That 10 years prior to retirement is often a golden time for investors.
Not only may you be in your peak earning years, but many big expenses may already be behind you such as mortgages, student loans and the various other payments that people setting up a home life or with young families tend to have. (Note that we are assuming here that retirement is on or around the national social security retirement age of 66! Your life may look different if you are younger and planning to retire in 10 years).
It’s also a time when planning for retirement tends to come more sharply into focus. There is a certain level of urgency that is more difficult to conjure at a younger age, yet often there is difficulty and uncertainty with the big decisions that need to be made.
Let’s look at some of the big questions and some tips that financial experts suggest for that final decade until retirement. Of course, as with any financial advice, make sure you get qualified advice for your own personal situation!
This is the key question which gets many people tied up in knots. How many years will you be retired for? What will the cost of living look like over that period, let alone the cost of having an enjoyable, comfortable retirement?
Hopefully, you began asking this question well before having a decade left until retirement and have something in place already, in which case it’s always worth reviewing and making sure you’re on track. If not, now is the time to have that conversation with a qualified financial advisor as soon as possible.
My assumption is you can live comfortably off of 75% of your pre-retirement income. So if you earn $100,000 the year you retire, I estimate you will need $75,000 during the first year of retirement. For each subsequent year, you should increase your income need by 2.3% to keep up with inflation.
So, it's reverse engineering basically. Know how much you will need earning an average of 7.5% at retirement and invest that accordingly year after year. Of course, you also need to make sure you factor in what your Social Security income will be from the statements they send you.
Even if you’ve had retirement planning in place for years, it’s always a good idea to sit down and take stock of your current situation. Are you on track to achieve the portfolio and savings you will need to support your retirement?
Another consideration for any couples is whether both are retiring at the same time or whether it will be staggered. This can make a significant difference in how much you will need to draw on your retirement portfolio in 10 years time. If one of you will be working for another few years, you won’t need to rely on as much from your portfolio for those years.
Take a careful look at all assets you have earmarked to provide you with retirement income and assess the mix of investments you have in your portfolio. A qualified financial professional can help you by running models on your portfolio against various market situations to provide a good overall assessment of your readiness. Variables such as inflation, market performance, tax rates and your own longevity are good to test against.
The road to retirement will look different for any given person, which is why it’s important to seek your own, individual advice, but here are some tips that are commonly used by investors in that final decade:
While you are under the age of 50, current rules for 401(k) say that the most you can defer is $18,000 per year to your 401(k). As soon as you hit 50 though, that goes up to $24,000 per year, allowing people to play “catch up” as they head toward retirement. (At least it is for now – this is up for debate under the Trump tax plan.)
That final decade before retirement sees a few plans allow extra deferrals, including some IRAs, so be sure to sit down with your financial advisor and check whether it makes sense to be increasing your contributions to any of these.
Tax planning is something that shouldn’t be neglected when you’re looking ahead to retirement, yet it often seems to get pushed down the priority list. The fact is, planning for your income sources and how you will strategically withdraw from each is a great way to minimize tax and maximize what you receive in the hand.
It really can make a big difference – for example, say you withdrew a $60,000 contribution from a ROTH IRA, this will create a smaller tax liability than a $60,000 contribution from a traditional IRA.
When you factor in your Social Security contributions, tax planning becomes extra-important. How you receive your contributions can make the difference between paying no tax on Social Security, some tax, or tax on 75% of your Social Security contribution.
I’d highly recommend prioritizing a meeting with a qualified tax planner!
One thing a lot of people immediately think when they’re getting close to retirement is that they should drop all forms of growth investments such as stocks and go for only investment options which are low risk (with the lower return that comes with them).
I would say that you need to be very careful about evaluating your investment position. What if you will be retired for 30 years or more? The chances are you will still need some growth investments to sustain that period, although, of course, this is going to come down to your own comfort with risk levels and advice from your financial planner.
Many advisors still suggest that stocks should be 50 – 60% of your investment allocation, dialing back to 40% if you’re within 10% of your savings goal. Again, seek professional advice for a mix that is best suited to your personal situation. There is definitely also a case for minimizing the impact of any market volatility on your portfolio, especially as you get to within 5 years of retirement or less.
Now that you’ve calculated a retirement budget and projected income need, it’s a good idea to practice living on the budget you will have for retirement, especially now while there is time to make some changes.
Take a few weeks or months and notice how it feels? Does it seem like you’re pinching pennies to make ends meet and that you’re not able to do all of the things you’d like to? The chances are that if it feels that way now, it will be worse in 10 years time.
On the other hand, if you find that you’re comfortably living the lifestyle you envision for yourself at retirement with some money leftover, you’re probably on the right track.
An important point is to think about what you will want to be doing during retirement. For example, many people see themselves traveling a lot, which inherently involves extra expenses you wouldn’t have staying at home. What will you do? Travel long-term and list your house on Airbnb to fund it? Consider any other activities which might be part of your ideal retirement too, and factor in the cost of those things. Most of us don’t want to be sitting idle!
That final 10 years until your planned retirement is time to really take stock and nail down the investment strategies that will see you to retirement and beyond. After all, it’s not just about what you have at the point of retirement, but how you can sustain 30 or more years of living.
Take advantage of any “catch up” rules in investment plans to make bigger contributions where appropriate.
Sit down with a qualified planner to take stock of your position and strategize to make your retirement dreams a reality. At the same time, don’t neglect that tax planning! Make the most of your investments by seeking professional advice and structuring them strategically.
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