Ideally, retirement planning should be a life-long pursuit.
In this post-pension era, you should start saving and investing for post-career life from the first day at your first job. A few years down life’s road, you should start visualizing life-after-work. Where will you live? How will you spend your days? This process is critical to both your financial and emotional health in retirement.
Using that vision of the future, you can start really planning for retirement. It takes an average of five hours of planning per year to shape a happy retirement, based on research I did for my book, You Can Retire Sooner Than You Think.
But no matter how well you’ve done your homework over the years, the last five years before retirement will be jam-packed with concerns and last-minute tasks. This is a critical time; a period when you will make decisions that might affect the rest of your life. You want to have your seatback upright, seatbelt fastened and tray table up as your career makes its final approach to retirement.
Here is a year-by-year look at the issues you need to address before you turn in your office keys.
Five Years Out:
Get your financial bearings. This is the foundation for the rest of your work. Figure out your post-work monthly expenses and income. How much will you have saved by retirement? How much will you draw from Social Security, pensions or rental income? Is there enough money to cover that monthly nut? If not, you have work to do.
Be honest in these calculations. If you are short, there’s still time to seek higher investment returns, boost your savings or maybe even push back your expected retirement date.
Check your allocations. Review your overall asset allocation among stocks, bonds, and cash. Unless you need big returns over the next five years to fund your retirement, as a general rule of thumb, a balanced allocation of 50 percent stocks and 50 percent bonds is a reasonable guide for someone headed towards retirement.
Consider getting help. Some of the issues that start to emerge closer to retirement can be daunting. Consider enlisting the help of a financial professional. Chose an advisor whose philosophies match your own, and who comes well recommended. Friends and co-workers can be a good source of referrals.
Four Years Out:
This is the year to prepare for eventualities.
Decide how will you pay for long-term care. The national median cost for long-term care last year ranged from $48,000 to $97,000. Understandably, many people consider buying insurance to cover that expense.
But if you have saved aggressively, you might not need such a policy. Some financial professionals recommend long-term care insurance only for people with net worths of $500,000 to $2 million. Those with more than $2 million socked away, they say, can probably cover their own care costs.
Long-term care insurance is crazy expensive. You can reduce that cost by purchasing a policy that covers only part of your expenses. Remember as you shop that there is a significant chance that you will never need long-term care.
Make your will. If you already have a will – and I hope you do – review that vital document and make any necessary revisions and additions.
Three Years Out:
Find your core pursuits. There’s more to retirement planning than money. Use this year to decide how you want to spend your days in retirement. My research on happiness in retirement found that happy retirees have an average of 3.6 “core pursuits” – activities they pursue with a passion. Some of these are life-long avocations, others picked up in retirement.
So, what are your core pursuits? If you don’t have any (not uncommon), now is the time to start exploring your passions. Try new things and see what floats your boat. You don’t have to master your latest hobby right away. That’s what retirement is for!
Assess your house and mortgage. If your home needs repairs or updates, take care of those now, while you are still getting a paycheck.
Financial advisors differ on whether you should pay off your mortgage before retirement. Here’s what I know: the happiest retirees, based on my research, have either paid off their mortgage or are within five years of doing so.
Two Years Out:
Run the numbers (again). Pull out those income and expense numbers from Year Five. How are they looking? Do you need to make any more changes to your plan – or expected retirement date?
Practice makes perfect. Try to live this entire year on the monthly income you expect to have in retirement. This demanding but powerful exercise can provide unique insight that might prompt you to tweak your retirement plan and/or expectations.
One Year Out:
Review your health insurance needs. Medicare starts at 65. If you are retiring before 65, you will need to look into Cobra, a program that allows you to keep your employer-provided coverage for 18 months after you retiree, or buy a policy on an Affordable Care Act (Obamacare) exchange. Be prepared for sticker shock as both of these options come with hefty price tags.
Review your asset allocation (again). If your portfolio is set to deliver the income you need in retirement, consider converting some of your stock holdings into cash and other short-term investments. Consider employing the 15/50 Stock Rule, which states that if you believe you have 15 years left on this planet, your portfolio should consist of at least 50% stocks, with the remaining balance in bonds and cash. The goal is to strike a constant balance between risk and reward. The stock allocation can be made up of either dividend-payers or growth stocks. You just need to keep an eye on your portfolio and reallocate as necessary to prevent stocks from creeping beyond the 50% mark.