5 Financial Actions To Take A Year Before Retirement

With retirement on the horizon, you may look forward to hanging up your work shoes and embracing a more relaxed lifestyle, free from the worries of assignments and projects. However, the year before retirement can be full of ups and downs. Approaching retirement can bring a mix of feelings – excitement for a slower life and worry about the changes ahead. You are likely to encounter various personal, professional, and financial challenges. Among these, the financial aspect is particularly crucial. To ensure a seamless transition into retirement, it is imperative to take decisive financial actions well in advance.

Seeking advice from an experienced financial advisor can offer valuable guidance during this time and help you pinpoint the right things to do before retirement to ensure a smooth transition. This article will explore five key financial actions you should take in the year before retirement to ensure your retirement is just as you plan it to be.

Below are 5 financial actions to take the year before retirement:

Action 1: Plan how and when you draw your Social Security benefits

One of the first things to do before retirement is planning how and when to draw your Social Security benefits. With various factors to consider, including your age, financial situation, and employment status, making informed decisions about when to start collecting benefits can significantly impact your financial security in retirement.

You can begin collecting Social Security payments at the age of 62. However, the trade-off for early withdrawal is receiving smaller monthly checks. On the other hand, waiting until your full retirement age, usually between 66 and 67, depending on your date of birth, ensures you receive your full benefit amount every month for life. Waiting beyond your full retirement age can further increase your benefits by 8% each year until you reach age 70. This delayed retirement credit can significantly boost your monthly payments, providing greater financial security in your later years. The timing of when you choose to access your Social Security benefits can have a significant impact on their overall value. For instance, if you opt for early withdrawal at age 62, you will receive benefits based on the value of your Social Security fund at that time. Conversely, delaying withdrawal until age 67 results in obtaining 108% of the monthly benefit, while waiting until age 70 yields 132% of the monthly benefit.

When considering when to withdraw Social Security benefits, certain circumstances may warrant early withdrawal despite the potential drawbacks. Here are scenarios where early withdrawal may make sense:

You do not have enough savings: If you find yourself in a financial crunch and have exhausted other sources of income, opting for early Social Security benefits can provide much-needed financial relief. While this may result in smaller monthly checks, it can help cover essential expenses during challenging times.
You have enough savings: If you have ample savings and investments to maintain your lifestyle in retirement, and Social Security benefits do not impact you much, you can withdraw your benefits at any time you like, even early if you prefer that.
You are terminally ill: If you are facing a terminal illness and expect a shorter life expectancy, opting for early Social Security benefits can provide financial support during your remaining time. While this decision may result in reduced overall benefits, it can alleviate financial stress and allow you to focus on quality of life during your final days.
You have too much debt: If you are burdened with significant debt that is impacting your financial stability, early Social Security benefits can help alleviate some of the financial strain. While this may result in lower monthly payments, it can provide relief from debt obligations and allow you to manage your finances in retirement better.

Drawing Social Security benefits early at age 62 may seem appealing if you have an immediate need for income. However, it is essential to understand the long-term implications.

You must also understand that to qualify for Social Security benefits, you must have accumulated at least ten years of work credits, with a maximum benefit of $3,822 for someone at full retirement age in 2024. If you have worked for more than 35 years, your benefits are calculated based on your 35 highest-earning years. Continuing to work full-time or part-time beyond this point can boost your earnings and subsequently increase your benefit amount. Additionally, your income and employment status can affect your Social Security benefits. If you earn more than the annual earnings limit, your benefits may be reduced if you are below full retirement age. However, once you reach full retirement age, your benefits will not be affected, regardless of your overall earnings. Understanding the earnings limits is essential, especially if you plan to continue working while drawing your Social Security benefits.

Ideally, if you are in a comfortable physical and financial position, delaying Social Security benefits can be a prudent strategy. Assessing your health and wealth and planning not to rely solely on Social Security income immediately upon retirement can also provide greater financial flexibility and security in the long run.

Action 2: Check your portfolio asset allocation

As retirement draws near, you may wonder how to prepare your finances for retirement. It is crucial to reassess your investment strategy to ensure that your financial goals align with your risk tolerance and anticipated needs in retirement. One of the primary financial actions to take a year before retirement is to evaluate and adjust your portfolio’s asset allocation accordingly.

Your risk appetite naturally decreases as you approach retirement age. After all, this is the period when you will be relying on your investments to provide a steady stream of income to support your lifestyle. Therefore, reviewing your portfolio and making necessary adjustments to mitigate unnecessary risks is prudent. The first step in this process is to assess your current asset allocation. Take stock of the various investment vehicles you hold, including stocks, bonds, mutual funds, real estate, and any other assets. Evaluate the proportion of each asset class in your portfolio and consider how it aligns with your retirement objectives. It is essential to identify and divest from investments that carry high levels of volatility and risk. While high-risk stocks may have provided significant returns during your working years, they may not be suitable for the more conservative approach required in retirement. Selling off such volatile assets can help safeguard your retirement savings from sudden market downturns and preserve the wealth you have accumulated over the years.

