Retirement may seem far away, but those who are closing in on it can tell you that it comes faster than you think. What you do in the last 10 years before you retire can make an enormous difference in how comfortable your retirement years will be.
“From 55 to 65, you’ve got time to really make a difference,” says Mari Adam, a financial planner in Boca Raton, Florida. “If you don’t do that thinking till you’re 65, it’s kind of too late.”
It makes sense to start with an assessment of where you are. If you haven’t saved an amount equal to six to eight times your desired annual income in retirement, Adam says, it’s time to increase your savings. To do that, you may need to consider downsizing now. That could mean moving to a smaller home, taking fewer vacations or going out to dinner less often.
“It’s about choices,” says Linda Lubitz Boone, president of the Lubitz Financial Group in Miami. People who choose to live well now may not be able to live the same way once they retire. “Nobody wants to cut back on the lifestyle expenses. But it’s the thing that they have the most control over.”
Many people think they should transition to more conservative investments as they approach retirement. But being too conservative could mean running out of money.
“You need growth,” Adam says. “You’ve got to be getting some serious growth and income now.”
Failing to generate enough growth could majorly derail your retirement plans. “You’re 55. You have a lot more than 10 years. You have the rest of your life,” Boone says. “You’re going to fail and run out of money most likely if we invest your money conservatively.”
Here are nine financial steps to take as you come down the final stretch before retirement.
Increase your savings. You want to make the most of the last years of full-time earnings. Start by increasing the amount you put in tax-advantaged investments, including your 401(k), IRA, SEP-IRA, Keogh, 403(b) or other plans. You can make larger contributions to many of these plans once you reach a certain age, and if you can, you should. “You should pay yourself first,” says Adelina Kieffer, senior vice president of The Bryn Mawr Trust Co., in Pennsylvania, who suggests having the funds withdrawn from your paycheck. “It’s never too late to start to do that.”
Be smart about Social Security. While you’re eligible to start drawing Social Security at age 62, that is not the best option for most people. Each year you wait until age 70 adds 7 to 8 percent to your monthly benefit. Couples especially may want to consult a financial advisor because there are numerous ways for married people (or anyone who was married for 10 years) to take Social Security, and choosing the wrong option could mean a loss of $100,000 to $250,000 in lifetime benefits. “It’s a really complicated decision and one that has a significant impact on people’s lives,” Boone says. You can register at the Social Security website and find out what your benefits will be if you draw at 62, your full retirement age (66 or 67) or wait until you are 70.
Get a money checkup. If you’re not sure whether you’re heading in the right direction, visit a fee-only financial advisor for advice. You can find a planner through the Financial Planning Association. “Set the goals, and take a realistic look at what you have,” Kieffer says.
Expect to work longer if you haven’t saved enough. If you can’t live on your Social Security and other income, you likely will have to keep working. “There are not a lot of options for people who have reached 65 and don’t have a lot of savings,” Boone says. “Social Security was never meant to be a sole source of income for people. … People are going to have to keep working longer and longer and longer.” For some people, that could mean starting a business or second career, and for others it may mean getting a part-time job or staying longer in a current job.
Figure out how much you’ll really need when you retire. It’s unlikely that you’re going to spend significantly less in retirement than you do now, unless you move to a cheaper area and slash your housing expenses. And if you plan to travel, you may spend even more. Most advisers say that, as a general rule, you should not spend more than 4 percent of your investment principal annually. Taking that plus your projected Social Security payments and any pensions into account, create a retirement budget and see if it’s realistic.
Get out of debt. You don’t want to go into retirement owing money. Plus, interest you’re paying on loans is money you could be investing for the future. Whether you need to pay off your mortgage before you retire depends on a number of factors, including the payment amount and your expected retirement income.
Keep the bulk of your investments somewhere they can grow. Converting all your assets into certificates of deposit or other assets that won’t increase in value is a recipe for disaster, advisors say. Consider that most recessions rarely last more than 18 months, so you should make 18 months’ expenses the amount to keep liquid, Boone says, with 40 to 60 percent of your investments in stock index funds. “You don’t have a loss until you sell,” Boone says. If the market falls, “all you’re seeing is things go down on paper.”
Be ready to cope with life changes. The best-made plans can be swept aside if one spouse dies or if you lose the high-paying corporate job you expected to keep indefinitely. Divorce can also complicate plans. Expect to need a Plan B or C or even D. “It’s an ongoing process,” Kieffer says of retirement planning. “You have to readjust and replan.”
Update your wills, trusts and beneficiaries. Retirement accounts are distributed to the beneficiaries you name on those accounts. Make sure you keep that information updated. It’s also wise to make sure you have an updated will, a trust, if needed, and health care surrogate documents. These issues are especially important for unmarried couples or couples in second marriages.
A version of this story appeared previously at U.S. News & World Report.