bartlett and Rushin agree. You can begin collecting Social Security benefits any time between 62 and 70, but the longer you wait, the higher your monthly benefits will be. If you begin collecting at 62, your benefits will be 2.5 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 you delay taking benefits. Plus, extra time in the workforce equals extra income and additional savings.
If you can’t stomach the idea of working full-time much longer, you could consider working part-time in retirement to provide modest cash flow, Bartlett says. Or you could remain in your current position, but transition — if your company allows it — into a consulting role for a couple of years. Both options would allow you to continue earning income while working fewer hours.
5. Maximize Your Savings Opportunities
You probably know that the sooner you can set aside money, the longer it will have to potentially grow. Pre-retirees should consider incorporating Health Savings Accounts, Roth IRAs, nonqualified annuities and life insurance policies into their savings plans. Insurance products purchased during pre-retirement tend to have lower premiums.
Don’t just save — plan to save. It is, of course, inherently difficult to predict how long you will live, how healthy you will be, how much you will need to spend and what the economic landscape will look like when you retire. Even the retirement age can vary widely.
But this doesn’t mean you should avoid planning altogether: Decades of psychological research show that abstract goals are more difficult to accomplish than concrete ones. Without a specific plan of action, people are more likely to procrastinate or avoid their goal entirely.
Deciding when to claim Social Security can also have a big impact. Many people begin collecting early, a decision that can be explained by a psychological factor called loss aversion — when one is motivated by the feeling that they may be missing out on benefits, even despite evidence that claiming at 62 causes them to lose out on money in the long run. There’s also the feeling of ownership over Social Security: if you’ve spent your working life contributing money to the pool, you may feel entitled to get those dollars back as soon as possible. Putting a plan in place ahead of time will make you less likely to fall into these counterproductive mindsets.
Increased savings must be able to grow to be advantageous. Fortunately, federal rules favor pre-retirement investing.
“Beginning at age 50, there are a lot of catch-up provisions that you can start to take advantage of,” Bartlett says.
Depending on your income, for example, starting at age 50 you can contribute up to $6,500 per year to an IRA instead of the standard $5,500. Likewise, you can exceed the annual contribution limit for a workplace savings plan, like a 401(k) or a 403(b), by an additional $6,000 per year.
And if you’re feeling pessimistic about your retirement savings, that could be a good thing. It turns out that being too optimistic can lead to putting off saving money, since you’re less likely to worry about saving this year if you’re optimistic that you can save more next year.
6. Rebalance Your Investment Portfolio
While you’re busy increasing contributions to your retirement accounts, you also should review the allocation of assets within them, according to Rushin, who says common investment wisdom — that you should become more conservative as you age — may not always hold true.
“If you’re going to live a long time in retirement, you’ve got to keep striving to grow your assets,” he says. “You do need to have some money that’s invested conservatively, because you need cash on hand to pay bills, but at the same time it’s wise to have a higher-risk bucket of assets that are pegged for longer-term use.”
From envisioning your ideal retirement to taking steps to actualize it, pre-retirement planning can yield emotional as well as financial returns, according to Bartlett.
“In my experience, most financial mistakes happen not because of bad investment selection or timing, but because the person making them wasn’t emotionally comfortable,” he concludes. “If you plan ahead, you can eliminate a lot of the stress associated with retirement and actually enjoy it.”
*U.S. Government Accountability Office, “Retirement Security: Most Households Approaching Retirement Have Low Savings,” June 2, 2015.
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