However, it is important not to abandon stocks entirely. Despite their volatility, stocks historically have provided higher returns over the long term compared to several other asset classes. Therefore, maintaining a certain allocation to stocks can help ensure the growth potential of your portfolio, albeit with a more conservative stance.

To reallocate your assets effectively, you can consider moving a portion of your portfolio into lower-risk options such as bonds, Certificates of Deposit (CDs), and money market accounts, among others. These investments offer more stability and predictable returns, making them suitable for retirees who prioritize capital preservation and income generation. In addition to traditional bonds and CDs, Treasury Inflation-Protected Securities (TIPS) can also be a valuable addition to your retirement portfolio. TIPS provide protection against inflation. They adjust their principal value in line with changes in the Consumer Price Index (CPI) to ensure that your purchasing power retains its value over time and you do not expose your money to high risk. However, remember that while reallocating your assets, it is crucial to maintain adequate diversification within your portfolio. Diversification distributes risk across different asset classes and reduces the impact of market volatility on your overall portfolio performance. Maintaining a diversified portfolio can help balance risk and return potential even as you shift towards a more conservative investment approach.

Seeking guidance from a financial advisor can be helpful during this process. A knowledgeable financial advisor can assess your situation, risk tolerance, and retirement goals to develop a customized investment strategy tailored to your needs. They can provide recommendations on asset allocation, risk management, and portfolio rebalancing to ensure that your retirement savings are adequate for the years ahead.

Action 3: Ensure your healthcare goals are achieved

Ensuring your healthcare goals are achieved is another essential thing to do before retirement. You need to carefully plan for your future healthcare needs, as medical expenses are likely to become a significant part of your budget during retirement. Taking proactive steps to understand and prepare for healthcare costs can help you maintain your financial security and peace of mind in your golden years.

One of the key considerations when planning for healthcare in retirement is understanding Medicare, the federal health insurance program for people aged 65 and older. Medicare eligibility typically begins at age 65 for most healthy adults, but if you plan to retire before then, you will need to explore options for private insurance until you become eligible for Medicare.

You need to enroll in Medicare during the initial enrollment period. This period spans seven months and starts three months before your 65th birthday and ends three months after the month you turn 65. During this time, it is essential to educate yourself about Medicare’s four parts (Parts A, B, C, and D). You must also know how and when to sign up for each and their premium costs. When evaluating Medicare plans, you can consider various factors to determine which plan best suits your needs and budget. You can start by assessing the benefits offered by each plan and comparing them to determine which provides the most comprehensive coverage for your healthcare needs. Additionally, compare the monthly premiums of different Medicare plans with what you are currently paying through your employer-sponsored health insurance.

It is also important to consider potential coverage gaps in Medicare and whether your existing healthcare providers accept Medicare. Understanding these gaps can help you prepare for out-of-pocket expenses and offer access to the healthcare services you need.

If you desire more extensive coverage than what Original Medicare provides, you may consider enrolling in a Medicare Advantage plan. These plans offer additional benefits over the Original Medicare coverage, such as vision, chiropractic care, dental, acupuncture, over-the-counter benefits, and fitness resources. Assessing your healthcare needs and preferences can help you understand whether a Medicare Advantage plan is a suitable option for you.

In addition to Medicare and private insurance options, you may also explore other avenues for healthcare coverage in retirement. For instance, you might have the option to join your spouse’s workplace health plan or purchase a policy through the federal healthcare marketplace HealthCare.gov. Alternatively, you could temporarily continue coverage through the Consolidated Omnibus Budget Reconciliation Act (COBRA), although it is important to note that your former employer may not contribute to the premiums, which can potentially lead to higher costs.

Furthermore, long-term care insurance is also prudent for retirees. Long-term care insurance can help cover expenses associated with nursing home care, hospice care, and assistance with daily activities such as cooking, bathing, walking, and dressing. Investing in long-term care insurance can provide financial protection against long-term care service costs and ensure that you receive the support you need as you age without being dependent on anyone financially.

Action 4: Create a budget and an income plan

Creating a comprehensive budget and income plan becomes increasingly crucial to ensure financial stability and peace of mind during your golden years. The year before retirement is an opportune time to lay the groundwork for your retirement income needs that reflect your changing lifestyle and financial priorities.

Retirement brings about a significant shift in your expenses compared to your working years. With no work, your expenses associated with commuting, work attire, dining out, and other work-related costs diminish. However, you will likely see new expenses, such as increased healthcare costs, travel expenses, and potential relocation costs if you plan to move closer to family or to a more retirement-friendly location. One of the first steps in creating a retirement budget is to assess your expected post-retirement lifestyle and associated expenses. Consider factors such as your hobbies, travel plans, healthcare needs, and any anticipated changes in your living arrangements. This thorough evaluation will provide a clearer understanding of your financial requirements in retirement and enable you to plan accordingly.

