When the clock is ticking down towards retirement, making sure you’ve dotted all the i’s and crossed all the t’s is a must. Taking a close look at where you’re at financially can give you an idea of how prepared you are and what you may need to work on. If you’ve got five years left to go, there are a few things in particular that you should be paying attention to.
1. Take advantage of catch-up contributions
Once you hit the big 5-0 you can start taking advantage of catch-up contributions to funnel even more money into your retirement account. As of 2015, the catch-up limit for 401(k) plans is set at $6,000, which brings the total amount you can contribute for the year to $24,000. If you’ve got a traditional or Roth IRA, you can throw an extra $1,000 in on top of the $5,500 annual limit.
If you’ve got five years left until retirement, being able to stash an additional $25,000 into your employer’s plan or $5,000 into an IRA can make a big difference in the size of your nest egg down the road. Maxing out your catch-up contributions can also work in your favor at tax time if you’re able to deduct the amount you’re putting in.
2. Decide when to tap Social Security
Timing is everything when it comes to drawing Social Security benefits, so if you know that’s going to be a part of your retirement income you need to figure out when you’re going to apply. Full retirement age is 66 as of 2015 but you can start drawing benefits as early as 62. The trade-off is that the sooner you start receiving payments, the less money you’ll qualify for.
For example, if you take Social Security at age 62, you’ll only get 75% of your monthly benefits. That amount goes up to 93% if you wait until age 65. If you can wait longer to start taking payments, you’ll actually get more money. Holding out until age 70, on the other hand, would cause your benefits to increase by 8%. If you’re married, you also want to think about staggering your benefits to make sure you’re drawing the most income possible.
3. Map out your post-retirement budget
One of the biggest pitfalls of retirement planning is underestimating how much money you’re actually going to need to cover your expenses. Whether you’re planning to travel the world or just putter around the house all day, you need to know that your bank account can sustain the kind of lifestyle you want to have.
When you’re working on a post-retirement budget, make sure you’re looking beyond the day to day stuff like housing, utilities, and transportation. You also need to factor in the cost of things like medical care if you’ll be without an employer’s coverage until you’re eligible for Medicare, prescriptions, and co-pays if you will be covered, and long-term care insurance premiums if you’re worried about paying for nursing care down the road.
Even if you’re still relatively healthy, these are all costs that are going to inevitably need to be worked into your budget at some point. A good way to see if your plan is realistic is to take it for a test drive if you’re able. Actually living on the budget for a few months can tell you whether you’re over or underestimating what your needs are.
4. Think about where you’re going to live
While some retirees are perfectly fine with staying put once they leave the 9 to 5 grind, others prefer to strike out for warmer destinations. Selling your home and moving to another city may allow you to save some money but if you like the area you’re in, simply downsizing may be the better option.
If you’ve managed to build up a significant amount of equity in the home or you already own it free and clear, trading it out for something smaller could put some additional cash in your pocket to supplement your retirement income. On the other hand, you could stay in the home and take out a reverse mortgage to create an additional income stream.
Reverse mortgages have a lot of benefits for seniors who have a good bit of equity built up and aren’t interested in moving. Basically, you’re converting the value you’ve accumulated into cash and you receive monthly payments each month from the mortgage lender. If you sell the home or you die, you or your heirs are responsible for repaying the mortgage company whatever you borrowed, with interest.
5. Wipe out any lingering debt
One of the things you don’t want to have to deal with in retirement is high interest credit card debt, car payments, or student loans. So if you’re on the home stretch, now’s the time to dump them for good. Choosing the best way to pay off the debt really comes down to what kind of assets you have and what your income looks like.
If you’re making enough to cash flow your debt payoff without having to reduce your retirement plan contributions, you should be throwing every extra cent you can at the total. Consolidating your credit cards into a home equity loan or line of credit can help you reduce some of the interest you’re paying, plus you’ll be able to deduct a little more mortgage interest on your taxes.
6. Figure out what to do with your 401(k)
Rolling over your 401(k) into an IRA once you retire saves you from having to foot a big tax bill and you can continue earning dividends on what you’ve saved. In some cases, however, your employer may allow you to leave your 401(k) where it is until you’re ready to start pulling the money out. Just make sure you’re looking at all the administrative fees that go along with leaving it behind since that can eat into your returns.
Cashing it out and taking a lump sum is another option but it can be an expensive one. If you’re over age 59 1/2 when you drain your account, you won’t have to pay an early withdrawal penalty but the whole amount is still considered taxable income. If you’re taking out hundreds of thousands of dollars, that could push you into a substantially higher tax bracket, which means even more money you’ll owe.
Final thoughts
When retirement is looming on the horizon, making the smartest financial decisions possible is crucial. Keeping these six points in mind can ensure that you continue to prosper in your golden years.