Taxes remain an essential consideration in retirement budgeting. While your income may decrease in retirement, taxes can still impact your overall expenses. Be sure to account for income taxes on retirement account withdrawals, Social Security benefits, and any other taxable income. Additionally, consider state taxes if you plan to relocate, as tax rates vary across states. Healthcare expenses typically increase with age, making it imperative to budget for medical costs in retirement. Account for premiums, deductibles, copayments, and any out-of-pocket expenses associated with healthcare services and prescription medications. Long-term care costs should also be factored into your budget, either through long-term care insurance or other financial planning strategies.

Carefully planning your income sources ensures that you do not overextend your retirement savings and allows for optimal utilization of your resources. It minimizes the risk of outliving your savings, known as longevity risk. This ensures that your savings last your lifetime and support you for as long as you live. Developing an income plan is also essential for deciding when to withdraw funds and how much to withdraw to maximize your income and minimize taxes. Additionally, it is important to evaluate if your income plan needs any potential adjustments. For example, if your budget reveals a shortfall in your income, you may choose to work part-time during the early years of retirement to supplement your finances. Working in the initial years of retirement not only provides additional income but also allows you to delay tapping into retirement accounts and potentially maximize their growth. However, it is important to understand how your additional income from a part or full-time job affects Social Security benefits to optimize your claiming strategy and maximize your lifetime benefits. Keep in mind that Social Security may be subject to taxes depending on your total income, making it all the more important to plan well in retirement.

If you do not choose to work post-retirement, you can take advantage of the low-income years that come after retirement and consider partial Roth conversions. You can live off cash and taxable investment accounts during this phase. Partial Roth conversions during your low-income years post-retirement can be particularly advantageous, as they keep your overall income low. This way, you can avoid higher tax brackets, making Roth conversions more tax efficient. With a Roth account, your withdrawals will not be taxed later, and you can enjoy more tax freedom in the years ahead.

Action 5: Create a contingency plan

Creating a contingency plan is a critical financial action to take the year before retirement to ensure your loved ones are secure in the event of any unforeseen circumstances. Creating a comprehensive contingency plan involves addressing various aspects of financial and estate planning to protect your family’s well-being and preserve your legacy.

Life insurance safeguards your family’s financial security in the event of your untimely demise. Consider purchasing a life insurance policy to provide a financial cushion for your spouse or dependents in your absence. Assess your coverage needs based on your spouse’s financial obligations, outstanding debts, and future expenses such as mortgage payments, college tuition, and living expenses. In addition to life insurance, you can explore the potential benefits of Social Security spousal benefits for your spouse. Social Security provides survivor benefits to eligible spouses upon the death of a retired worker. Understanding the rules of Social Security benefits and spousal entitlements can help you maximize your family’s financial resources.

Open communication with your spouse is also vital when creating a contingency plan. Discuss your life insurance coverage, Social Security benefits, and other financial arrangements to ensure that both of you are informed and involved in decision-making. Working together helps you develop a comprehensive strategy that addresses your family’s needs and priorities effectively.

Estate planning is also an essential component of creating a contingency plan for retirement. Drafting a will allows you to specify the conditions regarding the distribution of your assets after your passing. Be sure to update your will regularly to accommodate any changes in your financial situation, family dynamics, or estate planning goals. You can also consider establishing a trust to protect your money and other assets while providing for your loved ones according to your wishes. Power of attorney and healthcare directives are also essential documents that designate trusted individuals to make decisions on your behalf in case of physical and mental incapacity. This helps ensure that your financial affairs are managed according to your wishes and that your medical treatment aligns with your values and preferences.

Reviewing and updating the nomination on your retirement accounts is also crucial to ensure consistency with your estate plan. Designate beneficiaries for your retirement accounts and make sure they align with the beneficiaries specified in your will and other estate planning documents. This coordination helps prevent conflicts and ensures a smooth transfer of assets to your heirs, bypassing probate and minimizing delays in accessing funds. Seeking guidance from a financial advisor can be invaluable when creating a retirement contingency plan.

To conclude

A lot of people look forward to retirement as it marks a carefree and calm period in their lives. However, in the whirlwind of emotions and preparations that come with the year before retirement, it is crucial not to overlook the financial aspects of this significant life transition. While it can be easy to get caught up in the excitement and anticipation of retirement, taking proactive steps to address key financial considerations can streamline your affairs and set the stage for a fulfilling retirement experience.

Use the free advisor match service to get matched with experienced financial advisors who can guide you on what steps to take prior to retirement to enable you to retire smoothly. Answer some simple questions about your financial needs, and our match tool can help connect you with 1 to 3 advisors who can best fulfill your financial requirements.